Australian grocery delivery startups face funding challenges as venture capital pulls out

Downtown residents who like to have their groceries delivered within 10 minutes from services like Milkrun should take advantage while it lasts.

Analysts say rising inflation and interest rates have made venture capitalists – who over the past decade have been willing to invest billions of dollars in “disruptive” companies like Uber in case they can ever make a profit – much more conservative with their cash.

Two companies offering fast delivery of groceries to some suburbs of major Australian cities have collapsed in the past two months: Send, which promised 10-minute delivery in Melbourne, and the smaller Quicko, which operated in Sydney and allowed himself two hours. to get to the door.

The collapses leave Milkrun, which operates in Melbourne and Sydney and is backed by investors such as Atlassian billionaires Mike Cannon-Brookes and Scott Farquhar, and Voly, which operates in Sydney, battling it out for grocery orders.

Both are backed by venture capital funds that have accumulated large sums of money: $85 million in the case of Milkrun and $18 million for Voly. But Send’s collapse shows that startups can burn through cash almost as quickly as they can deliver fruits and vegetables.

A report to creditors filed with the Australian Securities and Investments Commission by Send’s directors Matthew Kucianski and Matthew Jess of Worrells shows he burned a total of $11 million in the eight months over from which it was exchanged.

As sales increased, losses also increased. In October of last year, Send had sales of $8,113 and recorded a loss of over $658,000. By March, sales had exploded more than 50 times, to almost $417,000 per month, but losses also soared, to $2.38 million per month.

milk bike
According to a report filed with Asic, the biggest expense incurred by Milkrun competitor Send was on personnel. Photograph: Blake Sharp-Wiggins/The Guardian

Trustees said staff costs of $5.5 million were the top expense during the eight-month period.

“The large salary expenses incurred are associated with the business model of the 10-minute grocery delivery business, as the business needed to employ a large number of employees in order to meet its business model,” they said in The report.

“As a result, despite management’s attempts to reduce the losses incurred, it is clear that without external financing, the business model of the company was not sustainable.”

Patrick Coghlan, managing director of credit reporting group CreditorWatch, said early-stage companies may find it harder to secure crucial funding as they seek to turn a profit.

“Supply chain issues, interest rates, inflation; they’re going to be talking points for at least six months,” he says.

“So we’re not going to see a silver bullet, and it’s just going to put pressure on companies that depend on raising capital to stay alive, fundamentally, not even for continued growth.

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“If you’re… a business that needs a fundraiser right now, and there’s no obvious path to profitability, then you’re probably going to struggle.”

Even large supermarkets – experts in warehousing and logistics – have struggled with home delivery, which has exploded during Covid shutdowns over the past two years. Neither Coles nor Woolworths offer to deliver as quickly as 10 minutes. Instead, delivery slots that can last several hours are reserved hours or days in advance.

Even then, while both make money from their online shopping services, the margins are thinner than what they enjoy in-store.

Woolworths, which led the charge online, suffered the biggest margin erosion from the change, analysts at investment bank UBS said in a note to clients in April.

Businesses like home delivery are expensive to start and run. In addition to staff, they need a network of warehouses close enough to customers to make deliveries – and the faster the deliveries are supposed to be, the more warehouses are needed.

Milkrun Delivery Rider on Bike
Milkrun founder Dany Milhan says “our ambitions have not been dampened by recent examples of [grocery delivery services] poorly managed and executed”. Photograph: Blake Sharp-Wiggins/The Guardian

Coghlan says the costs involved mean transportation-heavy companies need to be able to get big to survive.

“If you look at it from an investment or venture capital perspective, you need scale, and that takes a lot of investment until you actually reach profitability,” he says. .

“The most extreme version – although it’s not about deliveries – is Uber. Ten years later, no matter what they spent, [they’re] still not necessarily profitable – and no doubt they have a global scale.

He says Australian suburban sprawl has also challenged delivery businesses.

“Australia [is a place] where you don’t have a huge density of people like you would in, say, New York and other big cities around the world, you’re more spread out.

“So how many of these companies can actually survive? Is this some sort of winner-takes-all scenario? »

Voly co-founder Mark Heath could not be reached for comment.

However, Milkrun founder Dany Milhan says “his company’s business model is definitely sustainable and we are outperforming initial forecasts and projections.”

He rejected any comparison with Send or Quicko. “Companies enter government every day in categories where competitors are thriving and doing extremely well,” he says.

“We have (confidentially) reviewed Send’s financial information and can confirm that we are a materially different company in all respects.

“The fundamentals of scaling this business model have not changed since its launch eight months ago and our ambitions have not been dampened by recent examples of poor management and execution.”

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