Pradeep Elankumaran can't scale up fast enough.

As the CEO of Farmstead, an online-only startup that delivers groceries from a San Francisco warehouse and uses software to maximize efficiency, he's overrun with orders from people anxious to get fresh veggies while avoiding the masked throngs at the market. Elankumaran said Farmstead has about 20,000 credit cards in its system — a fivefold increase since the coronavirus outbreak. But while some customers are being served, others are wait-listed.

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"Given we are a software company with an easier path to scalability, we feel a moral responsibility to serve as many households as possible," he said. "We're literally limited by laws of physics right now because of the limited space in our hub."

COVID-19 has created a historic moment for online grocery delivery, perhaps best seen in Instacart's hiring binge and long wait times. But along with opportunity has come significant challenges in navigating customer expectations, worker discontent and unforgiving profit margins, according to interviews with company leaders.

Large firms are racing to capture market share, while smaller enterprises are trying to tap their unique strengths in software, delivery efficiency and customer experience to cement their place. Overshadowing everything is the question of whether much of the energy in the sector might dissipate with the lifting of lockdowns.

As Farmstead hustles to hire more drivers and pickers, expand its warehouse and retool the software that plots when to order produce, Elankumaran's team is also rewriting code to prioritize customers who self-report as being at risk for coronavirus exposure because of their age or health problems. But it's not easy: Who should get deliveries first? "We've been asked to make a bunch of decisions on prioritization that we weren't anticipating," he said.

The demand has been so high at Amazon Fresh and Whole Foods that people have created bots to snatch up coveted delivery times. Peapod, which operates delivery for Stop & Shop, says it is so busy that the company's servers crashed in some parts of the country. Target's online subsidiary Shipt is hiring hundreds of shoppers and customer support people to staff call centers inundated with requests.

Among smaller companies scrambling to seize the moment are Bay Area startups Good Eggs, which specializes in delivering local bread, meat and produce, and AxleHire, which does last-mile delivery for Safeway, Pet Food Express and others. Both say demand quintupled with California's shelter-in-place order.

In addition to a surge in customers, every company Protocol interviewed reported higher basket values. "Customers are focused on purchasing enough to feed their families throughout the week, in a world where lunch at work, dinners out and school meals are off the table," Good Eggs CEO Bentley Hall said via email.

"This whole thing is creating a new norm," said AxleHire co-founder and CEO Daniel Sokolovsky, who added more than 1,000 drivers in the Bay Area and is in the process of adding 10,000 around the nation.

Hiring a hurdle

But there's no single norm for hiring. Sokolovsky said AxleHire's Bay Area drivers are mostly employed by a third-party contractor and earn $30 to $35 an hour. Farmstead, unlike some big companies like Instacart, has been transitioning drivers to full employee-with-benefits status to comply with California's new Assembly Bill 5. They earn $17 to $22 an hour, Elankumaran said.

Those figures are comparable to the reported pay of Amazon drivers and higher than what Instacart shoppers, some of whom recently went on strike, have been found to take home: less than $10 an hour pre-coronavirus, according to one study. Instacart may be forced to reclassify contractors as employees in California, depending on court decisions and a state ballot initiative.

Still, some drivers working for AxleHire, and to a lesser extent Farmstead, have made similar complaints as other delivery and gig workers. On Indeed and other online job sites, drivers have grumbled about low net pay and other issues such as not being assigned to deliveries, even during this period of increased demand.

Companies that relied on independent gig workers before the pandemic are recruiting them faster than ever, taking advantage of systems that were designed for staffing up to meet seasonal demand. Instacart, which can onboard shoppers and get them working in just a few days, hired 300,000 in the past month and is looking to find 250,000 more.

The company has also partnered with Hertz, Hilton and other hard-hit firms, bringing on thousands of experienced customer care agents who recently lost their jobs. Those full-time jobs take longer to onboard, but the partnerships expedite the process.

Jacob Sadowski, 21, started as an Instacart shopper after losing both of his jobs due to coronavirus. Photo: Demian Bulwa/Protocol

Good Eggs, which relies mostly on full-time employees, is faced with a different conundrum: how to keep customers happy while still hiring carefully. The company — which downsized in 2015 after nearly going bankrupt — had already been staffing up to meet the increased capacity of a new Oakland hub, but CEO Hall said coronavirus has "dramatically" moved up that timeline.

"We're hiring quickly, with a thoughtful eye and preference for people that will be great, long-term employees," Hall said. "We're not hiring in wild numbers just to get people on the floor — we're not a gig-based company that has a desire to hire 100,000 people one month and abandon them the next."

Good Eggs is also focusing on retaining customers who were loyal before the pandemic, figuring they will be key when lockdowns end. "They've supported us through so much," Hall said, "so we are working on ways to ensure, even in the midst of this demand, that we can continue to prioritize and meet their needs."

Peapod, meanwhile, sees itself as positioned to harness long-term growth. The company told Protocol it hopes to hire another 1,500 drivers and shoppers in five Northeastern states, including New York and New Jersey. The jobs are part time but permanent, officials said, providing "an important base of new growth and opportunity."

'Our time has come!'

Industry watchers are somewhat split on how much of the demand will remain after the crisis. Harvard researchers predict that, without a vaccine, social-distancing measures may be needed through 2022.

Andrew Lipsman, a principal analyst at eMarketer, wrote, "Of course, these shoppers will eventually return to stores. But if households that had previously used ecommerce for just one out of every 10 grocery trips were to permanently shift to one out of every five, the long-term impact would be profound." While business has roughly tripled, he said, businesses might see a sustained 30% to 40% bump from prepandemic levels. "That's a dramatic change in your business long term," he said, "and yet it's a huge drop from where you're at in this current moment."

But startups in particular should approach this boom with caution, said Peter Fader, a professor at the University of Pennsylvania's Wharton Business School. "Some of them will delude themselves into thinking: Our time has come! This is our big breakthrough!" he said. "But a lot of folks are going to leave."

Whether they do will depend on factors such as cost of delivery and the customer experience, said Bill Pearce, assistant dean for the Haas School of Business at UC Berkeley and a former investor in Webvan, the company whose 2001 implosion became a cautionary tale for the industry. "The bar is lower right now," Pearce said.

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Farmstead CEO Elankumaran pointed to an inherent obstacle: Some customers will never want to pay for shipping. The company has been offering free shipping, but recently added a $6 safety fee to help cover the new costs of bags — reusable bags have been shelved to prevent potential infection — and protections including masks for drivers. He said he sees the fee as temporary.

Elankumaran said he is being careful overall. His operation has always had to be disciplined in spending limited funding, he said, because grocery delivery hasn't been a sexy investment for venture capital firms. Now, Elankumaran is extending that same logic to scaling up during COVID-19, doubling down on the software solutions and tight efficiency that distinguish the company, such as machine-learning algorithms that help repeat customers fill their digital carts.

Farmstead doesn't need to hire thousands of workers to shop at a grocery store and drive the goods to one customer's home. Instead, it uses a team of pickers to pack many bags at a time in a warehouse the size of a 7-Eleven in the Mission District. The company curates a selection of items, using software to ensure it stays fresh and to create efficient delivery routes that hit as many as 12 customers per trip.

With people clamoring for orders, Farmstead is looking for ways to grow, perhaps into a larger warehouse — but those are calculated decisions. Elankumaran said a new hub will probably top out at 20,000 square feet, less than half the size of a traditional grocery store. "We're not overdoing it," he said. "This isn't Webvan."