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Why This Website May Go Away (As Well as Your Delivery Career)

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Let me get it out there right now: I think our industry is in for some big changes. Big enough that this whole website will be obsolete. I may be wrong, but I think our days as delivery contractors in the gig economy are numbered.

Grubhub is on the brink of a shareholder revolt. A class action securities lawsuit was filed against Grubhub on behalf of shareholders. Meanwhile there's growing pressure for Grubhub to consider a merger with another company. Things are bad enough for them now that the talk is about them being taken over, rather than being the ones taking over.

the problem is is that it’s expensive because of labor costs today and fuel costs and everything else, and then the delivery companies want a 20% discount at least, or a little more, a little less. The restaurants don’t make any money then, because that’s our margin. Okay, so they’re not happy, we’re not happy, so I don’t know where it’s going to tell the truth.

Tilman Fertitta, owner of Landry's restaurants and of Waitr and Bitesquad

Grubhub is Struggling With an Uneven Playing Field

Part of the problem for Grubhub is, they have to keep up with competitors who don't have to play by the same rules. As a publicly held company, Grubhub has pressure to turn a profit. When they took a loss this last quarter, stock prices tanked, and investors got pissed. Maybe to the point that Matt Maloney, CEO, could be on the hot seat.

Doordash and Postmates don't have that same pressure. They're still in startup mode. They aren't worried about profit, the idea is to spend like crazy to build the value of the company so they can sell stock to the public. That sale, not profits, is where the first investors get their money. So, the playing field is uneven.

That doesn't mean things are great for Doordash and Postmates.

While Doordash has surged to the lead in market share, I think they're still in trouble. The same is true with Postmates. In their ability to spend, spend, spend, they gave away their delivery. It worked as far as pushing Doordash to the lead, and it helped bring down the market leader. However, in doing so they also pushed prices so low that customers expect cheap delivery. There's no room to bring them back up.

And here's where there's a real problem. To keep operating and to keep getting new customers, and to keep putting pressure on Grubhub and Uber Eats, these companies (Doordash and Postmates) need to keep spending more than they earn…. and if that money spigot turns off, Doordash and Postmates won't last long.

I think both companies are in bigger trouble than Grubhub. That's because the whole startup investment landscape changed in a way that puts those companies in peril.

I mentioned above that early investors get their money from the company sale, not from profits. But, Houston…. they have a problem.

Uber built their value on that model. They sold stock. Investors made a ton of money. And then the reality hit: Uber is losing a crap ton of money. Stock prices tumble and stock holders lose a TON of money. They're pissed. Then a company called WeWork that was built on the same model went public. Stockholders remember what happened with Uber, they see WeWork is losing money, and they don't buy the stock at the prices. The initial sale was a disaster and this time the initial investors lost out.

This new reality in startups is a problem for Doordash and Postmates.

Both companies planned to go public this year as well. Both are holding off. That's because they know if they sell now, it will be the same kind of disaster as WeWork. People are getting smarter (or more scared, or both) about what happened with Uber. They see the problems with Grubhub. They are not going to pay enough for stock if Doordash and Postmates go public.

And here's where there's a real problem. To keep operating and to keep getting new customers, and to keep putting pressure on Grubhub and Uber Eats, these companies need to keep spending more than they earn. That means they have to keep getting money from investors. But if investors start thinking this could be another WeWork cluster, they aren't going to pour any more money.

And the money spigot will turn off.

If Doordash and Postmates don't show signs of being profitable, the spigot of investor money could turn off.

And if that money spigot turns off, Doordash and Postmates won't last long.

Not unless they start operating in a sustainable fashion.

And we haven't even started on what AB5 could mean for these companies.

If these companies have to start paying employment costs and taxes, paying minimum wage and true vehicle reimbursement, they're in trouble. They won't be able to continue farming support overseas to the same extent, and that's more cost. And if they're already bleeding cash, this could be the domino that starts the beginning of the end for gig delivery.

Can it Get Better?

Honestly, I don't think it can. You would think it should be, the public is embracing the delivery economy in ways that surprise everyone. The opportunity is there.

But the business model itself is broken. It just isn't sustainable.

Six problems with the Business Model

In the interview I linked above, Tilman Fertitta summed it up pretty well: ” the problem is is that it’s expensive because of labor costs today and fuel costs and everything else, and then the delivery companies want a 20% discount at least, or a little more, a little less. The restaurants don’t make any money then, because that’s our margin. Okay, so they’re not happy, we’re not happy, so I don’t know where it’s going to tell the truth. “

There are a lot of issues that make this unsustainable

Inefficient labor costs

Too much of delivery right now is one person driving to a restaurant, waiting for and picking up one order of food and driving it to one customer and taking the time required to hunt down the customer. On average, it takes a half hour of manpower to deliver one order of food. However you calculate what that should cost, if you are being fair to the person delivering, that cost is often far more than the customer is willing to pay.

No control over those delivering.

The use of independent contractors is the biggest quality control issue facing these companies. By law, they cannot control scheduling, they cannot dictate who delivers what, they cannot dictate appearance standards, any of that. You really cannot go through any kind of interview or proper vetting process. It is impossible to manage things logistically in a way that is efficient due to the constraints.

I have no sympathy for these companies in this regard. This is the bed they made when they chose to use contractors instead of paying to actually employ people. Personally, I prefer the freedom of being an independent contractor. However, I know there are a lot of issues that go with using contractors. Ultimately, there is no real answer to those answers outside hiring employees.

Poor coordination with restaurants

There's a love hate relationship between restaurants, delivery apps, and couriers. Too often it's more hate hate hate. Delivery is a necessary evil for these companies. The commissions charged pretty much take away the profit for restaurants. Couriers can be rude. Restaurants have no quality control over what happens once the food leaves their store. Restaurants get blamed by customers for poor treatment of food in transit. Too often, the food sits way too long before being picked up. As a result, some restaurants refuse to start making the food until the courier arrives, and that creates tensions with the courier. Too often they make food that doesn't get delivered or where the order gets canceled, and the restaurant is out the food and labor costs without any compensation.

This is always going to be a problem as long as the restaurant, the couriers, and the delivery app are independent of each other.

The relationship between restaurants, delivery apps and couriers is confusing to the end user.

In most cases, the customer orders from the delivery app, not the restaurant. That takes away some of the accountability for the restaurant. The customer will blame the courier for restaurant related issues, will blame the restaurant for app related issues and will blame the app for courier related issues (and any other combination of all those issues that you can think of). As long as these three areas are not well in sync, it will be impossible to guarantee a good customer experience.

There's little room for apps to reduce costs

It takes a certain level of management to handle issues arising out of delivery, and to manage the relationship with couriers and with restaurants. Each of the dominant companies have moved a lot of support over to low cost overseas call centers, however that creates some inefficiencies to the point there's little room to improve. They have already slashed delivery fees, to the point they're struggling now to get many orders delivered. If they slash their marketing and restaurant relationship teams, they risk losing restaurants. There's not a lot of room to cut the fat.

There's little room to increase revenue

Let's face it: If you're not profitable you have to do one or both of the following: Reduce costs and increase revenue. If you can't reduce costs, you have to get more money coming in. Well, that's a problem. Where's it going to come from? They can charge higher commissions to the restaurants, but restaurants aren't going to do anything. Or they can increase the delivery fees for the customer. Unfortunately with their race to zero in trying to gain market share they've set the customer expectation so low that customers aren't going to pay extra. Especially not if there are other cheap options they can go to.

I don't see room for things to improve for any of these companies under this business model.

The bottom line is that with the competitive environment, and the lack of room for much improvement on revenue or expenses, I just don't see things improving. Until customer satisfaction reaches a breaking point to the point that customers will pay more for a delivery in return for that improved customer experience, there's no room for things to change.

I think one of two things is going to happen: One or more (maybe all of them) of these companies will go under and in order to survive the rest will have to dramatically alter their business model, or someone is going to come up with a disruptive model that handles delivery logistics differently, efficiently and sustainably. Either way, the delivery world as we know it can't last forever.

What does this all mean for those of us who deliver for these companies?

Change is coming. I don't know what that change really means.

I think the catalyst for change could be something like California's AB5 legislation that is intended to force gig companies to hire employees instead of contractors. New Jersey is trying something similar, only by suing gig company for unemployment insurance premiums and forcing them to reclassify contractors as employees through the courts. If companies are forced by several states to hire employees they will either have to close up shop or dramatically change their model. That kind of change will be the thing that can be the excuse to increase delivery fees to a sustainable level.

Maybe the catalyst will be if something happens like Amazon taking over Grubhub. That could be the introduction of an outsider coming in with a better logistical model.

I pay a lot of attention to efficiency in my delivery. I feel like it's the key to my being able to stay profitable in a consistent manner. Along those lines, I try to create my own efficiencies through how I accept orders and how I approach my deliveries. But there's a limit, and it's not always possible to do that with how inefficient these companies are with the current model. I say this for a reason: most contractors won't go that route. The independent contractor approach just doesn't allow these companies to manage the logistics of getting orders delivered in the way they want them delivered. For that reason, I think the independent contractor option will go away.

When will change happen?

I could be wrong. Maybe it won't go the way I think. I see the handwriting on the wall but maybe my reading skills aren't all that.

If it does, it's not going to happen right away. If Grubhub is bought out, it will take time to see changes happen. In the event any of the states succeed in forcing an employment model, it will take time for it to go through the courts and be finalized. If investment money dries up for Postmates and Doordash, it will take time for them to spend through whatever they've received to date.

I think the first domino to fall is going to involve Grubhub. Either they fire their CEO, they buy out someone, they get bought out, or they pioneer a new pay model. I don't think they'll be able to do the latter unless they fire Maloney.

I would say watch California closely. Drivers will not automatically become employees on January 1. The Gig companies are going to put up a fight, and any enforcement action by the state will have to go through court challenges. At some point either the courts will decide, or one or more of the major companies will voluntarily convert to an employee model (or pull out of California altogether). That's the next domino, and what happens there will tell us how quickly any following dominos (if any) will fall.

What should we do?

I don't think you have to do anything right away. There's time. I would say several months at the very shortest. The big changes could happen by late next year, maybe a year later than that. Maybe a LOT later than that if at all. My gut tells me that the end of 2021 will see a very different landscape.

This is not a quit driving tomorrow kind of thing. You have enough time to start preparing for a different landscape. I think the bigger thing you can do is start asking yourself what you'd love to do even more than this. (For more, you can look at this article on having an exit plan)

Bottom line is, I love doing this. I'd hate to see it go away. But I don't think it's sustainable as it is. My gut feeling that anything sustainable is going to involve employees rather than contractors.

And as much as I would hate to see this go away, I also think it will mean opportunities. Maybe it means employment opportunities. Maybe it means giving you a reason to jump out of the next into bigger and better things. I don't think you have to worry about doing something today, tomorrow or next week, maybe not even next year. But…. be watching. And be ready.

Could this help someone else? Please share it.

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Mike

Friday 10th of January 2020

GH has a “top down” culture problem that I fear is unrepairable. One need only visit a Reddit thread or simply google anything having to do w the company’s attitude.

I’ve always said that GH has some of the best customer service folks on the customer care lines. They have to bc nothing works as it should and if it does it won’t continue to.

Talked to a Firehouse Subs manager a few days ago about GH. She said they hadn’t had an order from them in 2 months but they keep sending drivers to pick up orders. She said she told them several times her tablet broke but they never did anything about it.

Familiar story I’m sad to say.

Mike

Thursday 9th of January 2020

Good article. A few thoughts though...

Let’s start with what I believe is the main issue. GH was first mover in this space and while there have been others before UberEats to enter, Uber has obtained 1st place status and likely will. More on that in a minute.

The biggest issue for these gig companies is that they mistook themselves for pure play technology companies. They never were bc as soon as boots hit the ground they became operational companies. BIG diff.

GH and Uber believed their own hype and sold themselves and their investors on the “driverless” car and delivery drone thus incurring no labor. Uber at one time had a 77% turnover rate and didn’t think a thing of it bc they were going to be rescued by robots and drones.

They even convinced would be angel investors of DD and PM of the inevitability of “no cost” labor. Anyone in operations of a delivery company could have told them (some of us tried) that was a fantasy. Alas, they wouldn’t listen and the reality of labor became abundantly clear.

You are correct about the demise of the gig companies overall only its going to be much quicker...especially for GH...6 months sounds about right and that may be too gracious.

As a previous restaurant owner I can tell you that the current model already works for them. Like delivery drivers the tendency to bitch about not making money is a bit exaggerated.

Given the fixed costs of restaurants like ovens, refrigerators, labor that is already there checking their Facebook pages, etc. the only thing that increases is food cost bc of the fees. Those can be rectified by adding a % to the price for delivery in the online menu. Delivery customers will pay it bc the delivery customer is a different breed.

The delivery companies will have to realize they are operational companies and act as such. They will also have to make sure the customer shares the burden of the tip to retain drivers who would rather stay busy making money than getting stiffed.

I’ve said for years that the successful delivery model will be runs going a couple miles for $5 a piece and carrying multiple or at least 4 to 5 an hour at that rate. $20-$25 bucks an hour and fewer miles equals plenty of drivers.

Don’t forget that for every 20-30% delivery surcharge there is a McDonalds or Taco Bell or KFC advertising essentially for the Mom and Pop restaurants and that is advertising they could NEVER afford

Problem is that until these gig companies get their act together and realize that the product they are offering is their service and get that right across the board none will be successful.

But what do I know. I’m just a gig worker...

ronald.l.walter

Friday 10th of January 2020

Thanks for the comments. You have some interesting points.

I've talked to some restaurant owners who've said that delivery works for them but not as a profit center. The commission they pay eats up their margins, but what it does do for them is provide exposure. They break even, people discover their food, and eventually those people come into the restaurant and that's how they make their money. Not sure all of them see it that way, interesting to see how it was from your perspective.

You nailed it on the head about how none will be successful until they get the service right. I wrote in December ("My Christmas Gift to Grubhub etc") that I think their real problem is none of them want to admit they are delivery companies, and that prevents them from going all in on delivery. They play the "we are tech companies, not delivery companies" game to try to avoid having to hire employees, but until they commit to actually BEING a delivery company, they'll all struggle.

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