Instant delivery start-ups are facing opposition from bodegas, who are seeking to use zoning laws to protect their businesses.

• Last year, New York City witnessed a surge in quick commerce services with around six start-ups guaranteeing rapid online grocery deliveries within 10 to 20 minutes.
• Bodegas and corner stores may be pushed out by delivery start-ups, according to concerns raised by some elected officials and small business leaders.
• These companies' growth, fueled by venture capital, is being restricted by critics using zoning rules.
• The response of New York regulators to the expansion of the quick commerce sector could set a precedent for other cities in the U.S.

A grocery delivery start-up, Gopuff, recently took up the ground-floor retail space in a new luxury apartment building on the Lower East Side of Manhattan, just opposite a bodega.

Jose Tavaras, who has worked at Stop 1 Deli for 10 years, stated that he didn't think it was a big deal because they have their loyal customers in the neighborhood.

After looking up the company, Tavaras learned that Gopuff was valued at $15 billion in July and could potentially be worth $40 billion after its latest funding round.

Tavaras informed CNBC that these companies, due to their financial backing, will bring about change.

Last year, New York City witnessed a surge in quick commerce services, with around six start-ups offering to deliver online grocery purchases to customers' doors within 10 to 20 minutes of ordering.

Some officials and business leaders fear that delivery start-ups could replace bodegas and corner stores. Critics are using zoning regulations to limit the expansion of these companies, which are backed by venture capital.

The response of New York regulators to the expansion of the quick commerce sector could set a precedent for other cities in the U.S.

Warehouse or grocery store?

In New York, Gopuff, Gorillas, Getir, Buyk, Fridge No More, and Jokr are competing for customers. Gorillas stated that they compete with supermarkets, not corner stores, while Jokr named the retail giant as their target.

Instead of offering third-party delivery services for stores and restaurants, quick commerce companies have their own products stored in hyperlocalized facilities, which Gorillas refers to as "microwarehouses." Workers assemble orders from these sites, and delivery personnel deliver the items to customers almost instantly.

The facilities operate in a gray area between commercial and industrial land use from a zoning perspective.

Gale Brewer, a Democratic City Council member and Manhattan borough president from 2014 to 2021, stated that the determination of whether they are a warehouse or a grocery store is necessary.

The Gopuff storefront on the Lower East Side is situated in a residential zoning district within a mixed residential and commercial use building. Unlike traditional fulfillment centers, which are often classified as warehouses and zoned for manufacturing and some commercial districts, Gopuff's storefronts are typically located in areas that allow for a wider range of uses.

According to New York-based land use lawyer Elise Wagner, a partner at Kramer Levin, the use of warehouses in residential areas was not clear in 1961 when the use categories were established in the Zoning Resolution. There was an assumption back then that a warehouse was incompatible with residential use, but it's unclear if that belief is still held today.

City planning involves taking into account factors such as traffic, noise, walkability, human activity, and the character of an area, according to Tim Richards, principal at land use consulting firm Clarion Associates.

The microfulfillment centers in New York City have not yet been categorized by the Department of Buildings, which enforces zoning regulations.

Quick-service fulfillment centers are a new business type in New York City, and they are not explicitly mentioned in existing zoning regulations, according to Ana Alcantara, deputy press secretary at the Department of Buildings.

In October, the brewer requested city agencies to examine whether the facilities, referred to as "dark stores" by her, comply with zoning regulations. The Bodega and Small Business Association, as well as the United Bodegas of America, have also urged the city to "enforce" zoning regulations, as stated in the materials they have distributed.

Alcantara stated that they have been in touch with elected officials regarding the issue and are currently collaborating with their counterparts from other agencies to determine the most suitable zoning districts for these types of businesses.

A Buyk spokesperson stated that Buyk is focused on hyperlocality and achieves this through its employment, assortment, and compliance with local and municipal guidelines when asked about zoning.

Gorillas, with 16 warehouses in New York, stated to CNBC that they adhere to city zoning regulations by permitting customers to enter their facilities and providing a waiting area for their orders to be prepared and delivered to them personally.

Gorillas, as a grocery delivery business, adheres to the retailer requirements in the locations where we operate, stated Adam Wacenske, U.S. head of operations at Gorillas.

In the "instant needs" industry, Gopuff holds the largest market share in the US with 73%, according to co-founder and co-CEO Rafael Ilishayev, who shared this information on CNBC's "TechCheck" in January. The company has over 25 locations in New York and more than 550 facilities across the country.

The company's New York retail stores offer in-store shopping and delivery, and are not warehouses, microfulfillment centers, or dark stores. Gopuff's Soho location in Manhattan has a front-of-house kitchen that sells freshly prepared food, which the company plans to expand to other locations in New York and the U.S. Additionally, Gopuff launched its own line of private-label products in January.

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

Gopuff workers on the Lower East Side have stated that the store is not yet open for in-store shopping, despite a CNBC reporter visiting the location twice in the past two weeks. Additionally, window coverings blocking visibility into certain parts of the storefront were removed in the past month.

A Gopuff spokesperson stated that the company remains focused on ensuring its stores comply with local laws, taking corrective actions as necessary, and providing guidance to employees on maintaining both a walk-in and delivery experience for the business in the market.

CNBC did not receive any responses from Jokr, Fridge No More, and Getir regarding their zoning compliance.

Small business impact

Venture funding is a challenge for small business leaders, who argue that zoning regulations hinder their ability to compete.

The quick commerce start-ups have attracted significant investments from venture capitalists, with Gopuff raising $3.5 billion and Gorillas securing a $1 billion round of funding in October. The ultrafast delivery sector as a whole received $5.76 billion in funding by mid-October, according to CB Insights.

Francisco Marte, founder of the Bodega and Small Business Association and a Bronx bodega owner, stated at a news conference on Jan. 9 that they are losing customers because they lack the financial resources that these customers possess.

According to a report in The Wall Street Journal on Sunday, some instant delivery companies incur an average loss of $20 per order. To attract customers, these start-ups provide discounts, a vast assortment of products, and, of course, rapid delivery.

Samia Noor, a 22-year-old Upper East Side resident who works in public sector consulting, stated that it's convenient to have deliveries made directly to her door. She added that sometimes she's in between meetings and doesn't have time to run down the street. Noor uses Gopuff and other delivery services at least once a week.

Gopuff claims that the company enhances, rather than substitutes, the products provided by other stores to customers.

Gola stated at the October launch event that as a local business, we prioritize providing employment opportunities and building strong relationships with local customers. We collaborate with local entrepreneurs and businesses to showcase them on our platform.

Gopuff's Lower East Side facility has been located on the block where Jesus Aguais, a New York resident since the 1980s, resides for over two decades.

Aguais expressed concern about the store appearing in a neighborhood like his and sending the message, "We have all the money in the world," which could negatively impact the sense of community in the area.

This year, corner store owners will experience pressure from instant delivery start-ups, predicts Jose Bello, founder of My Bodega Online.

"After nine months, the impact of the VC investment war on quick commerce will be felt by bodegas, resulting in one or two winners," Bello stated.

Jokr is in discussions with Gopuff, Getir, and FastAF to sell its New York operations, according to a report by The Information on Monday.

The instant delivery space has been compared to the growth of ride-hailing apps such as and , which affected taxi businesses in significant U.S. cities.

According to Veena Dubal, a law professor at the University of California, Hastings, who studies technology and the gig economy, Uber and Lyft's initial success was due to venture capital subsidies that kept ride prices low and driver compensation generous.

Dubal, a critic of ride-hailing apps, stated that "That was how they hooked drivers" and "That is how they hooked consumers."

Although both Uber and Lyft have gone public, neither company has ever been profitable on a nonadjusted basis. Uber and Lyft drivers are currently making 65% less than they were making in 2013 or 2014, Dubal stated.

Christopher Marte, a Democrat and City Council member, stated at a Jan. 9 news conference that they do not want to wait five years to take action. They have seen the signs and know the patterns, which is why they must be proactive. Marte, who has no relationship to Francisco Marte, is concerned about the rising rents that led to the closure of his father's bodega in the neighborhood.

Tavaras, a deli employee, expressed support for entrepreneurship but wished it were simpler for small businesses, such as bodegas, to obtain lower prices from suppliers and afford rent.

As long as it benefits the community, I have no issue with anyone earning money," Tavaras stated. "It's beyond my control.

— CNBC’s Melissa Repko contributed reporting.