Wednesday, November 20, 2019

Meal delivery services: all hat and no cattle?


In Texas, an expression I've often heard is that someone is "all hat and no cattle".  It means that someone is full of grandiloquent talk, but lacks the accomplishments or assets to lend substance to their words.

I've long felt that services such as Grubhub, Doordash and their ilk are pretty much "all hat and no cattle" in business terms.  They don't add even one cent of value to the goods they deliver.  Their entire business model is based on providing convenience for a price, but that's an entirely dispensable benefit.  If I'm short of cash, there's nothing stopping me cooking for myself, or even driving to a restaurant and eating there for no additional charge.  They aren't an essential service.

Now Wolf Street points out that they aren't economically sustainable businesses, either.

There’s no secret to success in tech. But like hitting a 98 mph fastball, it’s easy to describe, nearly impossible to do: Create a great product that can scale. Even better if you can build a patent moat around it. If, after five hard years of R&D, you create killer software at a cost of $100 million, then the first product you ship for $1,000 comes at a loss of $99.99 million. But by the time you’ve sold your millionth unit at almost no additional cost, you’ve grossed a billion. That’s scale.

Here’s the rub: You can scale intellectual property, you can’t scale labor. Your millionth pizza costs as much to deliver as your first.

Yet the meal-delivery guys claim they will scale when they create a critical mass. They will have the density they need to become profitable (none are yet) if they can somehow bag a huge market share. The density argument goes like this: if we can deliver enough meals in a given trade area, we can be like the post office in terms of efficiency (yes, the post office, I’m not being ironic). Nice idea, but it doesn’t wash.

. . .

Meal delivery is a discrete business. No one else in your zip code is ordering spaghetti Bolognese from Trattoria Pastaria at 6:30 on a Tuesday evening. Whether the Uber Eats guy drives to the restaurant or you do, it’s the same (except the food is hotter if you do it yourself). There is no way to string that discrete delivery into an efficient, cost-effective route. To that point, old-school pizza joints average about 2 deliveries an hour and their drivers start at the restaurant. Can a free-floating DoorDasher do more than two an hour?

In short, Mount Everest is scalable, meal-delivery companies are not.

. . .

Let’s get specific. DoorDash, Postmates and Uber Eats all deliver for McDonald’s. According to that most reliable of all sources, the internet, they charge about $5 to deliver your burger and fries. And it takes about 30 minutes from the time you order to delivery. This means that, like pizza, the driver can do about two trips an hour. This is a truly great service for the consumer too stoned to get his own milkshake at midnight.

But there is no way, no way, in the world this can be profitable for the meal-delivery companies (or the restaurants if they do it themselves). Ten bucks an hour won’t even pay for the driver’s gas and minimum wage, let alone his incidental car costs. What’s left for DoorDash on ten bucks an hour? Nothing.

There's more at the link.

That's the problem with so many allegedly "hi-tech" businesses in an Internet world.  All they're doing is piggybacking on someone else's hard work, charging a fee (sometimes a hefty fee) for delivering what someone else has made or done.  They aren't indispensable services in their own right.  As soon as money gets tight, or competitors enter the market, their business model collapses around their ears, because people won't pay excessive added costs if there's no added value.

I have a number of friends who've turned to driving for Uber, Lyft and such companies to make ends meet.  Those who've been doing it a while report that they made good money up to a couple of years ago;  but now the companies are paying them a lot less, or not passing on tips, or stiffing them in other ways.  The central company is trying to retain value at the expense of its contractors.  Guess how long that can go on before the contractors realize they're being stiffed, and start stiffing the company back in any way they can?  I know of more than a few Uber drivers who've made private arrangements with regular clients, being paid in cash at a discounted rate for a scheduled ride, and not sharing it with the company at all.  It works for them, and it works for the customer.

Ah, yes.  Modern economics . . .

Peter

17 comments:

Cedar said...

We tried out DoorDash while we were on a trip in DC. It seemed like a great idea - a meal to the hotel, no trying to drive in an unfamiliar city. Two hours after ordering we finally got our meal, cold, tough, and unappetizing. There were several phone calls involved, with me trying to figure out what was going on, and DoorDash promising that the meal would be remade - it was not - prior to final delivery. We tried it again after coming home with the credits we'd been given (and those were not straightforward, either. They promised $20 credit but would only allow it to be used $5 at a time). Guess what? The exact same thing happened. Hours until delivery of cold, nasty food. We won't be using them again. I'd rather drive after dark in the rain in DC.

Silent Draco said...

"... too stoned to get his own milkshake after midnight", or too busy to get his own food while working. The daytime solution is an old one: Office Boy. The office boy was the low rung to get everything: lunch or dinner, supplies, copies, paperwork. It served another business function of learning ops and logistica; education from reading documents being copied; learning clients and approval processes by messenger work. DoorDash and other services give no other use than 'convenience' at a high marginal cost; why not stop grumbling and just get it yourself?

Thinking further, maybe you really don't want Japanese takeout delivery, unless you are certain it's not a kamikaze driver. Those last couple feet could get interesting.

Eric Wilner said...

"No added value" is one of those common economic fallacies. In reality, a meal where you want it has more value than a meal somewhere else; things having more value in one place than another is the whole basis of the freight business.
Whether the value added to the meal exceeds the costs of transportation, organization, and overhead (plus the value lost due to transportation time and the meal possibly getting cold) is another question, to which the answer is probably "no" in most cases.
But... restaurants that deliver food are no novelty. A service that allows restaurants to outsource delivery instead of keeping Philip J. Fry on staff makes some kind of sense. Trying to implement this using the "gig economy" model, or anywhere outside urban centers, not so much.

Ray - SoCal said...

The Wolf Street article surprised me, I did not know the economics. Definitely more unicorns.

C. S. P. Schofield said...

Much of what was said here is spot on, but I have one quibble;

“ people won't pay excessive added costs if there's no added value.”

The assumption that moving goods from where they are made to where they are wanted adds no value is why Confucius didn’t value merchants. He considered them parasites, and his error has dogged China ever since. Now, the delivery services may overcharge for the value they add, but their service is not without value entirely.

Marx also fumbled this, though he screwed up so much it’s hard to say that that was critical.

The notion that the merchant is a parasite is almost as pernicious as the idea that the loan of money earns no return. It needs to be killed with an axe.

Unknown said...

One business model that would work is meals delivered to shut-ins or elderly people, with a fixed menu, and deliveries done on a route to minimize driving time.

Sherm said...

We could call it meals on wheels. :-)

A Reader said...

I think a question like "Does DoorDash add value?" is too simplistic. We're talking about a service which may be a necessity for some and a luxury for others, and flip from one category to the other at a specific price point. In other words, we're really talking about price elasticity and demand curves. At what price and under what circumstances does the convenience justify its expense, and conversely, at what price does it simply make more sense to go get the same food for oneself?

The question on other side of the coin, "Is this a viable business model?" is dependent on a sufficient number of people saying "yes!" to a price point which leaves the restaurant, the driver, and the company all with a workable marginal profit. Given that it is probably more of a luxury than a necessity for most people, demand is very elastic, so any increase in price will drive customers away (pun intended).

Beans said...

I tried it, found, as many have, that it's just simpler to go get the food or even cook it than it takes to have it delivered.

Especially since it seems every delivery driver either smokes tobacco or weed while driving. And no matter how well they package the food it ends up smelling like that product.

What's funny is listening to young people at the grocery store, while buying already prepared food, complaining about how broke they are, when they use delivery services for their take-out food, that they order 4-6 nights a week. And, yes, I love interjecting that cooking one's own food is better, healthier, and you get leftovers for lunch or other dinners (and get that 'Ewwwww' look at the idea of own-cooked leftovers, but then they talk about eating delivery food leftovers...)

Just face it, people today are strange. No concept of economics or common sense, almost like the education system was designed that way... Hmmmmm....

Uncle Lar said...

Restaurants prepare food, often specializing in options that can be difficult to prepare at home, requiring special equipment, time, or ingredients. And while some people actually enjoy a night out of fine dining, others simply don't care for the experience of eating their meal in the presence of a host of strangers.
It seems that the pizza business found a way to make home delivery work. As a systems engineer I would find it fascinating to read a detailed study of how their business model differs from what apparently is a similar yet economically unfeasible general food home delivery process.
Of course the proven solution, certainly as pertains to fast food in general, is the marriage of the dine out vs eat at home concepts. ie, the classic drive through. They prepare what you want to your order, you deliver it yourself. Or eat in the privacy of your vehicle for that matter.

Peter Bossley said...

I agree that the numbers don't make sense in most cases on this... But I'll say that as a person with a disability who can't drive, these things have been super nice to have around. I guess I will just enjoy the added convenience but not be surprised when the house of cards tumbles down.

Keith_Indy said...

I recall a similar service, before the DOT COM bust, that took orders from a web site, or phoned in, placed them at the restaurant for you, picked it up and delivered.

It went by the wayside at some point, long before there was an app for that. Mostly didn't get enough orders to make it economically viable I believe.

Sam L. said...

40+ years ago, I was a missileer. In Titans, we took food out with us, and cooked it on site. In Minuteman, with ONE EXCEPTION, there was a cook topside who fed us and the security troops. That exception was the one (the ONLY one in the fleet) that was ON BASE. Their food came from the chow hall. Food in insulation to sort-of keep it warm. Tacos...got limp. I will say, however, that for my last Thanksgiving on duty, my wife (of two months) brought down a pot of bouillabaisse, and the deputy's wife, and it was excellent.

pigpen51 said...

Everyone else focused on the right things. I was stopped at the part of hitting a 98 MPH fastball. I could hit a 90 MPH fastball my senior year of high school. I batted against a guy in summer ball who could throw 95 MPH, but was able to throw it with movement. I could not hardly touch it. He went on to play a couple of years for the Detroit Tigers. I know that is not saying much, but it is hard to make it to the big leagues for anyone.

Aesop said...

It's a limited value niche, and ultimately, it will work in places like NYFC, San Fransh*tco, or other vertical city downtowns.

Anywhere else, at $5/delivery, and farther than the round-trip drive time/distance of a gallon of unleaded, the market share approaches 0.
In an urban ER, we spiff one of the lower employees more than the GrubHub or Lyft guy makes, and we get 10-20 orders of everything, fresh and mostly still warm.
Grubhub couldn't do that, or they'd charge ten times as much, or need 10 drivers, and most of it would be cold and old before they arrived.

Game, set, match.
They can never win this.
It's a business model for people who can't calculate basic supply/demand curves, or cost/benefit analysis.

In short, double-digit IQ Millenials.

It's hard not to beat on them when they hang themselves by the neck with a rope, and dress like piñatas.

Larry said...

Where was that one exception? It was always a slow drive out over often gravel roads to LCCs from Minot.

kamas716 said...

Restaurants have the advantage of re-purposing the delivery staff when they aren't out delivering. I used to bus tables and wash dishes a lot while waiting for the pizzas to go out. They typically aren't charging as much as grubhub and the like, either.

Larry, many of those missile sites around Minot are paved now. The one just east of Balfour (A-01 I think) on US 52 is. The one off US 83 (D-01 maybe?) is as well. You just didn't wait around long enough for it to happen. ;-)