"Marissa" doesn't exist, but she's trying hard to have it all. She's a hypothetical archetype of a certain kind of grocery delivery customer: a college-educated mother who values locally grown organic produce and home-cooked meals, but who doesn't always have the time or energy to spend Saturday mornings schlepping her 1- and 3-year-old to the farmers market.
For San Francisco-based grocery delivery company Good Eggs, she's the key to profitability.
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Founded in 2011, the startup built a loyal local following and then scaled up fast. By 2015 the company followed a familiar playbook: It expanded to Los Angeles, New Orleans and New York, and nearly went bankrupt in the process. Now the company has retreated to its home territory, narrowly avoiding the fate of the failed grocery startups before it.
Grocery delivery is one of those fantastic business ideas that everyone loves but few have ever managed to make work: The logistics are just too complicated, the margins too thin, the food too perishable. Good Eggs is now attempting to make it work not by going big, but by staying small, serving a subset of customers in a regional market. If it succeeds, Good Eggs could chart a new course for how grocery delivery startups can build strong money-making businesses in the current era, even in the face of steep competition from delivery behemoth Amazon/Whole Foods.
'Niche of a niche'
At its 45,000-square-foot fulfillment center in San Francisco's industrial Dogpatch neighborhood a few months ago, Good Eggs employees were breaking down flats of Brussels sprouts and golden beets, packaging them into the 1-pound portions customers order. The center runs like a hyper-efficient grocery store, 24 hours every day. Good Eggs "pickers" don't have to fight with regular customers for access to the avocados or wander around to find the soy milk; they already know where everything is.
And there are lots of groceries missing. The center doesn't stock 10 different brands of peanut butter or traditional junk food like Cheetos. Everything in stock is geared toward the archetypal Marissa. Good Eggs has spent hours detailing her needs and analyzing her habits.
Marissa isn't the mainstream. Good Eggs' CEO Bentley Hall describes Marissa as a "niche of a niche." But he estimates that she represents about 650,000 potential customers in the Bay Area. Because Marissa values quality — and is willing to pay a little extra to get it — Good Eggs believes that this small section of the market is worth about $8 billion in California alone. The Bureau of Labor Statistics reports that San Francisco households spend about $5,000 on groceries every year. Control for the number of Marissas in the Bay Area, and Hall's estimate sounds plausible, says Andrew Lipsman, a principal retail analyst at eMarketer.
"I don't want to ship a six pack of beer and a bag of chips to one person who lives in an apartment," Hall says. "That's just not our business."
Instead, he wants to appeal to families who place much larger orders and are more-regular customers. Since 2015, when Hall joined the company, Good Eggs has become more than a produce delivery company, quintupling the number of items it offers. You can now order alcohol, flowers, and specialities from local favorites like challah from Wise Sons deli and ice cream from Bi-Rite Creamery. Customers can also find meal kits with pre-marinated meats or ready-to-assemble salads, which are mostly available for same-day delivery.
That's great, but Marissa can't get other staples like baby Tylenol, a toothbrush or a magazine. That's a trade-off the company assumes she's willing to make to get better-quality food without having to make an extra trip to the store.
Good Eggs wouldn't share its exact customer numbers or revenue numbers, though Hall admits the business hasn't reached overall profitability just yet.
Cracking the grocery delivery nut
In 2018 Americans spent more than $1.5 trillion on groceries. It's clear why grocery delivery is a tempting business to enter. Everyone needs to eat, after all, and we're increasingly used to the convenience of tapping an app and having what we need. But the history of this business is a cautionary tale, proving that demand is never enough.
During the first dot-com boom, companies like Kozmo and HomeGrocer.com both flamed out. The most notable failure was Webvan, a Bay Area-based startup that promised to deliver high-quality goods at unbelievably low prices. In 2000, a year after the company went public, Webvan report nearly $180 million in revenue. But expenses ballooned to more than $500 million. Webvan was never profitable, and two years after its IPO, the company declared bankruptcy and laid off more than 2,000 employees
In some ways, it should be easier now. Webvan was too early, according to Lipsman. "E-commerce was just too nascent," he says.
There weren't enough people buying anything online to offset the costs of delivery. "If you're treading on thin margins already and you don't have a scale to make those margins work, you're not going to get that company off the ground," he says.
That issue has since disappeared: "2019 was the big inflection point in the adoption of online grocery delivery," Lipsman says.
Managing customer expectations — another issue that haunted Webvan — has also been resolved. Now, companies understand they have to deliver exactly what customers are expecting to see: no bruised peaches or mushy bananas. Or they have to communicate when they make a switch.
But the biggest problems still loom for the industry. "It's just a really expensive thing to deliver to consumers homes, and we still haven't solved that," says Sucharita Kodali, a retail analyst at research firm Forrester.
Cold items have to stay cold and leafy greens can't sit on a hot stoop for hours, so items need to be dropped off at specific times that are convenient to customers. Absorbing the cost of delivery can be too much. "That was one of the things that killed Webvan," says David Bell, a founder at Idea Farm Ventures.
There are some successful grocery delivery companies like FreshDirect in New York and Ocado in the U.K. Those companies benefit from dense, urban areas where customers are more likely to live closer together, which helps lower delivery costs. Delivering in more-suburban markets is more complicated and expensive.
Some delivery startups have tried to keep costs down by doing only the delivering, not the storing of groceries directly. While delivery is still a relatively small and expensive piece of the market, many brick-and-mortar grocery stores are starting to offer the service. Some big chains are turning to automation as a way to keep costs down fulfilling online orders.
Others contract with third-party delivery services like Instacart, but that model is not without its own troubles. In an effort to keep down costs, Instacart has twice been accused of stealing tips from some of its workforce. A spokesperson for Instacart says the company changed its policy in early 2019, and it introduced minimum payments of $7 to $10 for orders. Instacart also alleviates the burden of delivery costs by selling advertising on its platform and expanding rapidly. It now operates delivery for more than 25,000 grocery stores across North America including national chains like Costco and Kroger. Still, in November, Instacart workers waged a three-day strike to demand the company improve pay.
Good Eggs, which pays drivers $19 per hour and offers full health benefits, has to shoulder not only those high delivery costs but also the cost of warehousing the goods. One way it is trying is by not promising absurdly low prices. The fictitious Marissa understands she's going to pay a slight premium over in-store prices in order to have farmers-market-quality food delivered.
That approach has earned it investors. "Good Eggs is all about curation and differentiated products you really can't get anywhere else than the farmers market," says Danny Rimer, a partner at Index Ventures who first invested in Good Eggs in 2011.
Rimer characterizes companies like Instacart and DoorDash as fundamentally logistics businesses. They rely on preexisting grocery stores and then have to find the fastest, cheapest way to get those orders to customers. Good Eggs, on the other hand, provides a unique service by connecting customers to farms they otherwise wouldn't be able to access. "They're very different businesses," Rimer says.
The biggest threat to Good Eggs isn't those startup logistics companies; it's the biggest logistics company of them all: Amazon.
The Amazon elephant in the room?
Amazon, which acquired Whole Foods in 2017, "has the best logistics network, and that's given them a lot of advantages," Lipsman says.
But even behemoth Amazon has come to grocery delivery slowly and carefully. Thanks to the Whole Foods acquisition and high-value Prime purchases such as electronics, it can afford to offer extremely low prices. And after years of charging monthly fees in the markets where AmazonFresh was offered, in November 2019 it finally eliminated those fees for Prime members.
Even with that advantage, Bell, who has invested in other direct-to-consumer companies like Warby Parker and Bonobos, sees lots of room in the U.S. grocery delivery market. He points out that a traditional grocery store stocks thousands of items, often with variations on a single product: crunchy, smooth, organic and traditional peanut butter, for example.
"The reason their assortment is so broad is they're trying to catch all the possible variations of taste in the local market," he says. That's an indicator that there are many niches for smaller businesses to fit into. "Instead of a one-size-fits-all, maybe the right way to address this market is with a whole bunch of very focused players."
With more than $1 trillion to split among all those pieces, those players could still net major profits even without owning the entire market.
Good Eggs says it's carving out a niche where Amazon/Whole Foods can't compete. "They're not focused on high-quality, peak-integrity food with local sourcing anymore," Hall says. "For a certain customer that means Whole Foods isn't serving them that well anymore and we can serve them better."
Good Eggs' veggies, for example, are sourced from local farms so they aren't traveling hundreds of miles and are often packaged within hours of being picked.
"We are not sacrificing freshness and local sourcing with our delivery programs and in our stores," a Whole Foods spokesperson wrote in an email, emphasizing that the company continues to work with local suppliers.
Kodali says that for now, Good Eggs' approach probably does give the company a leg up in certain markets. She points out that demand for high-end, organic groceries is exactly what made Whole Foods so successful in the first place, and that strategy could work out well for online delivery, too.
"The internet is the haven for niche brands," Kodali says. "The problem is that there are too many niche brands that have been funded by venture capitalists that think they're Brad Pitt. I applaud companies that have very realistic expectations of their market size."
But even Hall can't ignore the allure of some growth. Good Eggs recently moved into an Oakland fulfillment center four times the size of its current San Francisco space. The company plans to more than double its current workforce to around 1,000 employees. Once the new Oakland facility is firing on all cylinders, Hall says, the company will generate more than $300 million in revenue and reach profitability.
Eventually, he plans to expand to Los Angeles, San Diego and Seattle. By staying on the West Coast, Good Eggs hopes it will be able to limit the cost of expansion by using some of the same supply chains.
For the time being, Good Eggs won't make a national play. "Some of the strongest players in grocery have really strong regional roots," Hall says.
He points to H-E-B, a Texas grocery chain that reports $28 billion in annual sales, or Wegmans, a much beloved Northeastern chain that The New York Times describes as having achieved a "cult-like status."
Good Eggs may never become a national brand. It just wants to be the favorite grocery deliverer on the West Coast. That's a hard enough task. "We can build a big business here, and we intend to," Hall says.
