Orchata’s main dark store is inconspicuous to passersby; just another warehouse in the sprawling outskirts of the northern Mexican city of Monterrey. But past its big metal gate, there are 400 square meters of concrete occupied by a startup vying to become a leader in Latin America’s coveted food delivery industry.
The warehouse is mostly populated with racks full of grocery store products, carefully selected through the company’s proprietary software. Delivery workers in hot-pink uniforms charge their phones, rest, and wait for an order to drop. In a corner of the warehouse, a team of professional photographers engage in a photoshoot for Orchata’s social media content.
Mexican startups like Orchata have popped up in the past few years to challenge the dominance of the world’s biggest e-commerce players, like Amazon, Walmart, Uber, and Rappi. To differentiate itself from these last-mile behemoths, Orchata is focusing on becoming the country’s main provider of ultra-fast delivery — the promise to get groceries to a customer within 15 minutes. Yet it may already be running late: In the past year, ultra-fast delivery went from a novelty to a last-mile-must for any self-respecting delivery company.
Orchata managed to secure a $4 million investment from Y Combinator in 2021. The startup’s value proposition didn’t distinguish it much from its competitors: Orchata promised an easy-to-use app, no substitutions, and to match supermarket prices. At the time, it stood out for its proposal to deliver everything in 15 minutes.
That was then. Covid-19 pushed Latin America to become the fastest growing market for e-commerce worldwide. Online transactions grew 36.7% last year compared to 2019. The pandemic proved just how valuable convenience, speed, and reliability were for consumers. Venture capital funds jumped at the opportunity.
Emerging Mexican on-demand players like Orchata, Calii, and PideDirecto — all Y Combinator alumni — suddenly had much greater access to VCs, which were keen to capture market share and compete with the giants. “It’s like the story of David and Goliath,” García said amid an inventory that clearly reflects the barbecue culture of the region. “The little guy is hard to kill because he is swift and unafraid. … Startups today are very innovative and agile compared to big companies,” he concluded. He was not referring to big-box grocery chains, but to the disruptors of old like Rappi.
Ronni Samir, co-founder and co-CEO of PideDirecto, agrees. He considers ultra-fast delivery to be the kind of disruptor that Uber was in its day. On-demand startups are tapping into the market’s desire for convenience and, by doing so, disrupting the entire way Mexicans shop for groceries from big, planned weekly shops to many immediate purchases. He believes that startups like Jokr, founded this year, and his own PideDirecto are fundamentally shifting consumer behavior, which is no small feat.
“There’s a lot of appetite for quick commerce in Mexico, and interest in it will only increase,” says Gastón Eguren, an analyst at Proeza Ventures.
What makes up that appetite was broken down in a global consumer survey by PwC in June 2021. It found that 51% of consumers in Mexico consider speed and reliability to be one of the most important features of e-commerce. Startups are capitalizing on this desire and, in the past year, have launched an arms race to dominate ultra-fast delivery.
But, consumers in that same survey also said that “competitive” wasn’t enough — lower prices were what was most important to 74% of those surveyed.
That all delivery startups have deliberately chosen to prioritize speed rather than pricing speaks to the complexity and thin margins of the last-mile business. But it also speaks more deeply about the logic of venture capital–backed companies.
Startups were rushing to dominate delivery in Mexico well before the pandemic. Logistics and food delivery services like Chile’s Cornershop, now owned by Uber, and Colombia’s Rappi, hit the Mexican market in 2015 and 2016 respectively. They are now in direct competition with multinationals like Walmart and marketplaces like Amazon and MercadoLibre.
Since Covid-19, competition has expanded aggressively. Mexico, with its low e-commerce penetration and poor online shopping experiences, was a prime target. It was among the top three countries with the largest representation of startups at Y Combinator’s 2021 Demo Day. U.S. grocery and retail delivery startup Jokr raised $170 million in funding and began operating in Mexico City this year, offering deliveries within 15 minutes of purchase.
Around the exact same time, Rappi launched a “Turbo-Fresh” option for deliveries in less than 10 minutes. Colombia’s Merqueo also promised to deliver in 10 minutes, after moving its headquarters to Mexico City and announcing plans to invest $60 million in Mexico over the next two years.
New players are also popping up all along the supply chain, including logistics and fulfillment. It is pushing Mexican startups like Jüsto, a thriving e-grocer with an investment of $65 million two years after it launched in Mexico City, to step up by expanding to more cities across the country and beyond.
“Regional players are aiming to win in Mexico, the jewel of the crown in Latin America,” says Eguren, the VC analyst.
Luis Mario García Muñoz, the company’s 24-year-old CEO, and Javier González Rodríguez launched Orchata earlier this year. It’s now present in the country’s second and third largest cities, Monterrey and Guadalajara respectively.
On-demand delivery is capital intensive. Orchata requires large sums of money to open fulfillment centers to increase coverage and meet demand. The startup’s hefty initial investment eases some of the pressure of paying fixed costs — rent, product fulfillment, workers — without high sales, but not completely. They are still running against the clock against companies like Jokr, Rappi, and Uber.
To rise to the challenge, Orchata works as a comprehensive, all-in-one startup. “We are the retailer, the software, and the app,” says García from Orchata’s main warehouse, located just a few blocks away from an Oxxo convenience store, one of their biggest competitors.
They opt for “ugly spaces” located outside prime real estate locations, to keep rent low. On top of that, their handful of “micro” warehouses helps speed up deliveries to meet their ultra-fast promise by being individually closer to customers.
It hires delivery workers rather than keeping them as Uber-style partners, mainly to cut down on third parties but also to provide them with benefits, a comfortable work environment, and a sense of belonging to the company.
Finally, the company relies on its own technology to know how their products behave, minimize spoilage, keep a tighter inventory, and gather data from their customers in order to predict their needs.
The online food delivery industry in Latin America is projected to be worth $9.8 billion by 2024. That’s 20% more than in 2021.
“The market is already demanding faster services, and companies are being forced to raise more rounds of capital to meet that demand,” said Carlos Ramos de la Vega, manager of Venture Capital at the Association for Private Capital Investment in Latin America (LAVCA).
There are more sources of money for Mexican startups available today than there were 10 years ago, says Mario García Dávila, co-founder of AngelHub, a Mexican network of angel investors. Not only are there international VCs like SoftBank but national options willing to take on bigger risks, he told Rest of World.
Samir, who raised $5.3 million at Y Combinator this year to launch PideDirecto, says that “without the capital, we [startups] couldn’t grow at the pace we want.” But the money poured in by aggressive investors can also pressure entrepreneurs to grow unsustainably, he added.
VC-funded startups have to scale fast and gain customers at dizzying speeds, if they want access to more capital. This is also one reason why on-demand delivery companies like Orchata are aiming to go global at the onset.
The race to be the fastest service in the market has its skeptics. Rodrigo Barranco, head of Innovation and Strategy at ABC Logística, a logistics provider, sees the value in outsourcing and integrating different players into the supply chain within e-commerce. He thinks it could allow last-mile startups like Orchata the chance to focus on what customers really want — cheaper goods.
“From the viewpoint of sustainable operations, I’m betting on slower fulfillment for articles you don’t need immediately.” His own market research has shown him that customers don’t necessarily care if a shirt or a sex toy gets to them the next day.
“Some people can wait from three to five days, which in turn makes the operation cheaper and more efficient because you are able to send more packages in a truck on any given day.” The countercurrent to ultra-fast will be the push toward sustainable supply chains that draw from a myriad of players, he said.
The arrival of ultra-fast in Mexico is still at an early stage, but new startups are emerging all the time to push the envelope on innovation that makes something like a 10-minute delivery profitable to them and affordable to their users. Orchata is working “obsessively” to win the future that ultra-fast promises, according to its CEO, along with a list of highly motivated players, big and small. Who gets to win this future is yet to be determined, but the race is definitely on.