Bodegas are looking to zoning laws to defend their turf against instant delivery start-ups

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

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

Later, Tavaras looked up the company. Gopuff was valued at $15 billion as of July, and could reportedly be valued at as much as $40 billion after 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. Roughly a half dozen start-ups in the city promise to deliver online grocery purchases to customers’ doors in as little as 10 to 20 minutes after ordering. 

Some elected officials and small business leaders worry the delivery start-ups could eventually push out bodegas and corner stores. Critics are using zoning rules to try to curb the venture capital-fueled growth of these companies.

How New York regulators respond to the rapid delivery grocers could have implications for other cities as the quick commerce sector expands across the U.S.

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

Rather than provide third-party delivery services for stores or restaurants, the quick commerce companies carry their own products in hyperlocalized facilities. (Gorillas calls them “microwarehouses.”) Workers assemble orders from these sites and delivery personnel drop off the items to the customers almost immediately.

From a zoning perspective, the facilities operate in a gray area between commercial and industrial land use.

“Are they a warehouse or are they a grocery store? That’s what has to be determined,” said Gale Brewer, a Democratic City Council member and Manhattan borough president from 2014 to 2021.

The Gopuff storefront on the Lower East Side, for example, is located in a residential zoning district in a mixed residential and commercial use building. Traditional fulfillment centers are typically categorized as warehouses, which are zoned for manufacturing and some 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.”

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

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

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

Brewer in October asked city agencies to investigate whether the facilities, which she calls dark stores, are in line with zoning regulations. The Bodega and Small Business Association and the United Bodegas of America have also called on the city to “enforce” zoning regulations, according to materials the groups have distributed.

“We have been in contact with elected officials about this issue, and we are actively working with our partners at other agencies to explore the appropriate zoning districts for these types of establishments,” Alcantara said.

When asked about zoning, a Buyk spokesperson said in a statement, “Buyk is focused on hyperlocality and we pursue this in employment, assortment, and compliance with local and municipal guidelines.”

Gorillas, which operates 16 warehouses in New York, told CNBC the company complies with city zoning guidelines by allowing customers to be admitted to their facilities and offering a place 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,” said Adam Wacenske, U.S. head of operations at Gorillas, in a statement.

Gopuff is the industry leader in what it calls the “instant needs” space with 73% of 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.

The company told CNBC all of its New York locations are retail stores that allow for in-store shopping and delivery, and therefore are 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 is planning to expand to other locations in New York and the U.S. The start-up additionally launched its own line of private-label products in January.

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

When a CNBC reporter visited the Lower East Side location twice in the past two weeks, Gopuff workers said the facility is not yet open for in-store shopping. Window coverings blocking visibility into parts of the storefront were also removed in the past month.

When asked about the discrepancy between the company’s statement and the reporter’s experience, a Gopuff spokesperson said, “We remain focused on helping ensure all of our stores are operating in accordance with local laws, taking corrective actions as needed and regularly providing guidance to employees on how to best maintain both a walk-in and delivery experience for our business in the market.”

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

Small business leaders are calling attention to zoning regulations because they say they can’t compete with venture funding.

Investors have piled into the quick commerce start-ups. Gopuff brought in $3.5 billion of venture capital as of its July funding round. Gorillas in October announced a roughly $1 billion round of funding. The ultrafast delivery sector overall received $5.76 billion in funding as of mid-October, according to CB Insights. 

“We are losing those customers,” said Francisco Marte, founder of the Bodega and Small Business Association and a Bronx bodega owner, at a news conference on Jan. 9. “They have a lot of money, which we do not have access to.”

Some instant delivery companies lose an average of $20 per order, The Wall Street Journal reported Sunday. The start-ups dangle discounts, and they offer a wide selection and — of course — speed.

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

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

“At the end of the day, we’re a local business and we like to provide jobs and really connect with local consumers,” Gola said at the October launch event. “We partner with local entrepreneurs and local businesses to put them on our platform.”

Some New York residents aren’t convinced. Jesus Aguais has lived in downtown Manhattan since the 1980s and for more than two decades has lived on the block where Gopuff’s Lower East Side facility is located.

“I’m concerned with this store showing up in a neighborhood like my neighborhood, and sending the message like, ‘here we are with all the money in the world,'” Aguais said. “If the corner stores are pushed out, you lose a sense of neighborhood.”

Jose Bello, founder of a delivery app for bodegas called My Bodega Online, predicts corner store owners will start to feel the squeeze from the instant delivery start-ups later this year.

“First, you will have a winner or two winners out of all this war of VC investment on quick commerce,” Bello said. “I feel that it’s going to be a matter of about nine months and then bodegas will feel the impact of all this.”

Consolidation in the quick commerce sector could 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 taxi industries in major U.S. cities.

Venture capital subsidies kept ride prices low and driver compensation generous when Uber and Lyft first rolled out, according to Veena Dubal, a law professor at the University of California, Hastings, who studies technology and the gig economy.

“That was how they hooked drivers. That is how they hooked consumers,” said Dubal, who has been critical of the ride-hailing apps.

The cost of Uber and Lyft rides eventually shot up. Although both companies have gone public, neither has ever been profitable on a nonadjusted basis. Uber and Lyft drivers are making 65% less than they were making in 2013 or 2014, Dubal said.

“We don’t want to wait five years from now to take action. We see the signs. We know the patterns and that’s why we have to be proactive,” said Christopher Marte, at a Jan. 9 news conference. Christopher Marte, who has no relationship to the bodega association head Francisco Marte, is a Democrat and City Council member for the district where Gopuff’s Lower East Side facility is located. His father owned a bodega in the neighborhood, but eventually closed the shop due to rising rents.

Stop 1 Deli employee Tavaras said he’s supportive of entrepreneurship, but he wishes it were easier for small businesses like bodegas to buy from suppliers at lower prices and to afford rent.

“I have no problem with anybody making money … as long as it’s doing a good thing for the community,” Tavaras said. “I can do nothing about it.”

— CNBC’s Melissa Repko contributed reporting.