Flush With VC Money, Fast Grocery Startups Help London Last-Mile Rents Rocket

There’s an arms race going on right now in the world of London grocery deliveries, and it is creating big potential profits but also significant risks for the owners of industrial property in the UK capital. 

Consumer habits are changing, and venture capital investors are trying to tap into those needs. We get anything and everything delivered to us now, and at least eight new startups have moved into the London and UK grocery delivery market in just the last year, some of them promising deliveries in as little as 15 minutes. The start of 2021 has seen a particular rush of new entrants. 

Weezy, Get, Dija and Gorillas are the highest profile names, and that quartet have raised almost $850M of VC funding, with Istanbul-based Getir and Gorillas raising $590M in March alone, a big slug of which will be spent cracking the London and UK market. Proptech VC firm Fifth Wall was one of the lead investors in the Gorillas fundraising round. 

Big sector players like Segro, Mileway and Prologis speaking at Bisnow's recent digital industrial summit all cited these type of firms as being a major source of demand in the market right now.

“We're on a quick and rapid acquisition programme,” Weezy Head of Property Erin Peyman told Bisnow. “We took our first fulfilment centre in Fulham in July last year, we raised funding in December [$21M], and that has given us the ability to grow our pipeline. There are a lot of competitors out there, but our USP [unique selling proposition] is to get deliveries to people’s doors in 15 minutes.”

Weezy concentrates on the middle to upper end of the market, stocking fresh produce from butchers, bakers and delis local to its fulfilment centres as well as dry and frozen goods, offering 1,800 products in all. It employs its own riders rather than third-party contractors to avoid the stigma that is increasingly being attached to companies that rely on such gig economy workers, and the riders use electric scooters or bikes to make the service less carbon-intensive. 

So far Weezy has occupied or taken leases on 17 fulfilment centres, in London but also in other cities like Brighton and Bristol. Manchester and Birmingham are also on the agenda, and the eventual plan is to have more than 50 fulfilment centres, Peyman said. 

The units it takes are typically between 1,500 SF and 4K SF, and location is absolutely vital, which starts to explain why these companies are willing to pay top rents. As Peyman explains, to fulfil that 15-minute delivery promise, units must be located in very dense areas with a large number of customers within a small radius so an order can be picked, packed and delivered within a quarter of an hour. 

“The centres themselves are fairly simple; a lot of the work happens beforehand in picking the right property in the right location,” Peyman said. “It needs to be in a densely populated area where you know there will be a lot of demand.”

Weezy has taken one unit in a shopping centre, Landsec’s West12 centre in Shepherd’s Bush, west London, from which it makes deliveries and also offers a click-and-collect service. The deal with Landsec activates a previously vacant unit and brings footfall to the centre, Peyman said, and it is a good location for Weezy. 

But in the main it is taking warehouse space on light industrial parks, rather than spend a lot of time trying to rework former retail space, which often isn’t configured in the way the company needs and makes stock deliveries less simple than with industrial space.

Peyman said that while the field is competitive, and the company is looking to grow fast, it is not willing to pay any rent just to secure a site.

“It is important that the business and each site is sustainable,” she said. 

But some market participants think not everyone is being so disciplined and that landlords in the urban logistics sphere need to think carefully about their leasing strategy when it comes to this emerging sector. 

“Because of that delivery promise, there are certain locations that these companies just have to be in if they are going to be able to deliver to certain districts,” Knight Frank Senior Surveyor Tom Kennedy said. “They know that if they don’t take the unit, then one of their competitors will. You have got a lot of VC-backed firms paying miles above what they should be.”

Declining to name the firm in question, Kennedy cites a deal undertaken by a grocery delivery firm in the posh St John’s Wood area of north west London where a rent of £78 per SF was paid for a 2,500 SF unit. As a comparison, a rent of £78 per SF would not look out of place for a prime City of London office. Increasing demand is coming in to a sector that was already experiencing low supply. 

“That is a rent of almost £200K a year, and you simply can’t make a profit on that, you just can’t make enough deliveries,” Kennedy said.

Companies are looking to buy market share, hoping to see off the competition and become the dominant player in the market, at which point they have more pricing power. Kennedy cites the takeaway delivery market, where in a given location people tend to gravitate to a single platform, like Deliveroo in London or Just Eat in large regional cities. 

For landlords, while those big rents might look appealing, there needs to be an awareness that it is not all dollar signs. 

“Landlords are willing to take a view on this market, and take a view on covenants that 20 years ago, or even after the 2008 financial crisis, they wouldn’t have touched,” Kennedy said. “But these companies have a lot of funding behind them. Owners have seen how startups like Deliveroo have done, so they are willing to back the concept.” 

Some have gone big, and not necessarily in a strategically sound way, Kennedy said. He cites one owner of an industrial estate in Balham that has leased space to four different operators at high rents. It is unlikely they will all succeed, given the fact that one or two platforms tend to win out, so a couple of the tenants are unlikely to see out the lease. But the high rents give some cushion for when this happens. 

But both Kennedy and Peyman are backing the fast delivery service as a whole to keep growing, even as the need to get everything delivered as a result of Covid-19 recedes.

“People now order anything online,” Kennedy said. “We are all now used to the process. And it is not just Gen Z, even your granny is on here phone ordering everything.”