What, Another Silicon Valley Sharing Economy Scheme Revealed to be a Fraud?

Inspector Renault Says………

Round up the usual suspects, it turns out that food delivery companies are using their piles of venture capital money to dominate the market, and then they will be able to extract monopoly rents:

Ranjan Roy has a great article on Substack about DoorDash and “pizza arbitrage”: Roy’s friend was first annoyed to discover that DoorDash was providing delivery services for his nondelivery pizzeria: taking web orders without his knowledge, phoning in for takeout and sending a DoorDash delivery worker to pay and pick up the food, and often delivering to a customer who would be annoyed that the pizza arrived cold. And then he was surprised to see DoorDash was selling his $24 pizzas for only $16. This meant he had an arbitrage opportunity: Order his own pizzas at $16, sell them to DoorDash for $24 each, and pocket the difference. This worked even better if he didn’t put real pizzas in the delivery boxes. But how on earth was DoorDash ever supposed to make money selling his pizzas at a loss?

Delivery via smartphone is one of those venture-funded sectors where business executives appear to have taken seriously the old joke about “losing money on every transaction but making it up on volume.” Normal rules of capitalism about maximizing profits do not apply. This has led to a strange situation where restaurants feel squeezed by the fees charged by delivery services (when, unlike Roy’s friend, they participate voluntarily on a delivery platform) and yet the delivery services themselves manage to keep losing money. Why is this even happening?

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I think the missing element for profitability is different: productivity. The hope with a lot of business models that bring app intermediation to a preexisting element of the economy like ride services or food delivery is that technology will make workers more productive. You can see instances where this is obviously true: a Peloton instructor who teaches a class to tens of thousands of people is more productive than a SoulCycle instructor who can only teach about 60 people at a time. But with a lot of apps, the promised boost to productivity never materializes. The worker still has to render personal service to one customer at a time, and the app doesn’t do much to reduce the worker’s downtime or help him or her complete the task faster. As such, the productivity boost that is needed to make the financial model pencil — paying the worker a high enough hourly rate while charging a fee the customer is willing to pay and still having a positive profit margin — does not materialize.

Consider a few examples. In the traditional model, restaurants use their own employees to deliver food. DoorDash and its competitors offer a different approach: DoorDash contracts with the delivery person, sending him or her to whatever restaurant has orders at any moment. In theory, this should lead to better matching of labor to work: Restaurants don’t get backed up with too many orders, because DoorDash can send over extra staff as necessary; the restaurant also never has to pay a worker to sit around and not deliver food. But there are offsetting disadvantages to this outsourced model. A restaurant-employed delivery person knows the menu and can tell quickly whether a bag appears to contain what is listed on a receipt. He has a rhythm with the staff he’s picking up from. He knows the neighborhood and knows the addresses of frequent customers. He has the right equipment — if he’s delivering pizza, he has an insulated bag so the pizza is hot when it gets to the customer. A third-party delivery person is more likely to screw these things up: slower, less accurate, lower-quality delivery. At the very least, this mutes the productivity gains from better staff matching; it could offset them entirely.

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But what if the main reason the value proposition for these services has changed is that a third party is weirdly willing to lose money on the transactions? That doesn’t seem like a sustainable situation — and yet it has been sustained for years at this point. If it ends, if investors in app-based service companies start demanding profits, then we should expect the size of the personal-service part of the economy to contract. Some restaurants that came to rely on app-based delivery may find it makes sense to take delivery in-house. But others may find delivery isn’t worth it if they actually have to employ the delivery person. And then customers, revealed to be unwilling to pay the true economic cost of having their food delivered, may have to go pick it up.

What is going on here is that eventually, one of these companies will be the last one standing, and then they hope to extract even more from fees, with the threat that if your restaurant isn't a customer, then they will deliver cold pizzas stuck to the top of the boxes and ruin your reputation, because they will hijack your Google and Yelp listing anyway.

This is not innovation, this is a f%$#ing Ponzi scheme.