This is an excerpt from Monday’s (5/13) Point of Sale retail supply chain newsletter sponsored by ArcBest.

There’s a startup that was first created to deliver stoner essentials to college kids but is quietly capturing the imagination (and venture capital) of the tech world, and it’s time the logistics world took notice. Gopuff, founded by two friends at Drexel University in 2013, began delivering items like vaporizers, grinders and rolling papers. Soon after, munchies like Ben & Jerry’s became supplemental offerings to smoking and quickly became the bulk of their sales. 

The founders, Rafael Ilishayev and Yakir Gola, both came from families steeped in brick-and-mortar retail business. Ilishayev, who emigrated from Russia when he was 2, worked for his family’s sandwich shop and banquet hall business. Gola’s father, who moved to the U.S. from Israel, is a well-known jeweler in the Philadelphia area. I believe this background is a principal reason Gopuff was not built to be a third-party distributor. “As first-generation Americans, Yakir and I, we grew with values from our parents that you need to create a business that makes money,” Ilishayev said in an interview. Unlike its competition, Gopuff owns the inventory it delivers, and its founders are adamant the company is predicated on “making margins on products, and really not making margins on people or the gig economy.” 

Gopuff specializes in delivering “essential” or “instant need” items, which it defines as “liquor, local favorites, beauty and pet products, snacks and [over-the-counter] medication.” It’s shtick is delivering what you need right now, really fast. “We built a hyperlocal logistics network of micro-fulfillment centers,” Daniel Folkman, senior vice president at Gopuff, told CNBC. Gopuff operates more than 250 micro-fulfillment centers. Some call these dark stores, because essentially it’s a store that’s deliberately structured for online order fulfillment and isn’t open to the public. The company buys all the inventory from manufacturers and distributors, and is able to “fulfill those orders to customers in under 30 minutes, 24 hours a day,” according to Folkman.  

For the 600-plus cities Gopuff operates in, it’s an appealing offer for customers in need of quick essentials. Each MFC holds between 3,000 and 5,000 SKUs, and orders have a flat fee of just $1.95 per delivery. Notwithstanding highly active subscription users, this is the lowest per-order cost on the market. Shipt, Target’s proprietary on demand, runs about $7 per delivery; DoorDash and GrubHub typically start at $5.99 for grocery delivery. Even Instacart, which has seen parabolic demand this year, starts at $3.99 per order. 

By vertically integrating, Gopuff’s unit economics are vastly different from third-party aggregators. It takes some time to set up MFCs, spread awareness and build up order density, but the company says it’s profitable in all regions where it’s been operating for at least 18 months. That includes “100% of our top markets,” according to Ilishayev, FWIW. 

It’s still a ways away from profitability. The company reportedly tripled revenue to $340 million last year but lost $150 million, according to a report in The Information. The same report revealed Gopuff is aiming to hit $1 billion in sales this year. The meteoric growth over the past 24 months has had private money busting down the company’s doors. In August 2019, Softbank quietly invested $750 million in Gopuff through its Vision Fund. In October 2020, amid the business pandemic-fueled boom, Gopuff announced a $380 million round that valued that company at $3.9 billion. In March, Gopuff announced it raised a fresh $1.15 billion round at a nearly $9 billion valuation. 

Nobody raises that much money without attracting attention. The competition is coming, and it’s coming from much more sophisticated companies with decades of logistics experience, more money and countless other advantages. Gig economy competitor DoorDash launched DashMart last July, its digital convenience store that marks the company’s first foray into inventory management. On DashMart, customers can choose from 2,000 SKUs of grocery products, household essentials and, by leveraging its existing restaurant relationships, your favorite meal too. 

And of course Amazon isn’t going to sit around and let Gopuff, or anyone else, take its strategy to the micro level without a fight. Amazon is building dozens of more traditional micro-fulfillment centers co-located next to larger warehouses within 45 minutes’ drive time of major cities. There, Amazon can offer 100,000 fast-moving SKUs, delivered by Flex drivers within a couple hours. And we can’t forget Amazon Fresh and Go stores, which are being purpose-built to serve both walk-in customers and rapidly fulfill online orders for delivery. 

Gopuff is flush with fresh venture capital and is gearing for rapid expansion nationwide. Just last week, Gopuff made a major announcement that it has partnered with Uber in a shrewd customer acquisition deal. The collaboration will launch in more than 95 U.S. cities next month with a national expansion later this summer. Customers can order from a variety of items, more or less sold in a white label fashion, through Uber Eats, and the order will be sent to one of Gopuff’s MFCs. Gopuff handles the rest and delivers within half an hour; Uber gets a percentage of the sale. 

You have to respect companies that create and lead their own categories. Sure, Google was like the 22nd search engine on the market, but you know what I’m saying. You think search engine, only one company comes to mind. The term’s been coined category king. Uber, Airbnb and Netflix are all category kings. This category, instant needs delivery, is being fostered by gig economy companies, but I believe led by Gopuff. We are entering a world of hyperconvenience. Most of the country, outside of the top metro areas, isn’t quite there yet. Amazon rang in the new age of convenience, but its smaller, more nimble competitors are leading the charge in hyperconvenience. Time will tell which presents more utility to the most consumers: Gopuff’s speed and low cost, or Amazon’s long tail of items. 

Want more stories on micro-fulfillment and hyperconvience? Try Point of Sale, my twice-weekly newsletter covering consumer trends, retail supply chain news, and how some retailers are tying to keep up, while others (like GoPuff) are blazing new trails:

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