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Bodegas are in search of zoning legal guidelines to defend their turf in opposition to instant-delivery startups

A Gopuff location on the Lower East Side of Manhattan across from Stop 1 Deli. January 12, 2022.

Hannah Miao | CNBC

Grocery delivery start-up Gopuff moved to retail space on the ground floor of a new luxury condo building on Manhattan's Lower East Side, across the street from a bodega, last fall.

"I didn't really think it was a big deal because we have our loyal customers in the neighborhood," said Jose Tavaras, who has worked at Stop 1 Deli for 10 years.

Later, Tavaras searched for the company. Gopuff was valued at $15 billion in July and could reportedly be valued as high as $40 billion following its latest funding round.

"It's going to change something," Tavaras told CNBC. "These companies have an advantage because they have the money behind them."

Quick commerce services exploded in New York City last year. About half a dozen startups across the city are promising to have online grocery purchases delivered to customers' doors in just 10 to 20 minutes after the order is placed.

Some elected officials and small business owners fear the delivery startups could eventually crowd out bodegas and corner shops. Critics use zoning rules to try to stem the venture capital fueled growth of these companies.

How New York regulators react to the fast-shipping grocers could have implications for other cities as the fast-food sector expands in the United States.

Warehouse or grocery store?

Gopuff, Gorillas, Getir, Buyk, Fridge No More and Jokr are among the players vying for clients in New York. Gorillas has said it competes with supermarkets, not corner shops, while Jokr has named retail giant Amazon as a target.

Rather than providing third-party delivery services to stores or restaurants, the quick trade companies stock their own products in hyper-localized facilities. (Gorillas call them “microwarehouses.”) Workers assemble orders from these locations, and delivery staff get items to customers almost immediately.

A courier from German food delivery start-up Gorillas on his way to deliver an order in Berlin on July 8, 2021.

Tobias Schwarz AFP via Getty Images

In terms of zoning, the facilities move in a gray area between commercial and industrial land use.

“Are they a warehouse or a grocery store? That needs to be determined,” said Gale Brewer, a member of the Democratic City Council and Manhattan Borough President from 2014 to 2021.

For example, the Gopuff storefront on the Lower East Side is located in a residential area in a mixed-use residential/commercial building. Traditional fulfillment centers are typically categorized as warehouses that are zoned for manufacturing and some commercial areas.

"It's not 100% clear because that type of use didn't exist in 1961 when the use categories were created in the Zoning Resolution," said New York-based land use attorney Elise Wagner, a partner at Kramer Levin. “As early as 1961 there was the idea that a warehouse was not compatible with residential purposes. I don't know if people would agree with that today."

Traffic, noise, walkability, human activity and the character of an area are all considerations in urban planning, said Tim Richards, director of land use consulting firm Clarion Associates.

The New York City Department of Buildings, which enforces the zoning regulations, has not yet determined how the microfulfillment centers will be categorized.

"These types of quick-service fulfillment centers are a new breed of business in New York City, and they are not specifically mentioned in existing city zoning codes," Ana Alcantara, deputy press secretary with the Department of Buildings, said in a statement.

Brewer in October urged city officials to investigate whether the facilities, which she calls dark stores, comply with zoning regulations. The Bodega and Small Business Association and United Bodegas of America have also called on the city to "enforce" zoning ordinances, according to materials distributed by the groups.

"We have engaged with elected officials on this issue and are actively working with our partners in other agencies to explore the appropriate zones for these types of facilities," Alcantara said.

When asked about the zoning, a Buyk spokesman said in a statement: "Buyk is focused on hyperlocality and we are tracking that in terms of employment, assortment and compliance with local and community guidelines."

Gorillas, which operates 16 warehouses in New York, told CNBC that the company is complying with the city's zoning guidelines by allowing customers access to its facilities and offering a place to wait for their order to be placed prepared and delivered to you personally.

"As a food delivery company, Gorillas understands and meets the requirements of being a retailer in the locations where we operate," Adam Wacenske, U.S. operations manager at Gorillas, said in a statement.

Gopuff is the industry leader in the so-called "instant needs" space with 73% of the U.S. market share, co-founder and co-CEO Rafael Ilishayev told CNBC's TechCheck in January. It has more than 25 locations in New York and more than 550 facilities across the country.

In a Gopuff location on the Lower East Side of Manhattan. January 12, 2022.

Hannah Miao | CNBC

The company told CNBC that all of its New York City locations are retail outlets that enable in-store purchases and deliveries and are therefore not warehouses, microfulfillment centers or dark stores. Gopuff also has a front-of-house kitchen at its Soho location in Manhattan that sells freshly prepared food, which the company plans to expand to other locations in New York and the United States. Label products in January.

However, during the company's launch event in New York in October, Gopuff's co-founder and co-CEO Yakir Gola referred to the facilities as microfulfillment centers, or MFCs for short. The company also listed a number of job openings for "Site Manager, Warehouse" based in New York, but changed the titles at CNBC's request.

When a CNBC reporter visited the Lower East Side location twice in the past two weeks, Gopuff employees said the facility is not yet open for in-store purchases. Window coverings that blocked the view of parts of the storefront were also removed last month.

When asked about the discrepancy between the company's statement and the reporter's experience, a Gopuff spokesman said, "We remain focused on ensuring that all of our businesses are operated in accordance with local laws by taking corrective action where necessary and providing regular guidance to staff on how best to maintain both a walk-in and delivery experience for our store in the marketplace."

Jokr, Fridge No More and Getir did not respond to CNBC's requests for comment on zoning compliance.

Impact on small businesses

Small business owners are drawing attention to zoning regulations because they say they can't compete with venture capital.

Investors have flocked to the quick commerce startups. Gopuff raised $3.5 billion in venture capital in its July funding round. Gorillas announced a roughly $1 billion funding round in October. According to CB Insights, the ultrafast delivery sector received a total of $5.76 billion in funding through mid-October.

"We're losing these customers," Francisco Marte, founder of the Bodega and Small Business Association and owner of a bodega in the Bronx, said at a Jan. 9 news conference. "You have a lot of money that we don't have access to."

Some instant delivery companies are losing an average of $20 per order, the Wall Street Journal reported Sunday. The start-ups offer discounts, they offer a large selection and – of course – speed.

Delivery App Ads: BuyK, Fridge No More, Jokr

Melissa Repko | CNBC

“It's nice to have things delivered right to my door. Sometimes you're between meetings and don't have time to walk down the street," said Samia Noor, a 22-year-old Upper East Side resident who works in public sector consulting. Noor estimates that she uses Gopuff and other delivery services at least once a week.

Gopuff claims that the company complements rather than replaces what other stores offer customers.

"Ultimately, we're a local company and we want to create jobs and really connect with local consumers," Gola said at the launch event in October. "We're working with local entrepreneurs and local businesses to get them on our platform."

Some New Yorkers aren't convinced. A resident of downtown Manhattan since the 1980s, Jesus Aguais has lived on the block that houses Gopuff's Lower East Side facility for more than two decades.

"I worry that this place will show up in a neighborhood like mine and send the message, 'here we are with all the money in the world,'" Aguais said. "When the corner shops are pushed out, the feeling of neighborhood is lost."

Jose Bello, founder of a delivery app for bodegas called My Bodega Online, predicts corner shopkeepers will feel the pressure from instant delivery startups later this year.

"First, you're going to have a winner or two out of all this war of VC investing versus fast trading," Bello said. "I think it will be around nine months before the bodegas feel the effects of all this."

Consolidation in Quick Commerce may already be underway. Jokr is in talks with Gopuff, Getir and California-based FastAF to sell its New York operations, The Information reported Monday.

Critics are quick to point out similarities between the instant delivery space and the rise of ride-hailing apps like Uber and Lyft, which impacted the taxi industry in major U.S. cities.

According to Veena Dubal, a UC Hastings law professor who studies technology and the gig economy, when Uber and Lyft were first launched, venture capital subsidies kept fares low and driver compensation generous.

"That's how they tied up the drivers. That's how they captivated consumers," said Dubal, who criticized the ride-hailing apps.

Eventually, the cost of Uber and Lyft rides skyrocketed. Although both companies have gone public, neither has ever been profitable on an unadjusted basis. Uber and Lyft drivers are making 65% less than in 2013 or 2014, Dubal said.

“We don't want to wait five years to take action. We see the signs. We know the patterns and that's why we have to be proactive," Christopher Marte said at a press conference on Jan. 9. Christopher Marte, who has no relation to Bodega Association leader Francisco Marte, is a Democrat and a member of the city council for the borough where Gopuff's Lower East Side facility is located. His father owned a local bodega but eventually closed the shop due to rising rents.

Tavaras, a Stop 1 Deli employee, said he supports entrepreneurship but wishes it were easier for small businesses like bodegas to buy from suppliers at lower prices and be able to afford rent.

"I have no problem with anyone making money… as long as it's good for the community," Tavaras said. "I can not help it."

— CNBC's Melissa Repko contributed to the coverage.

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