Bonfire of the groceries

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The inflation adjusted price for delivering you a packet of Hobnobs from the corner shop is approximately five times more than it cost to put Americans into space.*

OK, it’s a silly comparison, but this is a silly subject. Rapid grocery delivery startups including Getir and Gopuff have raised more than $10bn from investors, according to Morgan Stanley data. Their funding rounds were mostly squeezed into the 12 months to early 2021, in what Morgan Stanley analysts Edward Stanley and Matias Øvrum say will be “a case-study for future investors from the growth-at-any-price era”.

So, what are the lessons?

First, it’s not easy to blitzscale demand into existence. Morgan Stanley uses Google Trends and app downloads data as proxies for consumer interest, finding that searches for delivery discounts dropped by about 90 per cent once global venture capital deployment had peaked:

Or, to put it another way, a wall of VC money was paying for the advertising and promotions that conjured up the rapid delivery market from nothing. But as soon as interest rates began to rise and new funding was choked off, the market returned to nothing:

This could be an over-simplification. Maybe backers became wary, having learned that the unit economics of rapid delivery didn’t work as hoped, or that established operators like Uber and Deliveroo were able to compete without resorting to M&A. It’s unknowable how much VC funding dropped off because startups failed to scale, or vice versa. The parable is not just about easy gains from easy money; some business ideas are just crap no matter what.

Which leads to lesson two: until the cash runs out, reality needn’t matter much to a unicorn.

Morgan Stanley finds that in the world of rapid delivery, everything is down 90 per cent-plus except the valuations. App downloads, discount searches and new fundraisings are all a tenth of the peak, or worse, but primary equity rounds are still just 14 per cent lower on average.

It’s a sample problem, of course. The drop in deal activity has meant precious few down rounds, so the sector’s aggregate valuation has only fallen from $35bn at peak to about $30bn. Eight of the 11 companies in Morgan Stanley’s data are still at all-time high valuations, in theory:

The fantasy doesn’t hold elsewhere. Fund marks for the private delivery names average 79 per cent, Morgan Stanley finds, with thin secondary market trading on the Zanbato platform typically happening at a 71 per cent discount to the last formal funding round.

The share prices of publicly traded food delivery companies are down between 60 and 90 per cent over the same period, so the discounts applied don’t look overly pessimistic. Neither does an implied secondary-market sector aggregate valuation of about $10bn — or approximately the combined market values of Just Eat, HelloFresh and Deliveroo.

The first two names are profitable and all three are, per Google Trends data, able to rely on relatively steady demand. Getir, meanwhile, has been flogging off its UK scooter fleet and was reported in July to be trying to raise new cash, having been pushed out of France by a “hostile regulatory environment”.

“While we see green shoots in private funding, it is hard to say with confidence that we have seen anything resembling a reset in unicorn valuations while discrepancies such as those above are sustained,” says Morgan Stanley. It’s referring to the gap between post-money valuations on fundraisings and secondary pricing, but might equally be describing the hangover left behind from anyone ever thinking that rapid grocery delivery might be a thing.

* Project Mercury, Nasa’s maiden programme of piloted orbital missions that ran between 1959 and 1963, had an estimated total end-of-life cost of $277mn, or $2.24bn adjusted for inflation in 2023.

Further reading:
— Gimmicky Gorillas (FTAV)