WHY DO FOOD DELIVERY Companies Lose Money?

Photo: Andrew Harrer/Bloomberg Via Getty Images

Ranjan Roy Has A Great Article on Substack About Dobordash and “Pizza Arbitrage”: Roy’s Friend was first annoyed to discover that doordash was providing delivery serving for his nondelivery pizzeria: taking web Orders with his knowledge, Phoning in for tactout and seding a doctry delivery Worker to Food, and Pick and Pick. often delivering to a customer who was would be annoyed that the pizza arived 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 ON PIZZAS AT $ 16, SELL TO DODordash for $ 24 EACH, and Pocket the difference. This workhed better if he didn’t put real pizzas in the delivery boxes. But how on the earth was Doordash Ever Supposed to make Money Seling his pizzas at a loss?

Delivery Via Smartphone is one of the venture-ended sectors where Business Executives appears to have taken section serial the Old Joke About “LOING MONEY ON EVERY TRANSACTION But MAKING IT IN VOLUME.” Normal rules of Capitalism About Maximizing Profits Do Not Apply. This has been led to a strange situation where restaurants feel squeezed by the Fees Charged by Delivery Services (well, unlike roy’s friend, they participate voluntarily on a delivery platform) and yet the deliver services to kept loos. Why is this tan happening?

A mental model that a lot of People have for these businesses is that they are waking to estabish a dominant markets, at which point they can raise prices where they will be profitable. That is, in the Future, Restaurants and Customers Will Pay more in Delivery Fees, and Dobordash Will Make Money. The problem with this view is that “the future” never seames to come. Uber has been providing rides for ten years. Wen does the “profit” phase of its business show up?

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 thusands of People is more productive than a Soulcycle instructor who Can only teach 60 People at a time. But with a lot of apps, the promised boost to producer Never materialism. The workrier still has to render personal Service to one customer at a time, and the app doesn’t will Much to the workrier’s downtime or help or her compute the task fastener. AS SUCH, The Productivity Boost that is Needed to make the financial model pencil – paying the workrier a high enough hourly rate while fee the customer is Willing to pay and still hating aprofit margin – does not material.

Consider A Few Examples. In the traditional model, restaurants use their own employs to deliver food. DOordash and Its Competitors Offer a Different Approach: Dobordash 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 Orders, Because Dobordash Can Send Over Extra Staff as Necess; The restaurant also never has to pay a workier to sit around and not deliver food. But there are offsetting disadvantage to this outsourced model. A Restaurant-Employed Delivery 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 to get to the customer. A Third-Party Delivery person is more lichely to screen theses up: Slower, Less Accurate, Lower-Quality delivery. At the Very Least, This Mutes the Productivity Gains FROM BETTER STAFF Matching; It COULD OFFSET THAT ENTIRELY.

Or consider uber. The Application is supposed to reduce drivers’ downime by efficiently matching riders to drivers. In places where you will Ordinarily have to Phone for a taxi, the app technology probably does real, Large advantages. In Practice, there are a lot of places where Technological Matching is less efficient than in-person matching, especialy airports, where inefficient uber pickup has led to increasingly clogged Access roads as drivers search for specific inspecting Whoever they see at the front of the line. Unfortunately, these places where the app is at a disadvantage compared to traditional taxi hails tend to be the places where Demand for transportation services is highest: Do you Key Driver of Manhattan’s Increased Congestion Over the Last Decade is Passsenger Uber Drivers, Moving, Moving, Moving, Moving Looking for seeds. And if uber’s technology is so good at matching drivers and riders and variations in customers’ Willingness to pay acroSs, why has the company had to repeatly resort to paying drivers than it collects from colcts in order to enure at Peak Times?

An Odditity of the On-Demand Economy is the assumption that People bent be supposedly a lot of personal-assistance-thype services than they used to. That’s what these apps would: let you hire people in small blocs of time to drive you around, Pick up your food, Clean your apartment, and so on. This is not a total new model. Long before the Internet, a lot of People who didn’t have the Money for a full-time personal assistant WOULD HIRE SOMEON FOR A COUPLE HOURS A WEEK, ESPECIALLY TO CLEAN HOMES. And as Roy Notes, Pizza Delivery is a long-standing business model that many business owners have made Money on for decades, before DOordash and Its Competitors decided to Lose Money. But does technology provide a reason that this part of the economic should be great resaped and expanded – should every restaurant offferr delivery now, Becusee Technology Makes financially vaable in a Way is not before? Should we be hind people to drive us places we were would have Ordinarily drive ourselves? The “Yes” Answer Relations on the Idea That Technology Has Significantly Changed the Value Proposion for Such Services, Eoth improving their Quality so that we are willing to pay, or improving workers’ productivity. less.

But what if the main reason the value proposition for the services has just a third party is weirdly Willing to Lose Money on the transaction? That doesn’t seem like a sustainable situation – and yet it has ben sustained for years at this point. If it ends, if investors in app-based Service Companies start demanding profits, then we have been should expert the size of the Economy to Contract. Some restaurants that came to relete on app-baed delivery May Find IT Makes Sense to Take Delivery In-House. But Others Find delivery isn’t Worth it if they actually have to employ the delivery person. Andn customers, revealed to be unwilling to pay the true economic cost of having their food delivered, May have to go pic it up.