Why the Delivery Companies are Going to Have a Very Hard Time Surviving

Jon York

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Nov 30, 2018
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Here's the thing you need to understand about these grocery delivery companies and why they're probably never going to make it in their current form.

They've been trying to do this since the late 80s when people could first go online on services like CompuServe. In fact, Kroger grocery stores tried to do exactly this in the late 80s. Except it wasn't all app-based. In other words, they didn't have a connection to thousands of available cheap pickers and delivery drivers. They used their actual employees. So, they had to dedicate an employee or two in each store to shop the lists that customers sent in and then they or someone else delivered the groceries to people's homes.

The problem was - and still is today - is that the margins in the grocery business are razor thin. Typically grocery store profits are anywhere from 1%-3%. That's right. If you spend $100 in your local grocery there's a very good chance that the store will only make a profit of $1 to $3 on your purchase. Pretty unbelievable, right?

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So, take that $1 to $3 profit margin and know that the grocery stores back then who were trying to do deliveries, only had that much extra money on each order to pay for the picker (the person who shop’s the customer’s list in the store) and the delivery driver and you can easily see, there was no way they could make money at it. Especially since they had to pay their people high union wages.

But it is in fact those high union wages that people need to earn in order to make ends meet. In the end for grocers, they couldn’t make any money at it, in fact they lost big money (which is why they pretty quickly gave it up). But they lost big money because in the end their customers weren’t willing to pay what it really cost them to deliver the groceries.

Imagine if they had offered shopping & delivery but said they had to charge a minimum of $30 per order – no matter how much the order was worth. Well, that cuts out all the people who are going to order $50 or less – which is about 80% of the delivery customers. They’re certainly not going to pay a $30 delivery fee on a $25 order! Yet they want the convenience and they’re fully willing to accept it for free. Which they did and which in the end provided the final nail in the coffin for grocery delivery services.

Now, we come to today and the gig delivery companies have figured out how to SLASH their worker costs, first by calling workers independent contractors and relieving themselves of all sorts of responsibilities. No more minimum wage worries, no more employee taxes the employer has to pay, no more benefits… no more nothing. In all honesty, these companies are basically getting gig workers at no cost to themselves.

In fact, we now even see the likes of Instacart and DoorDash using customer tips to pay the wages they promised to pay. So they don’t even end up paying $5 per delivery in most cases. AND, they markup – a huge markup – the price of the groceries! So they’re making money on both ends… a ton of money on the grocery markups and saving because they’re paying their workers’ wages through customer tips! Plus they get to keep, cost-free, any delivery fees they charge the customers. It’s a brilliant business… if you don’t mind exploiting people to death!

In the end though, it comes down to the customer’s refusal – or inability really – to pay what it actually costs for workers to make a living wage. So, even now and especially in light of this history, it’s going to b very, very difficult for any of these companies to survive in the long term in their current form.
 
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Reactions: Austin Bob

News Hound

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Jan 7, 2019
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That's a pretty pessimistic view. I think these companies are going to make it. They've raised billions and billions of dollars. Investors wouldn't be handing over that kind of money if they thought they weren't going to succeed.
 

Graham

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Feb 4, 2019
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"Investors wouldn't be handing over that kind of money if they thought they weren't going to succeed."

To be fair, this wouldn't be the first time investors throw their money at horribly overvalued companies with terrible ideas.