🔥"Instant Needs": How Much $ Will Go Puff?🔥
Gopuff, Getir, Gorillas, Jokr, Fridge No More & Buyk Duke it Out
What happens when you combine (i) a massive total addressable market (“TAM”), (ii) endless quantities of dollars chasing too few deals at “a blistering pace” in a low interest rate “yield, baby, yield” environment, (iii) pandemic-induced consumer behavior shifts, and (iv) tons of free sh*t?
That’s right. You get a wave of mostly money-losing(?) “instant needs” “quick commerce” “e-grocers” biking tampons, toilet paper, ice cream and Bud Light around to satisfy your every whim at $20 off your first order and $20 per referral!
For those of you who haven’t yet returned to the office and therefore remain outside of, say, New York City, you’ve missed the seemingly-instant rise of e-grocery companies that have gobbled up street-level storefronts and crowded sidewalks and bike lanes. They’re ubiquitous. The competition is fierce. And the landscape is changing by the day.
What follows is, admittedly, a foundational piece: we’re just skimming the surface of what could just be another “what to make of the cycle” example of froth or the early innings of real technological and data-driven secular change. Either way, there are potentially significant cascading effects to bear in mind. So, buckle up folks, we’re going for a (bike) ride...
A. The Players
In New York City, you’ve got Gopuff, Getir, Gorillas, Fridge No More, and Buyk. Each of these startups are operating (or were … we’ll get to the appropriately called Jokr ⬇️ ) out of their own “dark stores” — i.e., mini-warehouses stocked with groceries, otherwise known as “mini-fulfillment centers,” or “MFCs” — strategically scattered across the City, offering to deliver groceries “at supermarket prices” (ok, sure, lol) anywhere between “within minutes” to twenty minutes at delivery fees of $0 to $1.95 per order (excluding tips). Investors are tripping over themselves to fund these startups, pouring capital in to them at rapidly increasing valuations as part of a big bet that a pandemic-induced surge in grocery delivery demand will drive the largely offline and data-devoid grocery retail business online. Since January ‘21 alone, the aforementioned six companies have collectively raised a staggering $7b to expand geographies and scale:
And the arms race is only heating up. Founded in 2015, Turkey-based Getir raised merely $38mm in all of ‘20. In ‘21, however, it raised $1.1b from prolific investors like Tiger Global, SilverLake Capital and Sequoia Capital, and is, according to Bloomberg, now seeking to raise an additional $1b at a $12b valuation to fuel US expansion beyond its two recently opened markets, Chicago and New York. This news comes on the heels of the largest of the bunch — Softbank Group Corp.-backed (ugh, here we go again) Gopuff — raising a $1.5b convertible note from previous investor, Guggenheim Partners, at an eye-popping $40b trigger. In ‘20, Gopuff reportedly tripled its ‘19 revenue, earning $340mm. It projected $1b in sales in ‘21 only to double it — generating $2b on a $500mm EBITDA loss. Here ⬇️ are the specs, including funding amounts and valuation:
Naturally Gopuff is rumored to be exploring an IPO in 2H22 because, like, Softbank and stuff. 🤷♀️ And nothing says imminent IPO and “Softbank” like this ⬇️, Super Bowl promo featuring Lil Dicky and Cardi B:
We’ll come back to Gopuff momentarily but there’s a threshold question to address: what the bloody hell is going on here with all of this?
B. The TAM is, Naturally, Infinity, LOL
First, let’s address that TAM. We bet each and every one of the aforementioned six players above would calculate it differently — each choosing from a menu of uber-optimistic pie-in-the-sky assumptions to inflate the potential opportunity. We’re talking about food here, people, so the opportunity has got to be average monthly grocery bills multiplied by the number of human beings who, like, need to eat, right? Like, any pitch deck should just have a TAM slide with a picture of the globe on it, shouldn’t it?
In business, one plus one should equal three. So why are venture capitalists pouring billions into rapid-food-delivery startups that yield negative numbers?
Like so many investors these days, they are after the pot of gold at the end of the rainbow. DoorDash pegs the addressable market in convenience at $200 billion to $250 billion and grocery at $800 billion to $1 trillion, according to a December report by Gordon Haskett. Buyk, a rapid-grocery-delivery startup, has said its addressable market is $500 billion in just the U.S.
In other words, whatever it is, it’s big. Hence the notable venture players dabbling in the space all looking for the “Uber of” “instant needs” grocery delivery to make their fund.
C. JOKR Quickly Becomes a Punchline
Waaaaaaaaaaay back on January 12, 2022, Harry Stebbings released an interview with Ralf Wenzel, the Founder and CEO of Jokr after Jokr had just raised over $260mm at a $1.2b valuation. Mr. Wenzel, himself, has a resume that spans time at Foodpanda, Delivery Hero, WeWork (gulp) and, wait for it…Softbank (double big gulp).
Here are some of the key topics in the interview:
📍 Is Grocery Delivery a Sustainable Secular Trend? Jokr’s over-arching operating assumption is that consumers will continue to shift towards delivery due to its more social, personalized, data-driven, spontaneous, and speedy proposition. Wenzel calls grocery delivery a new secular trend that was accelerated by the pandemic and insists that the newer generations’ reliance on mobile screens rather than trips to offline traditional supermarkets will spark continued adoption and growth.
📍15-Minute Delivery Guarantee. Wenzel views this as critical on both the supply and demand side. Customers, he says, want super quick delivery; he insists that this leads to higher order frequency, retention rate, and lifetime value (“LTV”). On the supply side, the guarantee promotes a certain utilization rate among its rider workforce to ensure a certain number of food drops per hour which is critical to achieving profitability. Indeed, he emphasized that sticking to that 15-minute window drives higher rider utilization and, in turn, higher gross profit margin. In other words, he needs those four deliveries per rider per hour.
But then he goes on to hedge a bit when he discusses how sometimes the business needs to “stack” orders and expand the delivery time to 15-30 minutes. So, he contradicts himself because literally within minutes of insisting that 15 minutes is key he says that above 30 minutes, you lose retention and LTV. Uh, ok.
Right now, he says, in mature cities the business is getting between 3.5 and 3.7 drops per hour per rider — a function of sticking to the 15-minute guarantee as best as possible.
📍Asset-Heavy Vertical Integration. The delivery services we’re all accustomed to are asset-lite businesses that serve as middlemen for third-party food sellers. Jokr, on the other hand, is building actual infrastructure; it is taking advantage of a weak commercial real estate market in New York City, for instance, to drop micro-fulfillment centers all over the place. These 3k-4k sq ft delivery network hubs house roughly 2k-3k SKUs (roughly 10% of a traditional brick-and-mortar supermarket) and ensure proximity to consumers. The company needs a distribution center to supply each of these MFCs too, but it can be less centrally located and therefore more economical. The distribution centers replenish MFCs twice a day and can drop food based on customer order habits which change depending on the time of day (e.g., the business rotates inventory so that there are bagels in the morning and pizzas at night, for example).
Vertical integration also affords the business flexibility to enter into partnerships with local businesses, i.e., Breads Bakery in NYC, the type of local offering that Wenzel says is key to its business. Jokr has far more negotiating and pricing leverage with local purveyors than it does, say, a major CPG brand. If local brands become a larger part of the business’ product assortment, he can elevate product margins.
📍The Economics. Speaking of margins, the economics of this business are really … um … interesting. To start with, the business doesn’t charge a delivery fee and doesn’t have a minimum order size. That seems like a recipe for disaster. Yet, the company insists that the average order value (AOV) is $50/order. Kevin LaBuz has a really good breakdown of this here:
First, note that LaBuz (understandably) takes the midpoint of both (i) stated fulfillment costs as % of AOV and (ii) lease costs. So, these figures could toggle somewhat in either direction. Note further than “fulfillment cost” bakes in delivery/food-picking costs — which are higher in the US by a multiple because Jokr’s riders are full-time employees; it doesn’t use the independent contractor model made famous by 3rd-party delivery companies like Uber. Interestingly, Wenzel acknowledges that the model is much harder in the US due to the higher upfront costs, e.g., leases, security deposits, employment costs, etc.
But the other thing — the MAJOR thing — not baked into the above chart, as LaBuz acknowledges, is customer acquisition cost and SG&A. Though he’s asked pointedly what percentage of AOV goes to marketing, Wenzel dodges the question and instead states that CAC is high upfront in new cities but then it tapers off after 3-6 months to the point of 50% of new customers coming in organically. We call absolute complete and utter bullsh*t on that.
It gets better. LaBuz writes:
JOKR hasn’t disclosed its CAC, but the [Wall Street] Journal uncovered that New York competitor Fridge No More spends $70 to acquire a customer. If CAC were similar for JOKR, it would take 5.5 orders to recoup CAC at its long-term target margins. Because JOKR is operating below this level today, order frequency needs to be much higher to cover acquisition costs. If JOKR is performing at Fridge No More’s AOV, product margin, and CAC, over 11 orders are needed. That’s no walk in the park. Additionally, this doesn’t factor in any technology and development investment (apps and cloud services aren’t free), G&A, or other corporate overhead. High customer retention and repeat rates are required for the business to have a shot. If customers don’t use the service habitually, it’s hard to see a viable model.
He proceeds to break this down:
To make this all work, the business obviously requires additional levers to pull. Wenzel demonstrated his sheer lack of originality by talking about the power of private label which, he says, could add 5-10% additional margin at scale; he also noted how the business can become a platform for advertising for producers to promote product in a data-driven way. Because, like, everything is an ad business at the end of the day, isn’t it?
📍 The Comparison. Despite a troublesome economic picture, Wenzel insists that his business compares very favorably to the P&L of a traditional supermarket or offline grocery retailer and the 3rd party delivery companies. How? He says they yield better revenue per square foot than they do, insisting that Jokr’s yield per square foot is 3x better than Amazon-owned WholeFoods. He adds that procuring local is more accretive to the business than depending upon large CPGs; that his data-driven model brings down inventory loss; that SG&A is leaner because they don’ t need as many heads and they can leverage central tech around the world.
This all sounds pretty darn good. Jokr must be killing it in New York City, then right?
Or is all of this too good to be true (stateside, at least)?
While Wenzel was forthcoming about some things with Stebbings, he wasn’t exactly telling the whole story. How do we know? Well, for one, as we noted above with Fridge No More, the financials of competitors have recently gained some press.
According to the Wall Street Journal:
“So far, the unit economics look underwhelming. JOKR was losing $159 per order in the U.S. as of last August, according to a recent report from The Information citing internal data sent to investors, though JOKR says its first cities have become “operationally profitable.” Even Gopuff, coming off a year of significant expansion, isn’t profitable on the basis of earnings before interest, taxes, depreciation or amortization, though it says it is “contribution profit positive.”
Hahahaha. What a low f*cking bar — especially for Gopuff, a business that is going for asset-heavy vertical integration. We’ll come back to that.
Anyway, a more recent Wall Street Journal article concludes that these companies aren’t profitable because they are running ridiculous promotions to attract costumers.
“I have not paid for toilet paper, paper towels, dish soap or hand soap,” said the 23-year-old founder of a small online-auction startup. He said for most orders, his only costs are generally tip and tax. “As a consumer, I think it’s fantastic.”
In other words, there’s an obvious reason why Wenzel didn’t get into CAC.
Even more amusing, Jokr’s core premise that speedy delivery is critical may be fundamentally flawed. A small study by Coresight Research shows that fast delivery of groceries is of lower importance than other factors. Will these startups be able to compete with the 2-hour Amazon Prime delivery or Instacart?
“Nicolas Colin, co-founder of VC firm The Family, noted that with so many players, there is unlikely to be enough economic value in the chain to deliver a decent return on all of the capital invested. He predicts that as the sector matures and rankings become more established, startups will face down rounds and consolidation.”
What a bold call!
Right on cue, Jokr is already changing course. According to The Information, Jokr told investors in the fall it would experiment with slower delivery times and a subscription service to reduce its heavy losses. And it’s pulling out of New York City!! LOL. Jokr is already looking to sell its New York City business and listed a few competitors as potential buyers. The consolidation begins!!! On this point, Bloomberg’s Matt Levine quipped:
If you have a money-losing business of delivering groceries in New York, and someone else with a money-losing business of delivering groceries in New York approaches you asking you to buy their operations, you should do it! Your near-term goal here is customer growth, not profits, and buying another company’s unprofitable customers allows you to lose money twice as fast.
In that vein, Walt Hickey snarked:
Obviously start-up costs are considerable in any line of business, but a company that thinks they’re the next Uber may not realize that their balance sheet sure resembles the next Moviepass.
Which is funny because Levine once dubbed this whole VC-backed-spend-heaps-of-money-to-dominate-a-market-and-only-then-maybe-make-money-plan, “The Moviepass Economy.” He recently wrote:
Isn’t modern finance amazing? The basic model here is that you imagine the world five years in the future, and you imagine that your company has monopolistic dominance of the grocery business in that future, and then you think “that seems like it would be profitable,” and you model a stream of profit that is many billions of dollars every year for the rest of time starting in five years, and you calculate the net present value of that stream of income, and it is very large, and so you say “well then it makes sense to spend a lot of money giving everyone free groceries for a few years to get us to that future of monopolistic dominance,” and you go to venture capitalists with that pitch, and they say “well we do have a ton of money and we love monopolies,” and they give you the money, and you buy everyone groceries. And then everyone eats the groceries and is like “thanks, venture capitalists!” And then in a year or two you flip from giving them free groceries to charging them for groceries, and either it works or it doesn’t.
We have talked about this model a bunch before; people make fun of it but it remains popular and it’s not at all clear that it's wrong. For the venture capitalists the good outcome here is that you succeed in building a monopoly, jack up prices, squeeze your delivery workers’ pay and make a lot of money. From a societal perspective it is possible that the good outcome is … you know … Saudi sovereign wealth funds just give everyone in New York free groceries for a while? There is an argument that this business model is a symptom of investors having too much money, and buying groceries for people seems like as good a use of that money as anything else.
History is repeating itself.
Kozmo.com Inc. and Urbanfetch.com Inc. were both 1990’s dot-com era rapid delivery services that went out of business after the inability to contain losses. Kozmo, which raised over $200mm of funding to deliver convenience items in an hour, closed its doors in 2001.
Per The Wall Street Journal, the two Kozmo founders had different opinions on the current state of the market:
Joseph Park, Kozmo’s founder and chief executive, said there are many tech improvements that could benefit the current crop of companies, such as GPS that guides drivers. He said the basic rapid-delivery business model could work today, though 15-minute delivery is far more difficult than an hour.
“It’s not easy,” he said. But “it’s absolutely possible.”
His co-founder, Yong Kang, is less optimistic. “It’s the same story,” he said. “To make this profitable is hard.”
eBay Inc. attempted a same-day delivery service, but it ended in 2015 in a restructuring and Amazon.com Inc., has a one-hour delivery in New York but charges a $9.99 fee on orders under $35.
Clearly the investors who recently put in that $200+mm into Jokr didn’t like the economic picture (in NYC) and entreated Wenzel to pivot his focus to Latin America where, as the numbers LaBuz mapped out above suggest, the economics are far more favorable. Life comes at you fast: it was all of six weeks ago Wenzel was touting the benefits of the model to Stebbings. 🤔
E. What About the Biggest Player, Gopuff?
A mere few weeks later, on February 4, 2022, Jason Calacanis released an interview with Gopuff Co-founder and Co-CEO Rafael Ilishayev.
Ilishayev provided some interesting details about the Gopuff business:
📍Infrastructure, Delivery Time & Scale. According to Ilishayev, Gopuff MFCs are in the top 100 cities in the US. The smallest MFC is 5500 sq ft and the largest is 20k sq ft. Gopuff recently bought Bevmo in CA and LiquorBarn out of Kentucky. These were expensive acquisitions but they provide ready-made MFCs with liquor licenses attached to them that would otherwise be very difficult to get. 60% of CA’s residents are within 1.5 miles of a BevMo now. 🤯
He said the average delivery time for orders is 17 minutes and in newer cities like NYC, it’s in the low teens. He said NYC has 16 MFCs (every borough except State Island which he said is coming next month). Packing orders takes just shy of 2 minutes and most rider runs stack 2-3 orders within a tight delivery zone around the MFC so that not only does the biker not go too far, but he/she doesn’t take long to come back for the next wave. In NYC, this translates to generally 3-5 deliveries per hour per rider. This seems in line with Jokr though, significantly, Gopuff is clear to highlight that it is not guaranteeing 15-minute delivery.
📍Inventory. Calacanis asked pointedly why Gopuff is committed to making the investment to build its own inventory rather than be a 3rd party middleman like Uber. He replied that the 3rd party experience is really sh*tty and uneconomical. He claims that Gopuff was EBITDA profitable in the first 2.5 years (presumably before spending massively to expand because that is CLEARLY inconsistent with recent reporting). He added that owning inventory lets them track inventory in real-time so they don’t need to rely on substitutions that rankle users; they don’t do food swaps. Finally, he says that only 1 in 300 orders are mis-packed because they’ve been able to build the tech necessary to ensure a better user experience. The company started with just convenience SKUs. By ‘15-16, the company had realized that the opportunity set was obviously higher and so it expanded into “immediate needs” like ice cream, alcohol, etc. From there, it expanded into grocery in a deeper way. Assortment expansion is based on what consumers want. Each MFC holds 4k-6k SKUs and data drives that selection. Products that don’t perform are discontinued really quickly.
📍Economics: Gopuff differs from Jokr in that it charges $1.95 fee per delivery and doesn’t have a 15-minute guarantee. Another big difference is that, in the US, its runners are independent contractors (just like DoorDash)(but the in-MFC packers are W2). He says ICs make between $17-$30/hour in the US depending upon the market tier, how many orders the runner does and how efficient he/she is. In Europe, by contrast, runners are full-time employees. The AOV is $30 and margins are around 30% so the company makes $9/delivery. The delivery fee goes directly to the ICs — as do tips (which trend in the mid-single digits). This is how he gets to $17/hour for the ICs. Ilishayev claims Gopuff has 70% of share in “instant needs” in the US; that Gopuff is the #1 seller of ice cream in e-commerce and the #1 seller of alcohol on e-commerce.
Is there room to expand this model into the suburbs? Ilishayev cites this as the largest opportunity. He said suburbanites purchase larger baskets, show more loyalty and retain at higher levels. He’s looking at areas immediately outside major cities. This is what his new fundraise and ‘22 are for. Demand is there. On the liability side, he said fixed costs are obviously lower and labor is cheaper. They’ve tested this with BevMo and it was a big win.
📍Scale. Size matters. Because of Gopuff’s scale and distribution, it is able to partner with influencers like Mr. Beast on exclusive new product launches. Mr. Beast benefits from the distribution and Gopuff gets a ton of publicity via social channels. Now, says Ilishayev, celebrities are reaching out to Gopuff for collabs. It’s unclear whether Lil Dicky reached out or Gopuff approached him but does it really matter? Celebs are putting their star power behind Gopuff. Selena Gomez is an investor and a collaborator.
📍Private Label. Yup, they’re all looking at this. Gopuff started a private label called “Basically” after a consumer insights report indicated that 80% of customers would love to see a Gopuff private label that’s high quality and affordable. Because it is a higher margin opportunity, Gopuff brought on the team behind Brandless — a one-time Softbank portco that failed spectacularly after a ton of funding.
Does all of this combine to make the secret sauce? Time will tell. Per investor materials recently reviewed by Axios, “…all of [Gopuff’s] MFCs launched in 2017 or earlier are generating at least 10% quarterly EBITDA (Philly is above 15%). The figure is 66% for MFCs launched in 2018, 34% for 2019 and 26% for 2020.” Furthermore, Gopuff “…also claims a 14.2% per order profit for the 2017 and earlier markets, working out to $3.67. For 2020, those figures are 4.9% and $1.32. Query whether these figures are, like LaBuz’s analysis of Jokr above, pre-CAC.🤔
F. What About the Disrupted?
If this is the new wave of grocery shopping, what happens to your neighborhood bodegas and community stores? New Yorkers have seen this movie before in the transportation space: it ended with the decimation of the incumbent taxi industry at the hands of Uber Inc. ($UBER) and Lyft Inc. ($LYFT). Having seen that transpire, New York City bodegas and corner stores are already seeking help from lawmakers to regulate these “instant needs” grocery businesses. They seem to have reached some sympathetic ears. Per Gothamist:
"These bodegas are facing the ultimate threat from these 15-minute delivery apps,” said Christopher Marte, the new City Council member for the Lower East Side.
Marte grew up working in a bodega not far from the one he stood outside of last week on the corner of Rivington and Suffolk Street. As a teenager, he stocked shelves in the store his Dominican immigrant-family owned, he saw how they, and his community at large, were held together by the bodega. It was where neighborhood news was passed, where people could get a hot meal on a cold day, grab shovels to dig out their walkways, and where the grocery stock was able to accommodate the community, selling vegetables and goods from their home countries that weren’t always on offer in larger stores.
Now he’s worried these small businesses could be forced down a dark path — one that immigrant business owners, many from the same Yemeni and Dominican communities that once bought price-inflated taxi medallions, are still reeling from.
One issue is whether they’re violating local zoning laws. Per Pymnts.com:
How this issue plays out could have implications for other cities dealing with the expansion of the quick commerce sector, the report notes. Quick commerce facilities operate in something of a gray area, as far as zoning is concerned, Gale Brewer, a Democratic City Council member, told CNBC.
For example, the Gopuff storefront on the city’s Lower East Side is based in district that’s zoned residential, and housed in a mixed residential/commercial building. But fulfillment centers are typically considered warehouses, which are zoned for manufacturing and commercial districts.
“It’s something that is not 100% clear because this type of use did not exist in 1961 when the use categories were created in the Zoning Resolution,” said New York-based land use lawyer Elise Wagner, a partner at Kramer Levin. “There was an idea back in 1961 that a warehouse was incompatible with residential use. I don’t know if that is something that people would agree with today.”
This is cute:
Quick commerce firm Gorillas, which has 16 warehouses in New York, told CNBC it meets city zoning rules by allowing customers a place in their facilities to wait for their order to be prepared and delivered to them in person.
“As a grocery delivery business, Gorillas understands and complies with the requirements to be a retailer in the locations where we operate,” Adam Wacenske, U.S. head of operations at Gorillas, said in a statement.
We would love to know what percentage of Gorillas’ sales are pickup (and doesn’t that kinda defeat the whole purpose of 15-minute delivery??). 🤔
But maybe we’re being too quick to snark?
Most notable on the list is Gopuff, which has turned some of its micro-fulfillment sites into customer outlets after building up a business based on ultra-fast delivery. Gopuff is expected to IPO this year, after Reuters reported it has hired banks to help it go public, with a valuation of close to $15 billion. The physical locations could make Gopuff even faster by bringing customers to the delivery point, cutting down on time workers take to get items to customers at home. The stores are not typical convenience stores, but ordering hubs, where customers use digital kiosks to place orders that are then fulfilled from the warehouse. To facilitate this omnichannel strategy, GoPuff acquired companies in a land grab, with 161 BevMo stores and 23 Liquor Barns now acquired.
The Gopuff model does what retailers like Target are trying to retrofit their stores to accomplish: functions seamlessly as order fulfillment centers by serving both in-person and online customers simultaneously and sustainably. One look at instantaneous delivery data shows that Gopuff is not optimizing for sub-15 minute delivery:
By building its retail business off the back of its delivery business, Gopuff is poised to meet customers exactly where they want to shop: either online, at home, with instantaneous delivery, or in person when they’re out already and it’s easier, or they want to avoid additional fees.
Getting customers to build a Gopuff habit both via delivery and physical retail will place the nine year old company in a league of its own. With the launch of Basically, – Gopuff’s private label – and the in-store model that only DoorDash’s Dashmart comes close to in function, and Gopuff could present a case for why it may lead the convenience delivery market in the years to come. According to YipitData, as of now, DoorDash leads with 45% to Gopuff’s 23%. Instacart and Uber have earned 16% and 15% of the market.
This could – and should be – a wake up call to grocery and convenience store chains that have slowly turned to delivery.
None of this sounds very positive for the neighborhood corner store. The degree of alarm seems — 😬 gulp😬 — warranted…?
G. The International Picture.
That’s right: this sh*t is global. Two weeks ago, a company called Astro raised a $27mm Series A round led by Sequoia and Accel to conquer Indonesia. Similarly, Zapp, a UK-based grocery delivery business, just raised a $200mm Series B round at the end of January ‘22. But some European cities are putting a (one-year) freeze on new dark stores: “The freeze on establishment of new dark stores in both Amsterdam and Rotterdam is because of complaints from local residents who have reported nuisance. The people in these cities have reported that the collection of groceries by the couriers results in crowding, noise and even traffic nuisance.” Per Reuters: “In London's Islington and Berlin's Kreuzberg neighbourhoods, residents have complained about the noise. In Paris, the deputy mayor has decried unmarked stores as a blight on the cityscape and called for them to seek licences as warehouses or face "financial consequences and penalties.""
Similarly, there have been issues in Berlin which raises parallels to New York City. Per The New York Times: “In communities where deliveries are made, some residents fear losing a sense of place. Kaja Santro, a web developer and lifelong Berliner, is concerned that delivery services like Gorillas may threaten the city’s spätkaufs, Berlin’s equivalent to bodegas, since they sell items stocked in their own warehouses, unlike regular grocery services. “If you stay in and order from Gorillas, you won’t participate in your neighborhood,” Ms. Santro said. In New York last fall, Gale Brewer, then the Manhattan borough president, published a letter challenging instant delivery warehouses’ zoning compliance, saying the hubs “deaden our streetscapes.””
Headwinds are brewing. What was that global TAM again?
H. Even Though You Might’ve Seen This Movie Before, Stay Tuned
Despite the omicron variant surge that lasted throughout January, online grocery sales decelerated compared to last year and fell $400 million from the prior month. This is due to a few factors, said David Bishop, partner at Brick Meets Click, including a lack of economic stimulus dollars, labor disruption and, most notably, the fact that millions of Americans are now vaccinated against the virus.
That’s unwelcome news for the e-grocers.
Which brings us back to the NYT, “For now, Mr. MacAllen plans to continue to order sporadically from Gorillas, and maybe from other rapid delivery services, too, as they extend deep discounts to new customers. “It’s that golden age where nobody needs to make money and people on both sides are winning,” he said. “Long term is my concern.”"
If history is any indication, there’s a lot of reason for a lot of people to be concerned. In the meantime:
We can’t wait to see how this all plays out.
😎 Notice of Appearance - Justin Bernbrock, Partner at SheppardMullin😎
This week we welcome Justin Bernbrock, a partner in the Finance and Bankruptcy Practice Group of SheppardMullin out of Chicago, for a discussion about various restructurings he’s been involved in, some thoughts about the future, and some sage counsel for our younger readers. We hope you enjoy it.
PETITION: Welcome and thanks for doing this. Presumably you have a bit more time on your hands to do it because things have obviously been relatively quiet, lol. What has been keeping you busy? What are SheppardMullin clients calling about? And what is your prognosis for 1H22? What is the catalyst, if any, that creates a more robust restructuring market in the near-term? And what industry are you watching that maybe isn’t getting as much attention as it should?
Justin: Thank you very much for having me; I’m a huge fan of PETITION, and I truly appreciate your inviting me into the Borg. Yes, it’s been very quiet on the restructuring front. But, thus far, I’ve been successful at fending off extreme panic — you know, “this too shall pass” and all.
We are fortunate, as a practice group and as a firm, to have partners and colleagues in several different disciplines, many of which aren’t as slow as the complex restructuring market. We also have important mandates in the middle market, particularly on the West Coast, that enable us to continue developing talent and honing our skills.
As for 1H22, I don’t expect there to be a huge upswing in restructuring activity, but I do expect there to be an increase relative to 2H21. That said, I subscribe to the view that modern macroeconomics are far more exposed to dynamic changes than they have been in the past. For example, if Mr. Putin decides to invade Ukraine (after the Olympic Games, of course), there could easily be economic aftershocks that reverberate throughout Western economies and thus result in significant restructuring activity. Beyond a geopolitical event, we continue to watch for climate-change–based events that could drive restructuring activity. Absent these types of external drivers of restructuring activity, I do expect companies in the low-to-mid market to suffer the initial effects of the Fed’s interest-rate hikes.
There’s no one industry on which I’m especially focused. Much like the mighty P-3C Orion (pictured below), I like to say that we’re an all-weather, all-purpose restructuring shop.
PETITION: Let’s take a look at some things from your professional past. A little over a year ago you filed and represented Alpha Media Holdings LLC, a privately-held radio broadcast and multimedia company, in it and its affiliates’ prearranged chapter 11 bankruptcy cases in the Eastern District of Virginia. The company struggled with the pandemic; its advertising customers were small to mid-size businesses that severely reduced advertising budgets. This looks like it was the quintessential middle market deal with approximately $266.5mm of outstanding funded indebtedness at the time of the filing. Brigade Capital Management of “F*ck Citibank in Revlon” fame provided the DIP to take out the first lien lenders (and subsequently rolled into an exit facility) and the second lien lenders swapped debt for equity in the reorganized company. Structurally subordinated holdco notes were wiped out, meaningfully deleveraging the enterprise. General unsecured creditors were left unimpaired. You were in and out in a few months and effective within half a year. A lot of our “Notices of Appearances” have focused on mega deals. What was of particular interest in this middle-market deal that you think our readers might find educational? And please address the lawsuit against the Small Business Administration relating to PPP funds in bankruptcy. If we recall correctly, Alpha Media was on the frontlines of that issue.
Justin: The key takeaway from the Alpha Media case is don’t sleep on middle-market cases; they often provide opportunities to push the edge of the envelope without the risks attendant in a mega case. To this day, I’m a bit sheepish about the things we were able to achieve in the case: a day-one priming DIP, a full take out of our first lien lender prior to the final DIP hearing, uncontested plan confirmation, and a lawsuit that prompted the SBA to change its interpretation of what it means to be a debtor in bankruptcy (i.e., after our lawsuit, the SBA opined that a post‑confirmation debtor was no longer “in bankruptcy” for purposes of the PPP loan application).
I’d be remiss if I didn’t point out that, shortly after our tussle with the SBA in the Alpha Media case, we sued the SBA on behalf of the debtors in the Sizzler USA Restaurants, Inc. chapter 11 cases to ensure Sizzler obtained its second draw under the PPP. We had the Sizzler debtors in and out of bankruptcy in a little over three months. You’re welcome, America:
PETITION: You represented the Conflicts Committee of the Board of Directors in the Seadrill Partners LLC bankruptcy case. Why was a Conflicts Committee necessary in that case and what does conflicts counsel do? That’s not a subject we’ve focused too much attention on.
Justin: Seadrill Partners LLC was an MLP created by its ultimate parent company, Seadrill Limited. In conjunction with Seadrill I (2017–2018), Seadrill Partners underwent an out-of-court restructuring, whereby its funded debt was decoupled from the broader Seadrill Limited enterprise. Nonetheless, Seadrill Limited continued to operate the Seadrill Partners rigs and vessels, and Seadrill Limited retained a significant equity stake in Seadrill Partners.
In late 2019 and early 2020, a group of lenders to Seadrill Partners asserted several complaints regarding the terms on which Seadrill Limited was providing services to Seadrill Partners. Throughout 2020 the bonds of affection between the two companies were continually strained by these disputes. And our client, the Conflicts Committee of the Board of Directors, was at the center of the relationship between Seadrill Limited (and its stakeholders) and Seadrill Partners (and its stakeholders). Our role, therefore, was to guide the Conflicts Committee as it discharged its fiduciary duties—and, moreover, we added a layer of independence in a situation that was something akin to an unmarked minefield.
PETITION: You have a number of oil and gas restructurings on your resume. There was a period several years ago when it seemed like every restructuring pro was taking up residence in Houston. A lot of debt was eliminated in countless bankruptcies. You were involved in Penn Virginia Corporation, Magnum Hunter Resources Corporation, and Midstates Petroleum Company Inc. Since then, there’s been a bunch of industry consolidation and, seemingly, a lot more discipline in the industry. Still, there are ESG concerns and huge political pushes towards cleaner energy sources, just to name a few macro headwinds. Do you think we’re going to see another wave of oil and gas restructurings in the next several years?
Justin: Yes. There’s no question in my mind that energy transition is real. Over the coming years, I fully expect to see continued pressure and real movement from non-renewable energy sources to renewable ones. That transition will take time, however. I expect first-world countries to transition in a meaningful way to renewable sources over the next 20 to 30 years, whereas it may take longer in developing countries. As a result of this, I expect there to be a period of consolidation among oil and gas companies over the next decade and an increased focus on delivering hydrocarbons to the developing world. This all assumes, of course, that the earth doesn’t evaporate first. #dontlookup
PETITION: You represented Patriot Coal Corporation too. What do you predict for what remains of the coal industry? It sure feels like Peabody Energy Inc. ($BTU), to name one, is doing some sort of balance sheet maneuver every, like, six months.
Justin: Like the oil and gas industry, I expect we’ll see additional consolidation in the coal industry (what’s left of it). And we’ll see more focus on exporting coal mined in the United States and coal-related technology to the developing world.
PETITION: Looking more towards the future, we’ve been spending some time talking about some of the fresher things that are happening these days whether that’s the rise and evolution of DAOs or the growth of “decentralized finance.” We have no idea whether any of this stuff is real or top-of-the-cycle chicanery but we suspect, as we’ve written, that these things will end up converging with bankruptcy processes at some point. What do you think?
Justin: Here’s how I want to answer this question:
“There are very few things that I will defend with true passion: medical marijuana, the biblical Satan as a metaphor for rebellion against tyranny, and motherfu**ing Goddamn cryptocurrency.” — Bertram Gilfoyle, Silicon Valley
Alas, I’m not as cool as Gilfoyle. In reality, I’m very torn over the subject. I’m fascinated by block-chain technology and cryptology, I’m personally invested in a few “decentralized finance” products, and I generally favor things that run counter to the status quo (#RiotFest 2022). That said, if taken to its farthest reaches, decentralization could have incredibly destabilizing effects on our current societal structure. Huge swaths of the financial sector—on which much of the modern U.S. economy is based—would be rendered irrelevant. There’d be no need for central banks, and the value of fiat currencies would plummet. The parade of horribles could continue ad infinitum.
I do think we’ll see additional intersection between decentralized finance entities and the bankruptcy process; Mt. Gox is a clear example of this. Nonetheless, I think this intersection will also give rise to complex challenges—i.e., using a centralized system to administer intangible assets, the values of which are subject to wide–ranging differences. Nevertheless, I think it’s wise for restructuring professionals to get smart on these topics now. Again, to quote Guilfoyle:
“Let’s say Buffet is right. Bitcoin dies. So what? Myspace and Friendster both died but they paved the way for other social media like Facebook and Twitter to completely overrun the planet. Crypto is out there and it’s not going away.” Bertram Gilfoyle, Silicon Valley
PETITION: What is your favorite thing about the bankruptcy code? On the flip side, you must have some thoughts about inefficiencies in bankruptcy. What is f*cked and needs fixing? Is there one subject that not enough people are talking about? If you could implore Congress to take action about one thing, what would it be?
Justin: My favorite thing about the Bankruptcy Code is that it works! I don’t think it’s a stretch to say that the U.S. insolvency regime, writ large, is the envy of the world. And it’s played a major role in the U.S. economy by acting as a value recycling system.
As for inefficiencies, and this is a statement against interest, I’ve long thought that the practice of preparing and filing voluminous first–day pleadings is a waste. Save for a few critical documents in which a narrative story is important, I think a majority of the relief sought by FDMs could be achieved via check-the-box forms.
PETITION: You and some of your colleagues have gotten into the podcasting game. That’s something we’ve always wanted to do but … well … we have some obvious constraints (😉 ). One day, maybe. That said, why does the world need another restructuring podcast and what do you and the team hope to get out of it? Is this … not to be cynical here … just another indication that things in the market are slow (akin to what we’d dubbed the “Weil Bankruptcy Blog Index”)?
Justin: We could absolutely use the Stephen Hawking voice—without all the clever stuff (hat tip to R. Gervais)—if you’re worried about maintaining anonymity.
In truth, the idea for Restructure This! came while I was riding Metra into Chicago (pre pandemic, of course), and I couldn’t find a recurring podcast from the perspective of a restructuring lawyer. And, candidly, it’s something that I pitched to Sheppard Mullin when I was first interviewing. It’s taken a bit longer than I’d hoped to actually launch, but I’m very proud of what we’ve put out thus far. And, yes, we’ve had time to focus on the project because the market has been quiet—the challenge, I think, will be to keep it going once restructuring activity picks up.
PETITION: What is the best piece of professional advice that you’ve ever gotten and why? Any lessons you apply to your career from your experience in the military?
Justin: To quote one of my mentors, “care about your job” and “DFIU,” which stands for…well, you get it. At the crux of these is the idea of doing good work, which I think is essential to having longevity in this business. Indeed, performance has to be the bedrock of any successful career—no gimmick or social–status relationship is going fill the void left by not doing the work or not doing it well.
My military background is central to who I am; it’s difficult to reduce that experience to a series of transferable, discrete lessons. For example, I’ve not needed to field strip a Sig Sauer P320 in my time as a restructuring lawyer, nor have I needed to fold an entire compliment of uniforms so they could fit into a seabag. But, owing to my time in the military, I have a keen sense of attention to detail—and that’s something that has served me very well in my current capacity. I also think my military background provides a perspective that’s somewhat uncommon in my line of work.
PETITION: What are some books that have helped you in your career?
Justin: Here’s a list of books that come to mind:
PETITION: Finally, you’ve likely noticed that we like to snark “Long ABC” or “Short XYZ.” What are you “long” these days? What are you “short”? Feel free to be creative here but please list one thing that’s legal/financial and one thing that’s … well … whatever.
Justin: I’m long on post-pandemic, work-life dynamics. Our youngest daughter, Madalynn Grace, was born on April 20, 2020, and I’ve been able to observe and participate in her development far more because I’ve been home for most of her life. Time will tell whether she’s long or short on “Dada time.”
Of course, I think it’s important to spend meaningful, in-person time with clients and colleagues, but I suspect the future of these interactions will be more intentional and efficient. And I think that firms and companies will continue to evaluate policies and practices with an increased focus on human health and well-being.
I’m short on non-consensual (or quasi-consensual) third–party–release provisions in Chapter 11 plans. Purdue Pharma and Ascena are the latest flash points in a cold war that’s been lurking for some time. And I expect that Bankruptcy Courts across the country will more closely scrutinize all release and exculpation provisions in the wake of these decisions. To be sure, the United States Trustee Program will take up the standard (to the extent it hasn’t done so already) in the hopes of further eroding the practice of seeking/receiving broad releases under Chapter 11 plans. The harder question, I think, is whether it would be more beneficial for the canon of release law to develop in the Courts of Appeal (and, perhaps, SCOTUS) before a Congressional solution is fashioned.
PETITION: Thanks Justin.
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