After an explosion of apps and billion dollar valuations, is the ultra-fast bubble about to burst?

Any Londoner on a stroll down a main road in the city is bound to encounter a handful of instant grocery delivery riders zipping past.

With Getir, Gorillas and Gopuff among other players on the scene, the category has exploded over the past couple of years with some receiving billion-dollar valuations.

The pandemic saw many opt for online grocery shops as they hoped to dodge Covid-19, but now it’s those keen to make the most of a normal life that are being targeted by such apps.

One app to narrow in on the capital city is Zapp, which currently has around two dozen ‘Zappstores’ and plans to rollout further across the city.

“Everyone started to do their regular grocery shop online with big stores, but that doesn’t really serve the ‘need it want it now’ on-demand market,” Zapp’s vice president of strategy, Steve O’Hear, tells Morning Wire “You’re often having to vie for the right delivery slot, dealing with missing or replacement items.”Instead, the app is targeting those after “spontaneity and urgency”.

O’Hear said. “It’s for last minute socialising, when friends and family pop round or when plans change and people need an item or over-counter medicine. That’s our sweet spot.”

Analysts say cash is now flooding into the space as investors bet on demand surging in the coming years.

“There is clearly hope that one of these upstarts could give Amazon a run for its money, with consumers becoming hooked on the ability to command goods instantly, which are rustled up immediately from networks of dark stores and partner retailers,” Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says.

One big player, Getir, was recently valued at $11bn (£8.3bn). “By offering cut price deals to lure new customers, Getir is clearly hoping to gobble up market share quickly,” Streeter added.

Another goliath of the emerging sector, Gopuff, raised $1.5bn in a reported valuation of up to $40bn at the end of last year, according to Axios.

However, competition is fierce, with Gopuff quickly snapping up its UK rivals Dija and Fancy while Getir acquired Weezy. Restaurant giants and established supermarkets are also keen to muscle in on consumers’ appetite for instant deliveries.

Streeter adds: “Gross transactional value from Deliveroo’s instant grocery service is creeping up, with more investment being ploughed in to steal market share.

“Tesco isn’t going to be easily elbowed out of this space, and its whoosh delivery service is being trialled in locations across the UK.”

Analysts are also wary that a cost of living crunch could dampen demand for these services. With energy bills skyrocketing and National Insurance contributions going up this spring, how many consumers are willing to pay a premium for a bottle of wine –even if it is desperately needed in the middle of the night?

Streeter says there may be “less appetite” for the ease of rapid delivery as consumers begin to trim budgets in response to rising prices.

“That still could prove a big bump in the road for companies like Getir to navigate,’’ she says.

However, O’Hear believes his customers, whether they need a delivery of nappies at 2am or want drinks to continue a night on, are not that bothered about paying for a speedy delivery.

“There’s been a lot of capital invested in this space and if you get the model right, with the right ingredients, it can absolutely be a huge and very profitable business.”

A recipe for an ultra-fast success includes serving the right-use base of a ‘need it now’ market, selling products with the right margins and a hefty average basket, as well as building a self-reliant supply chain infrastructure, O’Hear says. 

Regardless of the trajectory of demand for rapid grocery delivery – take a step back from the industry and the overblown nature of the firms’ valuations is put into sharp perspective.

Supermarket stalwart Sainsbury’s toasted £60m of profits when it revealed annual results in January.

Getir – which has never turned a profit and does not appear to be close to doing so – now has a higher paper valuation.

US rival Gopuff, which is expanding into the UK, said the penetration of online shopping is still only around 10 per cent on these shores, which could be indicative of both major growth potential or a hefty portion of stubborn shoppers who prefer to ‘pop to the shop’.

Will investors keep ploughing in the cash to find out?

“The current level of funding is unlikely to be sustainable given how unprofitable these companies are,” says Jamie Blewitt, co-head of private growth capital at Finncap Group.

“There will inevitably be a race to dominate the key geographies and the best funded teams are probably best placed to do that.”

But Blewitt says the firms would be forced to recalibrate their business models as they approached inevitable moves onto the public markets, when valuation would come to more closely reflect hard sales potential, and customer loyalty will be key to success.

For now though, he argues, the flood of investment might just be venture capital in its purest form, piling in en masse as tech-backed challengers take on an industry ripe for disruption.