>>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?
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.
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.
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.)
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.
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.
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.
I wouldn't say it's that small a value. If there was no relevance to where you started in the life, the odds of reaching the top 5th from the bottom 5th would be 20%. 12+% is where San Jose and San Francisco stack up, which seems pretty spectacular considering all the potential factors pushing against someone.
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.
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.
“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.
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.
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)
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.
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.
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.
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.
Yes much more accurate to say smart phones came along. Back then the "mobile" experience was typically a WAP/WML service that would display text on the screen that you could navigate. I actually worked on a service back then called Strategy.com that used WML to deliver news, weather, and traffic to mobile devices. It was very limited. We thought we were awesome when we created traffic notifications using a push service that cell providers would bundle on the phone.
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.
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).
As far as I know you're right. The one that immediately comes to my mind is WebVan [1], which fits your description and according to the wikipedia page had a $1 billion order to build warehouses.
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.
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.
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.
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.
And yet, for the last 40 years, I've been able to get a pizza delivered to my house within a half hour window from a provider with miniscule market share for way less than $20.
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.
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.
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
I wonder if "3" isn't an unspoken reliance on self-driving cars for true profitability. If you can be the "Amazon" of delivery the day courier costs drop from $20/hour to $.56/mi, there's an awful lot of up-side. Similarly with Uber.
1. It's reasonable that shoppers (with the help of a mobile app routing them) can complete multiple deliveries / hour.
2. They won't have to increase prices but are negotiating better pricing from the stores they work with (most of ICs profit comes from the items themselves, not the delivery fee they charge).
3. Compensation won't go down, but perhaps it won't rise as quickly as courrier utilization does.
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.
A great Mixergy interview[1] was with Herb Sorensen, author of "Inside the Mind of the Shopper"[2]. There were many fascinating revelations about the grocery business. For example, he went through the four revenue sources for grocery stores and profit on selling the goods was in fourth place, behind real estate, shelf fees, and something else I can't remember. He also explained that there is an optimum layout for a store, with counterclockwise flow.
Average gross margin in a traditional grocery store in the US is 26-33%, depending on local competition. There is a huge range (0-90%) by product category however.
Net income after labor, distribution, and fixed costs ranges 1-6%, depending largely on market share and fixed cost control
Reference: I helped traditional retailers with price optimization for almost 20 years
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?
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?