Australian grocery delivery startups face funding difficulties as venture capital checks out. gig economy

City dwellers who enjoy getting groceries in 10 minutes from services like MilkRun should enjoy it while it lasts.

Analysts say rising inflation and interest rates have made venture capitalists — who, over the past decade, have been willing to throw billions of dollars into “disruptive” businesses like Uber, on the chance that they might one day turn a profit — Cash far more conservative with them.

Two companies offering quick delivery of groceries within selected suburbs of large Australian cities have collapsed in the past two months: Send, which promised to deliver within 10 minutes to locations in Melbourne, and the smaller Quico, which operated in Sydney and allowed itself two hours to reach the door.

The collapse leaves MilkRun, which operates in Melbourne and Sydney and is backed by investors, including Atlassian billionaires Mike Cannon-Brooks and Scott Farquhar and Wally’s, which operates in Sydney, fighting it over grocery orders. Used to be.

Both are backed by venture capital funds, which have pooled large amounts of money: $85m in case of MilkRun And $18m for volley, But the closure of Send shows that startups can burn cash as fast as they can deliver fruits and vegetables.

A report filed with the Australian Securities and Investments Commission by Send’s administrators, Matthew Kusiansky and Matthew Jess of the Worrells, shows it burned through a total of $11m in the eight months during which it traded.

As sales increased, so did the losses. In October last year, Send sold $8,113 and lost over $658,000. By March, sales had grown more than 50 times to approximately $417,000 a month, but losses also increased, reaching $2.38m a month.

milkeron bike
According to a report filed with Asic, the main expense incurred by MilkRun competitor Send was staffing. Photograph: Blake Sharp-Wiggins / The Guardian

Administrators said staff costs of $5.5m were the main expense over the eight-month period.

“Significant wage and wage expenditures are associated with the company’s business model of delivering groceries in 10 minutes because the company needed to hire a large number of employees to complete its business model,” he said in the report.

“Accordingly, despite efforts by management to reduce losses, it is clear that the company’s business model was not sustainable without external funding.”

Patrick Coglan, chief executive of credit reporting group CreditorWatch, says businesses in the startup phase can find it harder to get significant funding as they work toward profit.

“Supply chain problems, interest rates, inflation; They are going to be the subject of discussion for at least six months,” he says.

“So we’re not going to see a quick fix, and that’s going to put pressure on companies especially that rely on raising capital to survive, basically, not even for sustained growth.

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“If you … are a company that needs a fundraising round at the moment, and there’s no clear path to profitability, you’re probably going to struggle.”

Even large supermarkets – experts in warehousing and logistics – are grappling with home delivery, which was booming in the last two years during the Covid lockdown. Neither Coles nor Woolworths offered delivery as fast as 10 minutes. Instead, delivery slots that can be of several hours in duration are booked hours or days ahead.

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

Analysts at investment bank UBS said in a note to clients in April that Woolworths, which has moved the charge online, has suffered the most erosion of its profit margins from the shift.

Starting and running a business like home delivery is expensive. In addition to employees, they require a network of warehouses close enough to customers to make deliveries – and the sooner deliveries must take place, the more warehouses they need.

Milkeron delivery rider on a bike
‘Our ambitions haven’t been dampened by recent examples’, says MilkRun founder, Danny Milhan [grocery delivery services] being poorly managed and executed’. Photograph: Blake Sharp-Wiggins / The Guardian

Coglan says the cost involved means transportation-heavy businesses must be able to become bigger to survive.

“If you look at it from an investment or venture capital standpoint, you need to scale, and it requires a lot of investment until you really get profitability,” he says. .

“The most extreme version – while it’s not delivery – is Uber. In ten years, no matter how much they spent, [they’re] Still not necessarily profitable – and arguably, they’ve got a global scale.”

He says Australia’s suburban sprawl also challenged delivery companies.

“Australia” [is a place] Where the density of people like you is not very high, for example, in New York and other large cities globally – you are more dispersed.

“So how many of those companies can actually survive? Is this kind of a winner-take-all scenario?”

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

However, MilkRun’s founder, Danny Milhan, says his company’s “business model is certainly sustainable and we are outperforming the original forecasts and estimates”.

He rejected any comparison with Send or Quico. “Businesses move into administration every day in categories where competitors are thriving and doing very well,” he says.

“We have (confidentially) reviewed Send’s financial information and can confirm that we are a vastly different business in every aspect.

“The fundamentals of growing this business model haven’t changed since its launch eight months ago and our ambitions have not been undermined by recent instances of it being poorly managed and executed.”

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