Watch out Amazon: These startups deliver in a matter of minutes

New York(CNN Business) Have an instant craving for a bag of chips or ice cream and don't want to run out to the store? A new breed of startups in the United States is trying to deliver to customers with the munchies in as little as 10 minutes.

Companies such as Gopuff, Gorillas, Getir, 1520, Jokr, Buyk and Fridge No More are expanding delivery services in major US cities, and they're putting pressure on traditional grocers, convenience stores and e-commerce players to offer delivery options within minutes, instead of hours.

DoorDash is building warehouses of its own to offer 30-minute delivery on convenience items. And Kroger earlier this month announced it would offer deliveries from Instacart for a new, convenience-style selection within 30 minutes.

That means if you live in a big city, you may find yourself with a deluge of options for speedier delivery on food and household essentials.

"There's increasing expectation for on-demand everything," said Alex Frederick, who covers emerging tech companies at Pitchbook, a research firm. "Convenience is the next step."

Some investors are betting so, too. In 2021, investors have pumped around $4 billion into rapid delivery startups, according to Pitchbook. Gopuff is valued at $15 billion; Getir at $7.5 billion; and Gorillas at $1.6 billion.

But despite the influx of funding and soaring valuations, the startups face major hurdles to future growth. Some analysts are skeptical that this model of delivery can grow profitably and question whether consumer demand will be there for their services in the long-run.

'A land grab'

Gopuff is the largest by valuation and most expansive of such instant-delivery apps in the United States. Founded in 2013 by college students in Philadelphia, Gopuff is now in more than 1,000 cities, including Miami, Chicago, Boston and Dallas.

Getir and Gorillas operate in major European cities (Getir is Turkish for "bring") and have announced plans to expand in US cities. Meanwhile, Jokr, which initially launched in Latin America, Buyk (pronounced bike) and Fridge No More are moving to more neighborhoods in New York City, where they see an opportunity to grow in the city's dense boroughs. Each have said they will expand to other cities as well in the next year. After starting in New York City earlier this year, 1520 has since expanded to Chicago.

There are some differences between the startups. Gopuff sells alcohol in some markets, charges a $1.95 fee per order and has a $10.95 minimum order. Gorillas charges a $1.85 fee. Fridge No More, Jokr and 1520 don't charge fees or have order minimums.

Bank of America estimates that the market for grocery, convenience and alcohol purchases online will increase from $66 billion this year to $156 billion in 2025. DoorDash is the market share leader in convenience store ordering online, while Gopuff is in second place, according to Bank of America. Uber Eats is in third, followed by Instacart and Grubhub.

"It's a land grab," said Daniel Ives, who covers technology companies at Wedbush Securities. "The jury is still out on who is going to be the winner." He expects to see consolidation in the this crowded market in the coming years, similar to what's taken place in the food delivery industry.

"The Instacarts, the Amazons, the other behemoths, we expect them to chase this market," he said. "It could result in acquisitions."

Steep challenges

Unlike food delivery platforms like DoorDash, which rely on couriers who pick up and deliver items from restaurants, the new breed of rapid delivery players operate their own small warehouses in neighborhoods stocked with a couple thousand high-demand items— much less than what grocery stores carry.

Also, unlike major delivery apps that rely on independent contractors to deliver to customers, the startups directly employ workers picking orders at warehouses and drivers who deliver goods. However, Gopuff mostly uses independent contractors as drivers and has faced criticism from some of them for how they're treated. The company is not obligated to provide benefits like minimum wage, overtime, and unemployment insurance to independent contractors.

Operating warehouses is expensive because the businesses have to sign leases, pay rent, hire stockers and drivers, and buy inventory. But it means that the companies can better tailor the selection of goods available to customers than they can picking orders from other stores.

Analysts say there are many challenges to making this model succeed in the long run.

For one thing, these startups are spending heavily on marketing as they enter new neighborhoods and cities, and some are offering discounts to acquire customers, Ives said. But it's unclear whether customers will stick around when those discounts eventually disappear, prices go up, or delivery or other fees are added.

Some experts also aren't sure there are enough instances in which customers need delivery of ice cream or run out of cooking ingredients, especially if there is a bodega or convenience store nearby or they can get it from Amazon or Instacart in two hours or less. And they say it's unclear whether such models can work in neighborhoods outside of New York City or dense cities, where the population is spread out and a delivery driver can fulfill fewer orders an hour.

"My expectation is most of these players for longer than we expect are going to be unprofitable," said Daniel McCarthy, a professor at Emory University's Goizueta School of Business who studies online delivery companies. "The losses are going to be supported by venture capital firms."

The companies, however, say they can achieve profitability by adding customers and driving down their costs from suppliers as their buying power increases.

Gopuff for instance said it was profitable for its first two years and is profitable in many markets across the country.

Gopuff said that demand for rapid delivery is growing from shoppers who crave instant gratification, and it's able to build the scale necessary to be profitable.

"The business has experienced at least triple-digit order and sales growth in each year of its existence, and in 2020 alone, we served more customers than we have in all previous years combined," a GoPuff spokesperson said in an email.

And one startup says the model can, in fact, work outside of dense urban markets.

"A 15-minute delivery to a customer in Manhattan can mean the same as a 30-minute delivery somewhere less populated" and still be faster than traditional grocery delivery windows of up to two hours, 1520 founder Musheg Saakyan said in an email.