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Delivery start-up goPuff fills overnight needs — and whims

Have a 2 a.m. hankering for ice cream or organic seaweed chips, or a need for cat litter or dog food before dawn? Perhaps you'd like a toaster, pregnancy test or rolling papers, or a spatula, mousetrap or smartphone charger and don't want to wander around town in the middle of the night looking for one.

If you live in Philadelphia, Washington, Boston, New York, Austin, Chicago or other cities served by fast-growing delivery start-up goPuff, you may be in luck.

goPuff founders Rafael Ilishayev and Yakir Gola
Source: Dinah W. Brin
goPuff founders Rafael Ilishayev and Yakir Gola

Founded in 2013 by Yakir Gola and Rafael Ilishayev, then Drexel University students, goPuff aims to challenge traditional convenience stores by delivering products from its own warehouses to customers' doors within 30 minutes of an online or app order.

As fast delivery becomes an important retailer edge — 7-Eleven recently made its first drone delivery; Amazon.com offers same-day orders — goPuff's on-demand service may have arrived at the right time.

The company, which recently closed an $8.25 million Series A funding round from Anthos Capital, offers more than 3,200 products, charging a $1.95 delivery fee, with free delivery for purchases of $49 or more. It operates 24/7 in its Philadelphia home base and from noon to 4 a.m. in most other cities, with nearly 60 full-time employees.

"We really want to make a mark here," Gola told CNBC.com, explaining that goPuff sees itself eventually offering its "affordable convenience" in every market in the United States. "We're the people's delivery service."

The company, which operates in a total of 10 cities, including Seattle, Phoenix, Denver and Portland, Oregon, has plans to expand to more cities before year-end. It has also introduced a companion beer-delivery service that operates in Philadelphia and a few other goPuff markets.

Americans are moving from "just in time" supply chain management to "instant," delivery, noted Jamie Gutfreund, global chief marketing officer at Wunderman and an expert on millennial and even younger, Generation Z consumers.

"Numerous start-ups are capitalizing on our desire and expectation for convenience. GoPuff is a fascinating and addictive service — if they can maintain their business model and provide high levels of quality and service, they have an opportunity to learn about consumer behavior in a new sales window — instant shopping," she said via email.

Gola and Ilishayev, both 23 and roommates since their Drexel days, bootstrapped goPuff, starting with about 100 products, mostly snacks and drinks, sometimes dashing from a college classroom to make a delivery. They developed their app with a Ukrainian team and continue to work with them and U.S. developers.

"For the first four months of the business, it was just Yakir and I making deliveries seven days a week, every day until four in the morning to anyone in our delivery zone in Philadelphia," Ilishayev said. Students at three universities near central Philadelphia were the early adopters.

Now, he said, independent drivers earn the $1.95 delivery fee plus tip, averaging $3.20 per delivery. Ilishayev cited healthy convenience-store margins — a 27 percent industry gross margin, excluding fuel and food-service products, he said — in explaining the company's profit opportunity. The company said its gross margins are higher than the industry average but declined to be more specific.

"GoPuff is a fascinating and addictive service. ... They have an opportunity to learn about consumer behavior in a new sales window — instant shopping." -Jamie Gutfreund, global chief marketing officer at Wunderman, millennial and Gen Z expert

GoPuff makes thousands of deliveries a day and sells tens of thousands of pints of ice cream every week — Ben & Jerry's, Häagen-Dazs and Talenti — in addition to the variety of other products.

"We've become one of Philadelphia's largest sellers of ice cream," Gola said, citing information provided to the start-up by distributors. Nerds Rope candy, a nostalgia product popular with goPuff's millennial target market, is the business' No. 1 seller in Philadelphia, where the company operates from a former church and factory space and soon will expand into a large former tofu factory nearby.

Pet food is a "huge" seller, the co-founders said, and Gola noted that healthy snacks are the fastest-growing category. Among other items on goPuff's menu are water, cutlery sets, irons, Plan B birth control, Twinkies, baby wipes (and a similar product, called Dude Wipes), hookahs, butane torches, cleaning supplies, toothbrushes, shower speakers, bath towels, beer pong balls and hundreds of organic foods.

GoPuff has close to 40 suppliers, some local, and shares a supplier with Whole Foods. The company isn't trying to compete with grocery stores and offers no fresh produce except for pre-packaged fruit, cheese and salads like what customers might find in a 7-Eleven or Wawa.

While he wouldn't discuss company-wide finances, Ilishayev said goPuff is profitable in most markets, reaching a break-even point in an average of 5.5 months. The co-founders initially used their Philadelphia profits to launch the business in Boston, the nation's biggest college market, then in Washington. The company would not reveal its revenue but said revenue growth year-over-year (2015–2016) is on track to reach 1000 percent.

"The real money starts coming in when you start focusing on brands," Ilishayev said.

Arm's-length ordering

GoPuff can offer premium virtual shelf space, custom product categories and the opportunity to conduct highly targeted sampling campaigns, which has drawn interest from consumer goods manufacturers that want to reach the millennial market, Gola said.

Indeed, consumer expert Gutfreund said the role of the brand is interesting, as people rely more on delivery services. "Are consumers buying specific brands — supported by advertising and media — or are they buying the delivery service and allowing the delivery companies to select the products for them? Do I buy shampoo or am I buying Suave? Am I buying laundry detergent or Tide?"

Daniel Shpigel, 23, also a former Drexel student, heard about goPuff through word of mouth and is a customer as a medical student at Thomas Jefferson University in Philadelphia.

"Everybody at Jefferson has heard about it now, too," said Shpigel, who likes to order healthy microwave dinners. With frequent exams and a tight schedule, Shpigel said he and his roommates like the convenience of delivery, even though there are stores within walking distance.

While there are many on-demand delivery services in the United States, goPuff is unusual in operating its own warehouses, Ilishayev said, allowing the company to control the user experience from start to finish. The app's predictive algorithm allows the company to keep on top of inventory and know when to restock, reducing the risk of running out at the warehouses and eliminating the need to call customers for a product change.

Another delivery service start-up, Postmates, connects customers to local couriers who deliver anything sold in any store or restaurant in minutes. Postmates has raised more than $138 million in seven rounds of venture capital, according to CrunchBase. It operates in 40 major U.S. cities and states as its plan nothing short of creating the on-demand delivery infrastructure for every major city in the world. Postmates didn't respond to a request for comment about goPuff.

Big tech companies are also aggressively expanding into on-demand delivery — not just Amazon. Alphabet's Google Express plans to cover the entire United States by the end of the year, according to a recent report in Business Insider.

Ilishayev cited two delivery businesses that failed around the turn of this century, including warehouse-based grocery delivery service Webvan — which collapsed after reaching a more than $1 billion market value — as reasons that others may be skittish about warehouses. "One of the most epic fails in the dot-com bubble fiasco," according to CNET.

Those businesses, however, predated the app boom and other significant technology and cultural changes that make on-demand delivery so popular now. "The rise of mobile purchasing, through apps specifically, has certainly opened the door for businesses like ours. Our customers are almost never more than an arm's length from their phone and, by extension, a potential order. Customers can get what they want, when they want it, with no more effort than opening their favorite social media app," Gola said.

By Dinah Wisenberg Brin, special to CNBC.com