
Delivery Startups Are Back Like It’s 1999 - dotluis
http://www.nytimes.com/2014/08/24/magazine/delivery-start-ups-are-back-like-its-1999.html
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gambiting
>>Instacart charges as little as $3.99 for grocery shopping and delivery. Yet
Shah said its shoppers make about $20 an hour, plus tips, which makes
profitability seem unlikely, even with the smartest algorithms routing
shoppers through grocery stores and city streets. When I told him that, he
sounded a lot like Borders back in Webvan’s heyday: “We’re really well funded,
so that is not something we’re as worried about,” Shah said. “Growth is the
most important factor.”

So is this what is happening in the SF startup world then? You get funding,
get absolutely huge by selling your product at massive loss, bleeding money
out with every product/service sold, and then show to investors how much you
grew -> proceed to get more money? Is that it?

~~~
specialp
Strategy for consumers: Use Instacart until they run out of investors' money
or raise their prices. Then use competitor when they are funded and repeat
taking advantage of loss making enterprises. Once bubble is popped, go to the
store yourself.

~~~
smacktoward
Assuming the local store still exists by then.

~~~
gambiting
As far as I understand, those delivery services still do all their shopping
locally, to avoid renting warehouses and dealing with suppliers. So basically
- a courier gets the order, goes to a nearest shop, buys all grocery, and
delivers it. If anything, the local shops win in this scenario.

~~~
makomk
I'm sure they'd be able to find some way to accidentally take the local stores
they relied on with them when they go; local businesses aren't cynical enough
to deal with Silicon Valley shadyness. (Remember Groupon and the wave of
business failures it created? The same or worse could happen to stores if
Instacart goes bankrupt and never pays for the last n weeks/months of
purchases.)

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hkarthik
There's another phenomenon at work in the cities which is driving the Delivery
startups today: the availability of a large labor pool of people who now do
these jobs to survive.

In India, the following lower caste laborers have been doing business with
their mobile phones for at least a decade:

* Laundry/Dry cleaners

* Drivers

* Grocery Delivery

* Home cleaning

These folks have been doing the same work for a long time, and as cell phones
got cheap in India they just started using them. Their standard of living may
have gotten better, but their social standing really has not.

In my occasional travels to SF, I am starting to see a similar caste system
emerge. And it's pretty depressing.

~~~
govindkabra31
To be fair, that's not _caste_ system.. better phrase would be income
inequality or unskilled labor.

~~~
ZitchDog
Keep telling yourself that. [http://en.wikipedia.org/wiki/Socio-
economic_mobility_in_the_...](http://en.wikipedia.org/wiki/Socio-
economic_mobility_in_the_United_States#Current_state)

~~~
hatu
The bay area has the greatest social mobility in the US: [http://www.equality-
of-opportunity.org/](http://www.equality-of-opportunity.org/)

~~~
ZitchDog
I stand corrected - I am from the midwest and didn't realize SF was so much
higher than the US average in terms of socio-economic mobility.

~~~
idlewords
It's not. Young people with no money move here (like to any other city) from
Podunk and make their way up the ladder. If they're in tech, the end point is
much higher and you get there faster.

You're not going to see a Tenderloin drug addict or one of the Mexican day
laborers waiting outside Home Depot make their fortune here. Nor will you see
someone like Kevin Rose reduced to working at Burger King, however much value
he destroys.

Your original comment was very much on the mark.

~~~
ameister14
That's true, but that's the case pretty much everywhere. The difference here
is that the Mexican day labourer's son/daughter can learn to code at school
and completely change their fortune by the time they are 22.

That's pretty significant. In a small town in Minnesota, people won't follow
that path because it would be completely outside their experience. Not so
here.

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bitJericho
"After all, the worst case is that we’ll go back to doing the same thing I did
when Rewinery went under — running out to the store."

No, the worst case is that Rewinery took out your favorite mom and pop shops
and now you have to go to walmart to get your second favorite wines.

~~~
CocaKoala
Can you clarify this point for me a bit? Because I'm not confident I follow.

Somebody orders their favourite wine from Rewinery. That wine is, by your own
admission, not available at Walmart. But the wine still gets delivered, right?
So somebody, somewhere, went to a store and bought that bottle of wine. If
they're not getting it from the mom and pop shops, where are they getting it?
Surely Rewinery isn't stockpiling bottles of wine from wineries all over the
country, just waiting to deliver them.

So there clearly must be some store, somewhere, which is getting a lot of
business because couriers from Rewinery keep on buying wine there. Right? It
may not be a mom and pop store, but it assuredly has the selection that the
deliveree is looking for, otherwise Rewinery wouldn't be offering his wine. So
there must exist someplace close by where he can buy his favourite wine, even
after Rewinery shuts down.

I think you're confusing online retailers with courier delivery services; you
can argue that Amazon drove Borders out of business, but if I'm paying
somebody to drive to Barnes and Noble to get some books and bring them to me,
it's hard to see how my use of that service will lead to Barnes and Nobel
losing business.

~~~
biot
Amazon doesn't get their books by having employees drive to Barnes & Noble
stores to purchase books at retail prices. Amazon buys from the same
distributors/publishers that B&N uses. If B&N goes out of business because
everybody buys from Amazon, the distributors/publishers don't care; they still
get the business just from a different customer.

Rewinery is the same with respect to mom & pop shops. They both order from the
same distributors by the caseload and pay wholesale prices. Those cases of
wine get delivered to each of them by the distributor and they, in turn, each
maintain their own inventory, whether on luxury handcarved hardwood shelving
in a mom and pop's retail store or scattered on concrete floors in a warehouse
for delivery to the consumer by truck. The distributors don't care if the mom
& pop goes out of business because their other customer, Rewinery, is ordering
just as much.

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timr
_“The complicated part is not getting customers, it’s getting the product to
the customers,” said Paulo Lerner, Rewinery’s founder, who fled San Francisco
for Brazil. “If they charge a lot, it loses the appeal. If they charge less,
it has a lot of appeal, but at the same time, they are running on losses.”_

In other words: the revenue up-and-to-the-right graph (the fetish of the
moment) is misleading. There's a broad class of crappy businesses that can
easily generate revenue, but will never be able to generate profit.

We're back to the 1999 strategy of giving away dollars for 95 cents, and
making up the difference on volume.

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Instacartlove
As far as i know, both Instacart and Postmates make money with every delivery.
They used the last two years to figure out what to charge and when. Both get
kickbacks from select merchants, both are in a heavy growth phase and both
have tweaked their algorithms to either allow for multiple deliveries per hour
or use in-store shoppers for faster access to gods. What they are doing is
working and it looks impressive to me. The really interesting differentiator
is that one of them can become a giant supermarket without owning any
warehouse space and the other has a shot at powering local deliveries
everywhere. But then again, maybe they both still figure all this out.

~~~
avalaunch
Well I suppose when you have fast access to the gods anything is possible.

~~~
rmcfeeley
Beautiful typo

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govindkabra31
There are some major differences.

1) Increased pool of unskilled labor-- manufacturing industry tanked,
increased immigration.

2) Proliferation of internet connected, smartphones.

3) Avoiding obvious mistakes: no free deliveries for a bottle of coke, like in
webvan days.

4) Doing direct store to consumer deliveries, avoiding warehouses, getting
20-25% cut from retailers (who see this as savings in marketing cost and
reduced in-store staff cost)

~~~
sarah2079
Google shopping express will happily deliver you a $1.67 bottle of coke for
free if you are covered by their free trial. This is not their ultimate
business plan (outside the trial is $5 per store for 10 items max), but get in
on the trial if you can! I have been getting free delivery from them for over
a year now.

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ianstallings
But there's one _huge_ difference between 1999 and 2014 - mobile phones. And
people, everyone, seems much more accepting of digital delivery services. Back
then it was kind of a novelty.

That being said I think the ones that will be most successful will put the
burden of service and delivery on a 3rd party.

~~~
Curmudgel
You should say "smart phones" instead of "mobile phones". The Nokia 3210,
which came out in 1999 and was bought 160 million times, has similar
dimensions (same height and smaller width) to the iPhone5, and although it is
more than 2x as thick as the iPhone 5, the smallest model was still less than
an 7/10 of an inch thick. I would guess that it also has better battery life
than any smart phone sold today.

~~~
beamatronic
There were mobile devices in 1999-2000 such as the Palm devices that were
easily capable of running a network stack, but what really changed in the last
15 years is the deployment, improvement, and adoption of wireless _data_
services - We had to wait for the network to catch up.

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sutro
I remember being at a Giants game at Pacbell (now AT&T) Park back in 2001.
Webvan had just gone bankrupt, yet the entire ballpark was still covered with
Webvan ads, even the cup holders. Another major ballpark advertiser at the
time was Enron, and that scandal was just breaking. I remember thinking that
the Giants ad sales staff might have to put in a few extra hours of work that
week. If and when I see a DoorDash cup holder at AT&T, that will be my canary
in the coalmine telling me that the new bubble is about to pop.

Go Giants!

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capkutay
Weren't the delivery startups of the 90s severely bloated? From what I
remember, they had fleets of delivery trucks, warehouses, distributors, etc.
Today's delivery startups are pretty lightweight (Not counting Amazon or
Google since they're already $100b+ companies).

~~~
mayneack
In my limited experience with Google shopping express, they are pretty light
weight too. They will only deliver something from a store nearby, they don't
seem to have a warehouse full of stuff.

~~~
ChuckFrank
Google is outsourcing their deliveries. They aren't the ones actually doing
the delivery. From their wikipedia page it's clear that The deliveries are
subcontracted to a courier service, 1-800-Courier. Plus they aren't
warehousing anything as well. It's all point of sales logistics.

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akgerber
Another big difference between today & 1999 is that today there are a lot more
un- and underemployed people, which makes business based on being a 'network'
employing 'contractors' is a lot more practical, since the alternative to such
work is unemployment, as opposed to a full-time job with predictable hours &
benefits.

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carsonreinke
I wish people would stop referencing the Amazon delivery drone thing.

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saosebastiao
One of the more disappointing aspects of this go-around of delivery services
is that they don't seem to have learned anything about logistics. Logistics is
not just solving the Traveling Salesman problem.

If I could miraculously solve a TSP in linear time, that would be an amazing
accomplishment. But what good does it do you if the fixed costs of loading and
unloading at each node are in the 5 minute range? That limits you to a hard
max of 12 deliveries per cycle with the quoted 1-hour cycle time. At that N,
even a shitty algorithm with off-the-shelf heuristics would suffice.

Furthermore, logistics is far more complicated than just transportation; It
heavily depends on sortation. If I have someone shopping for 1 person, there
is no sortation problem. As soon as I tell that shopper to pick for 2 orders,
I introduce a sortation problem, as those two orders need to be kept separate.
And the sortation problem becomes a distribution problem: Do I have the
shopper pick a list of items and then later sort them into orders? Do I have
the shopper pick into different baskets on the same trip? Do I send the
shopper on different trips for different orders? Distribution tradeoffs
absolutely matter...distribution affects the level at which an atomic
sortation action takes place. With wildly different costs for different types
of sortation actions, ignoring this potential for optimization could be
deadly.

They don't seem to have learned much about economics either. When considering
the costs of making a delivery, you can be assured that the variable cost
components is weight/volume/highway-distance, and the fixed costs represent
the cost of the last mile. Using this simple rule, you can extrapolate (or
interprolate) the costs of a given amount of market share. To appoximate the
fixed costs of delivery, get the cost of sending a tiny item to your neighbor.
For example, sending a postcard via US Mail (with US Mail representing an
approximate 99.9% market share and delivery density) costs you $0.34. To do
the same with UPS, you are typically running into the $2.00 range. UPS has a
much lower market share (delivering to maybe 5% of all addresses in a given
delivery day). And UPS has $50B in revenue! To make matters worse, these
companies (at least instacart) are promising one-hour deliveries. This means
that the delivery vehicle physically cannot contain all of the items of two
orders where one is placed at 0600 and an order placed at 0700. The
implications of this are huge. If UPS switched to this model, sending out a
new truck every hour, you can rest assured that the $1-2 last mile cost would
balloon to the $20 range, because you have now reduced their delivery density
proportional to the number of trucks you have to send out. The costs of the
last mile of delivery are so dominant that they are the reason why fixed-price
postage works as a pricing method! If you need 100% market share to reduce
your last mile delivery costs to $0.34, and 5% market share to reduce it to
$2.00, where does that leave Instacart? They are away from UPS size by several
orders of magnitude, and they promise hourly deliveries on top of it! They
have the right philosophy (growth matters), but that is a bit like saying that
if I keep building my sand castle, I can eventually reach the moon.

In my opinion, Instacart is DOA. Hopefully, the next time this trend pops up,
they'll hire some experienced OR professionals from the very beginning.

~~~
brianchu
The problem is with taking Instacart's $3.99 delivery fee at face value. Last
I checked (which was a year ago - they've probably lowered this) on top of
that they charge 10-20% markup on each item, and they also pocket any savings
from coupons / sales / bulk / rewards card discounts, which I imagine can run
another 10%. It's in this situation where Instacart can plausibly meet your
quoted $20 figure.

~~~
saosebastiao
My $20/delivery estimate was for UPS levels of marketshare but translated to
1-hour cycle times. I wouldn't be surprised if Instacart's logistics costs
were more than double this amount.

------
mmagin
"But this time we have big data!"

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lnlyplnt
I never understood how companies like instacart explained this to their
investors. Over time one of several things must happen: 1\. Instacart
magically makes a courier capable of doing 4 trips an hour 2\. Instacart
drastically increases it's prices 3\. Instacart Severely lowers the
compensation to courriers

~~~
govindkabra31
Or, they get 20-25% discount from retailers (coming out of stores marketing
budget and reduction in store staff cost).

EDIT: The discounts come from the cost savings stores will see from delivery
companies, to clarify to people commenting margins are not that high in
grocery business.

1) These delivery services are become sales and marketing channel for stores.

2) Cut down time it takes for cash register scanning each product and bagging
them, pick up guys do that for stores.

3) Bulk pickups-- e.g., if I can have delivery company gather milk directly
from back store, my store staff does not have to spend time replenishing the
shelves.

~~~
refurb
What's the margin on groceries? 1-2%?

~~~
Semaphor
Pretty much it seems:

> "The average profit margin for grocery stores is 1.3 percent" says Jeff
> Cohen, a grocery industry analyst with IBIS World.

\-- [http://www.marketplace.org/topics/business/groceries-low-
mar...](http://www.marketplace.org/topics/business/groceries-low-margin-
business-still-highly-desirable)

~~~
coryrc
That's net, not gross. They can afford to cut the item price if they have
lower marginal costs (stocking?).

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ChuckFrank
Currently, I'm working for a food delivery service in San Francisco where you
can order from your 'favorite' (or on our list) restaurant, and we'll deliver
it straight to your office. The entire delivery process is rife with problems.
For starters, the majority of our deliveries are made in downtown San
Francisco, a transportation arena that is terribly over used, and our presence
doesn't make it any better. There's no functioning loading and unloading zone
in front of our delivery locations, so either we have to park further away, or
we have to park illegally, and sometimes even double park. This impacts all
the traffic around us making the traffic arena even less efficient. Certainly
people 'understand' our purpose, but the streets are not designed to
accommodate us. We are abusing the commons with our use of their
infrastructure for our delivery. If streets were designed with delivery
involved, surface parking would be moved inside the blocks, and not alone the
most valuable street edge. It's possible to have the street edge be for
loading and unloading only. They do it at the airports, and it would create
great increases in delivery efficiencies, but our cities are not designed that
way. So we steal transport space instead, while trying to stay one step ahead
of the ticketing agents.

Next, there's the problem of sorting, and order processing. If we have the
orders early enough, our algorithm can process a decent delivery route, but
with all the one way streets, it's never the most efficient route, it's just
the most allowably efficient route, and so again I spend time, energy,
exhausts driving around blocks to get somewhere that was just around the
corner from my previous stop. Delivery doesn't have the power to change the
street system, and the street system was never designed to optimize delivery.
The reality of the street is a huge obstacle towards any real delivery
efficiencies.

This becomes increasingly complicated when we get late orders - which we do
all the time - where dispatch sees if we can 'fit another one in'. Once that
happens, the perfect solution to the TSP is gone, out the window. A last
minute order (especially a big order) can easily add 30 minutes to a simply
route.

Then there's the issue of the actual delivery. We try to get them to our
clients 'hot and steaming' but that can be a challenge. And often it gets
there acceptably hot.

Then there's the actually logistics of getting the food into the buildings.
Some buildings have doors that have to propped open while you are unloading.
Other buildings have burdensome security measures that take extra time. Other
buildings require that all deliveries be made in the delivery entrance, using
the freight elevator, etc. None of this is actually on the logistics, it's
only something that you discover during your route. Again this means that you
have another layer of information - call it security information - that
reduces all attempts at optimization.

Finally, it can't scale. No matter how efficient the point of purchase is, or
the wheel and hub distribution, or the route, I can only make 16 deliveries in
a shift. That's my absolute max. I can't make more. I've tried, but I can't.
And I get paid a set amount every hour. What that means is that each delivery,
at a minimum, has to pay half my hourly wage to receive their delivery.
There's no other possibility.

The fact is that this type of delivery is extremely elastic. Fatally elastic.
A tiny drop in income will result in two things - 1. Less ordering. People
will simply buy fewer restaurant meals from their 'favorite' restaurants. &
2\. More take out. Because in the end we are competing with take out, and
while the number of restaurants a company can order from is not as large as
the number of restaurants that we deliver from, the reduced price will justify
the reduction in choice.

Can I see the writing on the wall? Not yet. Orders are consistent, but the
nature of the business should give anyone long term pause.

As for Amazon's delivery - well they are in a completely different game,
competing against a completely different segment, and so I think that they are
in the strongest position to reap the benefits of same day delivery services.
In fact from my perspective, I'm seeing more Amazon trucks than Office Max,
Office Depot, UPS trucks. And I'm seeing Amazon boxes everywhere.

I've also been surprised at how much Ikea delivery I'm seeing. I think that
they are mostly being delivered by FedEx, but we might see stand alone Ikea
delivery in some cities in the future.

Those companies deliver at the end of their service structure, they already do
everything else up to that point. Those are the companies that I think will
come through this delivery game strongest.

So the question is who else has massive warehouse infrastructure that could
just add on local delivery? Costco?

This restaurant delivery is a fools game.

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imgabe
Can we resurrect Kozmo.com? I miss that on-demand convenience store.

~~~
nsxwolf
I was under the impression that it is in stealth mode right now, but is on the
verge of a comeback.

------
rmcfeeley
Have you ever seen a white Seamless delivery person?

~~~
dodders
Yes, plenty in NYC.

------
adultSwim
Dot-com Bubble Back Like It's 1999

~~~
billmalarky
You can argue that with some tech companies these days but many web delivery
companies have a very successful and profitable business model.

