Benchmark Makes ‘Contrarian’ Bet on Small Grocery Startup in Age of Amazon
(Bloomberg) -- Silicon Valley venture firms have cooled on food delivery startups, especially since Amazon traumatized the entire industry with its $13.7 billion acquisition of Whole Foods.
Not Benchmark. It’s participating in a $50 million round for Good Eggs Inc., which delivers artisanal farm products in the San Francisco area and has aspirations to expand in the western U.S. after a previous retrenchment. Benchmark’s Bill Gurley, who backed Uber Technologies Inc. and Open Table, has even joined the Good Eggs board. “This is a very unusual deal for us,” Gurley says. “It’s very contrarian.”
That’s an understatement. Just last week, meal-kit startup Munchery Inc. said it was axing 30 percent of its staff and halting delivery in three cities; Munchery had once been losing some $5 million a month. Blue Apron Holdings Inc. shares have fallen almost 40 percent this year after the company cut marketing and lost customers. Last year, Sprig, which cooked meals in its own kitchens, shut down after burning through close to $1 million a month. In 2015, Good Eggs itself had a near-death experience that ended with the ouster of the founder and chief executive officer.
Why is Gurley so optimistic about Good Eggs? He sees Amazon.com Inc.’s Whole Foods acquisition as an opportunity rather than a competitive threat. “A lot of articles suggest the Amazonification of Whole Foods is not sitting well with some customers,” Gurley says. He believes Good Eggs will resonate with choosy millennials who prefer to stock their kitchens with small, curated brands. Good Eggs Chief Executive Officer Bentley Hall argues that Amazon’s push into groceries is helping take fresh food delivery mainstream. “Every time Amazon launches something new with Whole Foods,” he says, “our growth accelerates because people feel more comfortable buying groceries online.”
Another benefit, according to Gurley, is that Good Eggs skips the grocery store altogether and operates from a warehouse. Rivals like Instacart Inc. and Doordash Inc., which recently began shuttling groceries for Walmart Inc., pay shoppers to walk the aisles. “The warehousing of retail is very exciting,” Gurley says. “There is simply no reason to double-handle goods in a brick-and-mortar store.”
When Hall joined Good Eggs in 2015, it was retrenching after growing too fast. Executives had pulled out of New York, Los Angeles and New Orleans and fired some 140 people, more than half the staff. Hall says Good Eggs was failing because it didn’t recognize that it was a food rather than tech company. Hall has since quadrupled the assortment to 4,000 items, added alcohol and ushered in same-day deliveries.
Good Eggs says that on average customers spend more than $100 per order (shipping is free after $60) and that the company processes 1,000 orders a day. There is no subscription but many customers order more than once a week, the company says. Hall plans to use the $50 million infusion to open a 100,000-square-foot delivery hub in Oakland and expand to Southern California next year. (The company declined to disclose Goods Eggs’ latest valuation.)
By 2025, online grocery sales are expected to account for 20 percent of the total or about $100 billion a year, according to a report from Nielsen and the Food Marketing Institute, a trade group. The market will be fiercely contested by Amazon and Instacart, a well-funded startup that picks and packs groceries from traditional chains like Target.
The challenge for Good Eggs and its ilk will be to restrain costs while keeping quality exceptionally high, says Brian Frank, who invests in food-tech companies through his FTW Ventures fund. “The key is to not be like Amazon and these other web businesses that are willing to grow at all costs,” he says. “Amazon will always be better at losing more money than you.”
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