São Paulo — Delivery companies need a large customer base because the percentage gain of the transaction is small. And in this percentage, there is still the cost of logistics, with payment to delivery partners. That is why Jokr, the quick delivery supermarket group that the São Paulo startup Daki is part of, recently left operations in the United States and Europe to focus only on Latin America.
For the company -- which was valued at over $1 billion after a $260 million round in December last year, one year into its existence -- the Latin American region is more attractive for delivery because delivery drivers earn less than in the US and Europe, according to co-founder German Peralta.
There, the business is more complex. Delivery costs are related to the deliverers’ wages. “A delivery driver in New York earns $25 an hour, while in Latin America it is no more than $4 an hour. The tickets are much higher in the United States, but the delta is not as big,” said Peralta, in an interview with Bloomberg Línea.
If the mathematics of American and European business didn’t make sense for the startup, in the U.S. and Europe there is also stronger rivals, which means more spending on brand positioning.
“We were operating in two cities in Europe and New York and Boston, so it was very expensive from a marketing perspective,” Peralta said. With the end of operations in the United States, about 50 employees were laid off. In Brazil, Daki said it cut 16 people.
Because of the margins, companies like Jokr have to have a lot of customers for the business to make sense. Delivery startups are pushed to do promotions, give discounts, burning money. Money that used to come from venture capital.
But rising interest rates are causing investors to turn to less risky assets. That’s why the money available for startups that burn a lot of cash is getting smaller and smaller, as economist and professor at Fundação Getúlio Vargas (FGV) Roberto Kanter explains. “That time of money at zero cost is over,” he said.
For Peralta, Jokr was fortunate to raise a Series B in December, just before the market cooled down. “We have something to hold on to for the next few months. I think our team has been very disciplined about money management from the beginning.”
“We are not sponsoring soccer clubs, F1 cars, or celebrities. We are focusing on our business, which I think is the right way to spend our investors’ money,” he said, pinpointing players such as Kavak, which sponsors the Mexican national team and has a partnership with driver Sergio Perez.
Asked if Jokr considers any rounds that will no longer value it as a unicorn - a down round - the co-founder claimed that the company does not need to raise money now. “I think if we were going to position ourselves aggressively, we would raise. But we were lucky to raise a good round recently.”
Inflation and delivery costs
Delivery companies, which are highly dependent on the number of consumers, have to date chosen to grow their base. Now, with capital more scarce, they are looking for greater profitability, according to Kanter. The professor believes that this search for profitability will be reflected in the increase of fees to the consumer.
But, for Peralta, the price of the service depends on each product. “Fruits and vegetables are priced very locally and depend on local inflation costs. But imported products will change price according to the dollar exchange rate,” he said.
He assured that Jokr is not increasing delivery fees. “If the price of meat is going up in the market, it will go up in the shop. But I believe our position is good about costs because if you go to the supermarket, you spend on petrol or public transport to go and come back. We have the same price as the supermarket, but we deliver to your doorstep,” he said.
The other side of the coin, according to Peralta, is that in a time of recession people stop doing leisure activities. “In a recession, you probably don’t go on a holiday trip, you don’t go to a restaurant, which means you change your behavior to buying from the supermarket.”
This Jokr sees from user data, which, according to the executive, if they used to order supermarket products only two days a week, they now order three.
Getting to breakeven point
Kanter believes that companies that were dependent on “cheap money” will only become profitable if they have a huge customer base.
“These companies will have to change their way of acting, they will have to think of a business model with a smaller scale, with fewer clients, seeking more profitability. But it is important to remember that this is always transitory. It is the natural cycle of the economy and it applies to everyone. No expansion is forever, just as no retraction is eternal. These are movements and companies will need to adapt to this new reality by seeking more profitability instead of growth at any cost,” he said.
Peralta says Jokr has a plan to reach breakeven [breakeven point between earnings and costs].
“We are at a point where gross costs are already being covered by what we are earning from deliveries. In this industry, first, you have to pay for the product, you have to have money to pay for the costs. Then you have to pay for the disposal costs - products that break, for example - and pay the delivery people. That’s what we call contribution margin 2,” he explained.
Then there are the customer service costs, payment gateways, and additional costs such as buying t-shirts for the delivery drivers. “For that, we have already reached the break-even point. Now, we are spending our money building a better tool and positioning our brands (Daki and Jokr), and hiring the best people in the market. For those fixed costs, we haven’t reached breakeven yet, but we have a clear plan to get there. If we sell more, we can pay these costs.
Peralta believes that in this time of downturn, startups need to build sustainable businesses. “Founders need to remember that we are here to build sustainable businesses. And it’s not something the founder needs to look at alone. We need to echo the unit economics to the company because the best ideas come from the least expected places. There’s always going to be someone who’s going to raise their hand and say where can we cut costs from. There’s the famous phrase that costs are like fingernails. If they grow, we need to cut them.”