Why the last-minute grocery startup is the worst kind of business

Got a cool idea for a new business? Here’s a thought.

Before you pitch it to investors, work yourself close to death for years, sign a bunch of leases and guarantees, build a head office fit for planetary scaling, then have the whole thing go up in flames like the Hindenburg, maybe chat to friends in old-school businesses outside startup world.

Who would have said: “Don’t do that, it’ll be really painful, have a different idea.”

I love to see anyone have a go, and I feel for the founders of instant grocery startups. Groceries-in-15-minutes brand VOLY is slashing staff and seems in deep trouble. SEND is gone. Milkrun Soldiers on, with bigger, richer investors.

Get daily business news.

The latest stories, funding information, and expert advice. Free to sign up.

It’s a business model that seems to have cherry-picked all the worst, hardest, and most expensive elements of running a business, and combined them into a massive bag of dicks. Not for their customers, but for themselves.

I’m no startup wizard. But we do have businesses around the country that have to cope with the same factors as the grocery pedallers. Let’s break a few of them down.

Deliveries are a nightmare to manage

Please, if your exciting new idea involves delivery, be aware that it’s super hard and expensive.

Our business includes deliveries. It’s one of the parts we like least. We have fleets of vehicles. We move more kilos than groceries, but the hard costs of those vehicles, and the cost of the people in them, is hundreds of dollars per delivery. Not $9.99 or free with product purchase.

People sometimes ask why we charge more than they expect for delivery, and it’s because we’re not the postman. They’re paying for stuff to arrive at an exact time, to a busy place, usually in the CBD. Traffic issues become our problem. Getting anything from a warehouse to CBD customers is a Player Level 150 Mario Kart challenge. A daily battle with parking inspectors, construction closures and irate building managers.

The instant grocery brands use electric bikes which lessen some of this pain. But plenty of dramas remain. Customers with sketchy addresses that take a private detective to find. People not answering their buzzer. Rain. Dogs. Managing deliveries is a world of hurt, even when you’re on normal deadlines.

If you’re promising groceries in 15 minutes — 10 for Milkrun — I can’t see any way to deliver that other than to have one delivery person waiting per customer order, crouched in the blocks like an Olympic sprinter. Ten minutes doesn’t leave time to consolidate orders. So you pay someone for a 15-20 minute round trip for a grocery order that might be $25. And if you don’t have orders, you have to pay a big team to idle around.

Back-of-a-coaster maths paints a grim cost picture.

And paying your delivery team is a can of worms. There are two approaches to deliveries:

1. Pay people fairly. To their absolute credit, all the grocery startups do this, five stars.

Or:

2. Set up a contrived contractor structure like most of the food delivery guys. So people who work full-time for you get paid piece-work money below the minimum wage. While you pretend you’re doing them a favor because they get to be “an entrepreneur running their own business”.

I don’t want to sound too cranky, but if you take option 2, I wish your brand a rapid, painful death. Because you’re using loopholes to bring US-style inequality here. And competing unfairly against us and every other business that has to obey local wage and workplace safety laws.

Morals aside, the reality is that if you have a startup that does deliveries, you must compete against these rule-skirting scumbags who can afford to charge less.

And deal-seeking customers don’t care.

Warehouse space is hell-expensive right now

Then there’s warehouse space. For that ‘last mile’ convenience, they needed warehouse space with access to the city and the ring of lucrative suburbs around it.

We also have warehouses in that area in each city, because most of our work is in the CBD. Many in our industry have moved to more affordable spots that might be an hour away, more in the peak hour. We’ve stayed closer in and damn that space is expensive now.

Small warehouse space in our area is up to about $300/square meter per year in Sydney with outgoings. We’ve moved warehouses four times in 12 years as the business grew, all in a suburb 10 minutes from the city.

In that time the competition for that space has gone from panelbeaters to global health tech companies with deep pockets. We can cope because we have decent margins, but grocery margins are very far from that. Coles and Woolworths make around 5% net. You can scale for years in groceries and your margins will still be puny.

While the big supermarket brands make their customers do more and more packing and checkout work to increase their margins, these plucky little guys step in to do more of the work than any grocer has done in human history. For a picnic-for-two sized basket of products. And for the same prices.

How is that ever going to develop into a profitable model some time before the eventual heat death of the universe? You might hope to grow big enough for one of the big guys to buy you. It’s a long shot. Why would they bother when they have all the grocery customers and they’re starting their own speed-delivery services?

I know part of the idea is to get the user numbers, then somehow sell a profitable product that you haven’t thought up yet. Like Amazon Web Services.

Tech share prices lately suggest that shareholders are finally thinking: enough delayed gratification, we want profit, soon.

Why not consider going straight to your own version of web services, something that stands a chance of making money within a few years?

Spoilt, entitled customers

How’s this for a target market pitch?

“Our customers will be those who don’t want to wait for regular grocery deliveries, who want it in the next 10 minutes.”

ie spoilt, entitled customers sitting at home like little Roman emperors, thinking up shit they want right now and summoning a member of the underclass to bring it, quick sticks.

Do you reckon that’s the sort of customer who’s going to complain a lot? And demand refunds if you disappoint them in some manner?

Milkrun’s CEO is currently in apology mode, emailing their customer base last week for “unacceptable declines” in service. Poor bastard. It’s like Jesus having to apologise for turning water into a Riverland white blend rather than gold medal Margaret River chardonnay. “I’m sorry our miracle was less miraculous than your lofty expectations.”

We all have these customers, but in regular businesses they’re diluted by lots of nice, normal customers. Here they’ve developed a self-selecting mechanism to get only the most demanding ones. So every order brings the same urgency expectations as calling the fire brigade. That’s got to send daily tornadoes of stress and aggro right through your business.

honest to god, anyone who runs a business in a non-startup environment could have pointed this stuff out. Ironically, in under ten minutes. Why didn’t they ask around?

Clearly the people who started these businesses aren’t stupid. I really hope Milkrun makes it, the founder has a strong track record other. I just wonder why all these founders chose to go all-in on concepts that were always going to be a world of pain. These are real “don’t try this at home kids” business models.

It feels like everyone involved has spent too much time in tech hothouses, around people who believe they’re somehow immune to the laws of business costs and margins. Because those are for old school merchant dinosaurs, not the disruptors of tomorrow.

The more panelbeaters, bar owners, insurance brokers or dog groomers you know, the more you realise you ain’t so special. There are plenty of startup innovators who set out to make profit from the start because they had to. Be more Atlassian or Envato and you’ll be less likely to end up on a delivery bike yourself.

---

Things move fast: Monday 7.30pm update

I finished this story and recorded it on Monday, then this story popped up tonight:

They’ve dropped the 10-minute promise. Good move. There’s a stack of interesting numbers from a leaked investor pitch doc, though it’s from April. I really hope they pull through this.

This article was first published on the Undisruptable website. Ian Whitworth’s book Undisruptable: Timeless Business Truths for Thriving in a World of Non-Stop Change is out now from Penguin Random House.