Photo by Paolo Feser on Unsplash
Rapid Delivery Apps in Los Angeles Are Facing a Reckoning
After a couple of years where pandemic lockdowns made lightning-fast, app-based delivery essential, the industry is facing a shakeout—and apps that promise delivery under 30 minutes are facing an existential crisis.
The so-called “dark store” model – which forgoes the traditional corner store for a sprawling warehouse that delivers through mobile apps – exploded during the pandemic. But many of those companies are now struggling to become profitable, largely because of rising overhead costs.
The Industry and the Challenges
At stake is a multi-billion industry aiming to deliver everything from groceries to convenience items and hot food, through bikes, cars, drones and even robots. Operating from a number of competing platforms, those companies saw sales more than double during the pandemic. Few experts see the industry disappearing entirely, but the sector is widely expected to shrink. The coming months and years will determine which model wins out.
Celia Van Wickel, senior director of digital commerce for analytics and brand consulting firm Kantar Group, told dot.LA she expects the bubble to burst—and soon, as venture firms become more discerning about their investments.
“Valuations are declining [and] money is not being forthcoming to rapid delivery companies,” Van Wickel said. Even as the economic climate becomes more challenging, some companies do have the chance to rise above the fray and gain market share – and satisfy investors – while others could be destined to go bust.
“[Investors] really want to see a profitable model, kind of akin to what we've seen in the dot-com era, where the bubble burst on ecommerce,” Van Wickel said. A lot of money was thrown into these new companies, they weren’t really profitable and then all of a sudden a lot of them collapsed.”
Some venture capital firms were “just investing to invest,” Van Wickel added, to see how the delivery market fared. She predicts they’ll soon become more judicious about who they fund. Burning cash without turning a profit isn’t going to be acceptable in the long term, she added.
Along with slackening consumer demand and less VC investment in the space, nearly every fast delivery company that relies on fulfillment centers, even Amazon, is going to face steep real estate, upkeep and staffing costs. Rapid delivery firms will need to spend big on real estate to operate fulfillment centers across cities that enable them to get to consumers fast.
Local startups Serve Robotics, URB-E, Kwibot and Duffl are trying to rise above the fray by delivering fast, to specific areas, with scooters or drones, but there’s no guarantee of success.
Image courtesy of Duffl.
Philadelphia-based GoPuff, one of the largest new rapid delivery services to enter in Los Angeles alongside DoorDash, Instacart and Uber (which also offer convenience delivery in addition to food) depends on having quick access to warehouses throughout the region. It bought liquor store chain BevMo in a bid to gain access to lucrative (and hard- to- get) liquor licenses and warehouses. It aims to save money by installing micro-fulfillment centers “within almost every” BevMo store that can service deliveries, its CEO told the L.A.Times. Still, it laid off 10% of its workforce in July after cutting about 3% in March, and shut 76 warehouses. GoPuff originally had plans to go public in mid-2022 at a $15 million valuation, but shelved them.
But GoPuff is not alone. Instacart cut its valuation forecast by 38% in March citing “poor market conditions,” and international rapid delivery startups like Gorillas, Getir and Zapp have also cut staff recently.
The layoffs suggest that rapid growth may no longer be enough.
“The GoPuff CEO basically said, ‘hey, we were getting a lot of investments by just showing top line incremental growth,’ they were growing customers and growing markets and that was okay enough for investors in 2021,” Van Wickel told dot.LA. “But now they're being pressured to really look at how their company is profitable [and] they're being asked to do this very quickly, or their investment will not be forthcoming.”
GoPuff pointed dot.LA to a recent shareholder letter that said it is “already driving 76% [year-over-year] sales growth for the core business.”
“GoPuff is the only company in this space that has proven it can be profitable at a city and regional level,” co-founders Yakir Gola and Rafael Ilishayev wrote. “We are now targeting full company profitability in 2024 while maintaining a strong cash balance throughout.”
An URB-E rider hauls deliveries in Santa Monica.
Image courtesy of URB-E
The Opportunity
Despite the headwinds, the rapid delivery industry “feels like it's here to stay,” said Alex Vasilkin, co-founder and CEO of Cartwheel, a Hollywood-based startup that makes delivery management software and recently raised a $3 million seed round in April.
“There’s all these dark kitchens opening, there are all these different startups popping up with drone delivery, and scooters delivery and hyperlocal, 15-minute delivery so I feel like there’s more options for customers and so far, we've seen it getting bigger and bigger,” Vasilkin said. Cartwheel works mainly with restaurants, but is looking to find “very big partners in mostly the alcohol space,” its co-founder Magdim Metshin told dot.LA.
The need for rapid delivery isn’t likely to disappear so long as people decide they need items fast and can’t make the trip themselves. The question is now “which companies can iron out their paths to profitability before they’re forced to go bankrupt?,” Van Wickel said.
“I think there's a balance between what the consumer wants and what behavior’s going to change,” she added. “To me, it's all about on-demand. So we're changing the model to an on-demand model… it’s changing the trip occasions out there from stocking up to more grab-and-go convenience models.”
Startups that seem poised to weather the storm are the ones that can control every aspect of the business – including supply, warehousing, distribution and, crucially, their apps. Usually, they’re seeking buyouts from larger companies that have existing infrastructure in place for this exact reason.
“I don’t think we have quite a winner yet; I think there’s [companies] that are more set up to win,” Van Wickel said, adding that it’s mostly “the companies that do have some cash on hand today to continue to iterate their business models.”
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Ambercycle co-founders Shay Sethi and Moby Ahmed are scientists and former UC Davis college roommates. The two see themselves as different from traditional fashion or manufacturing founders – and other research-based innovators.
“Traditionally, people have always thought, ‘here's an interesting technology, how do we craft a story around it?’” Instead, Sethi says, Ambercycle “start[s] with the products that we would really like to see and then work backwards into the technology. We develop, do research and engineering that way instead of starting in the lab.”
Ambercycle CEO and co-founder Shay Sethi
Their technology is able to break down the components of clothing to its basic polyester materials, separating its natural fibers and dyes, and creating a new material in the process, which they call cycora.
“We imagined a technology that could take an old t-shirt and turn it back into the yarns required to make that green t-shirt again,” he adds. “Anything that's in your closet today – like yoga pants or dress shirts – that's traditionally made of polyester can be made with cycora.”
Sethi and Ahmed started their company in San Francisco in 2015, then moved it to Los Angeles’ garment district two years later, looking for a manufacturing hub close to a center of innovation.
“We felt like this is a really good nexus for innovation, fashion – as well as material sciences,” Sethi says. “There is a very strong industry and a very strong familiarity with manufacturing so we felt it was a perfect blend. Also we grew up in California and didn't want to leave.”
We chatted with Ambercycle co-founder Shay Sethi about his company’s journey, its new funding and how it plans to get beyond buzzwords in planning a sustainable future for fashion.
What are the biggest challenges to the fashion industry?
When we consider the future of humanity, there's a couple key things that need to change. The big one is – given that consumption will not decrease – the reliance on natural resources will put a strain on the way in which we can live on this planet. So in order to change that, we need to take advantage of these traditionally viewed as waste streams and turn them back into new resources. So the future upstream will be all of these textile materials that are in our closet. But it's not really easy today to throw away or recycle our old garments.
We need to be able to have a low-friction way to throw away our garments and have them go back into a circular system. If we can tell a transparent and traceable story to a person, then brands and retailers will start to care.
Why is it so hard to recycle clothing currently?
So let's talk about our clothing. They are mixtures of different fibers – polyester and cotton, as well as dyes, additives, zippers, tags and stains – when they're at their end of life. We can't really recycle those materials, because they're these complex, intimate blends. Recycling has really struggled as a business, and also as a solution to waste, because you can't create a high quality product from those materials once they are at their end of life.
How is Ambercycle different from other recycling processes?
Most recycling processes are shredding or very simple mechanical processes. You can turn a t-shirt into pillow stuffing in a similar way that you can turn paper into a sort of grey newspaper and then downcycle it; The same thing happens with textiles.
The Holy Grail is really being able to turn an old t-shirt into a new t-shirt. So over the past five years, we’ve developed technology that takes these mixtures of materials that have dyes and additives, put them through a process, and make the base raw materials needed to make those same yarns. This goes in line with what's traditionally known today as circular economy where you can reuse materials, again and again.
Will Ambercycle always be focused on apparel?
Right now our focus is on apparel.
We have a couple of luxury clients that are really interested in transitioning to circular systems. Over the next couple of years, we're going to be able to talk about those, but the major message we want to help shed light on is that every year, over 120 billion garments go to landfill. We need to, as a fashion industry, transition to a circular system. It's [not] just one or two companies that can do things; Everyone as a whole needs to adopt a new ecosystem, where things are being reused in supply chains over and over again. It's very important for this transition to involve all verticals in the power supply chain. The demand for these materials is already so high. So people already care. I think we're just trying to figure out the logistics of the society right now.
There's a lot of possibilities when you think about it. You can imagine this being transformed into a system that can take other materials as well. I think we're excited about the possibilities in the future but I’m really focused on the textile-to-textile stories today.
What do you plan to do with your recent funding?
We’re trying to scale up the number of projects we're doing with different companies across the apparel industry that will require a lot of manpower or womanpower. That's a key gap we need to fill. A technology like ours that uses sort of molecular separation technologies, that advanced material science requires a sort of scale before you can really start to see the fulfillment of these contracts.
It's very easy to make a couple of t-shirts, but it's very hard to make millions and millions and millions of kilograms of stuff. We're going to be scaling up production of one of our main materials today, cycora. Demands are already way through the roof. I felt like right now was the right time to raise external capital to accelerate that plan.
This interview was edited for clarity and brevity.
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