Why are delivery companies like DoorDash and GrubHub suddenly economically viable?


People have had cars, addresses, and telephones for a century. Pizza and Chinese food have been showing up at people’s doorsteps for decades. Surely it seems like everything one would need to build a food delivery contracting company existed before the internet. What was missing that prevented me from ordering tacos by phone in 1995?

In: Economics

These types of food delivery companies are not new, they’ve been around for a very long time. Yes in 1995 in many cities had local companies doing restaurant delivery. They were pretty common.

Nothing is special with these companies. They are doing the exact same thing as the older ones. Many older ones even had online ordering setup in the mid-2000s that isn’t much different than it is now… in fact it looks pretty much identical.. hell to a degree, these new companies UI and ordering systems are actually worse.

Restaurant delivery is s actually a pretty poor business to be in as well. Margins tend to be very low, especially for home delivery, though large catering orders for businesses have always been the better, much more profitable option, though delivery for that isn’t as big of a business as you may think, especially outside of major cities and business hubs with many corporate offices. You need significant scale to even make it a good business to be in over being in another business when you’re past the “small business” phase that most delivery companies have existed in for the past 20 years.

Smartphones mostly. Basically every driver comes equipped with their own GPS and order management system that GrubHub or DoorDash doesn’t have to pay for.

The rest of it is mostly about convincing different restaurants that its more viable to get these services to deliver for them than it is to have their own delivery service. And that random people can be reliable enough to get the job done. Like Grubhub was founded in 2004, and the entire recruiting random people via smartphone to deliver things has been building up since then.

They actually aren’t economically viable. Most of these companies don’t make profits, a few like OrderUp have already gone out of business. The rest will probably follow. And even when they totally outsource most of their costs onto their employees (employees drive their own cars and are responsible for their own gas, insurance, and maintenance) they still have to pay ridiculously low wages and wouldn’t even dream of paying for benefits like health insurance. And despite all that, these companies mostly still don’t turn a profit.

Food delivery just isn’t a viable business most of the time. If the price for delivery is low, then companies can’t turn a profit on such low margins, and if the price is high, then people just don’t order delivery very often because they can’t afford it, and then the company also can’t turn a profit.

It’s mainly scalability and efficiency… it’s almost painless for these companies to break into new markets, all they need is an office and a few employees to support their contracted workforce.

They are not new. They have been economically viable for a long time. Food delivery companies have existed in cities all the way back to the 1980s if not earlier. But instead of the restaurant contracting with them for delivery people they can instead be hired by the customer directly via the ease of technology such as phone apps and websites.

But margins on delivery companies are very very tight. They are only viable in places where population density can support them.

What changed was that these models manage to skip most of the expense of running a delivery business by… not having employees or assets to maintain. DoorDash, Grubhub and all these other Uber-model companies are delivery services that dont own any inventory, dont have to train or even employ any drivers nor own and upkeep any vehicles, don’t need a physical place to put all it and they dont need to insure it because they dont own any of it, unlike a local courier or taxi service.

Instead they rely on contract workers, directly connecting people driving their personally owned and maintained cars to customers, just skimming a fee off the top for providing the software platform that does the connecting.

Thats why its economically viable, because your nation-wide delivery service now only has the upkeep of a single office of software developers and the payment given to the contractors doing the deliveries is lower than an actually employed delivery or taxi driver would get.

I think the main thing is the ease of access. Door dash etc. didn’t get into it as an employer. It was mainly treated as a connection app. Connecting Jim who wants a a hotdog, Frank’s frankfurters who wants to sell jim a hotdog, and bill who is not going too far out of his way or decided that he wanted to spend his evening making a few extra bucks by ferrying food.

By their powers combined, Jim gets his pulverized meat in a tube. This isn’t how things are going though. There aren’t enough people who “just happen to be going that way” and have the app, and too many people using it as employment, so now we, as a government and a society, are figuring out what that means and how to treat it.

They are not really viable economically. Most run on the same model: fake it till you make it. They basically compete using other’s people’s money and try to gain a significant market share. Once they do this they cash out during the IPO. Basically a money losing company suddenly worth billions even though it might never make a profit.

Recent Uber profits came out, lost more money than ever and they admitted they have no idea when they will make profit. IPO price was $45 now its $ 3x.

In the big scheme they aren’t but they get by thanks to minimal expenses(drives eat most of it) and low pay w/ no benefits. The only thing that has changed is due to smartphones increasing the customers accessibility to the market and the ease of finding/managing a workforce.

* More people live in dense cities, so it’s faster to deliver to them.
* Fewer people own cars so they need delivery.
* People have gotten used to delivery nowadays (e.g., food, Amazon packages) compared to going out to stores.
* It’s easier to coordinate the customer, delivery company, the restaurant, and the delivery person now because of smartphones and wireless internet.
* The gig economy has taken off and more people are choosing to do flex time work as delivery drivers.
* Soon self driving cars, drones, and other technologies will make the products even more economically viable. This means that investors are willing to put money into these companies even if they are losing money today in hopes that they can become the brand leader by the time the market really takes off.

It’s tricky because it’s not completely clear IF they are economically viable.

A lot of these businesses don’t make a profit. That’s in large part because today, the name of the game is “corner the market”. Basically, growing and taking over the market is more important than profit, because once you’ve succeed then you’re the king of that world and can easily become profitable. This makes it high risk / high reward and is the reason these businesses can have so much investment and such high valuations.

Of course, from a free market perspective, this is terrible. These businesses are not “competing in the market” as is considered good for society as a whole, instead they’re competing to gain a monopoly, which kills the market. This is not a new strategy and was banned a long time ago but apparently no one cares about enforcing those rules anymore.

The above point is true for most markets today unless they have nothing to do with technology (soon everything will be tech though). But the other point has to do especially with the so called “Gig Economy” which basically means that people are not employed but instead run their own business, except they don’t actually run a business.

The question here about economic viability comes from the fact that regular people are terrible businessmen. Most people who work in the Gig Economy don’t realize all of the cost that they have to pay themselves, such as taxes, depreciation on cars, even the cost of gas is not always considered. And then you have healthcare, saving for retirement, safety regulation, benefits of having a steady employment, and on and on.

This allows businesses to hire “employees” with both a lower pay than normal And for it to be completely performance based which means labor is both cheap and risk free. They also don’t need to invest capital in cars, car parks, buildings (AirBnB etc), camera equipment (YouTube etc) or pretty much anything else. You might also consider social media (and even Reddit) part of the Gig Economy since it’s regular people who provide all the value (data and content) but in that case the profits are not shared at all with the regular people.

The third point is Technology, which is the only point in favor of these businesses being economically viable. It’s because of the internet and smartphones, as well as the whole “big data” sector, that it is possible to connect so many people and so many resources in real time, on demand, anywhere in the whole world, with an extremely high rate of efficiency. The economic value of technology is immense.

TL;DR: “Cornering the market” strategy is not good for society, the Gig Economy is mostly bad for the “employees”, but modern technology does make things better.

There’s two components..

First is the tech. The key point here is friction. Traditionally, there were large hurdles for potential customers who wanted to order a delivery. First you needed to know which restaurants in your area delivered, then you needed to figure out what they sold and how much it cost, then you needed to find the number, find a phone to call and finally find cash money to pay the delivery driver.

The hurdles for potential drivers was even greater. First you needed to know which restaurants delivered in areas you were prepared to drive to. Then you needed to figure out which company ran the delivery for those restaurants, then you needed to figure out how to apply to that company, pass whatever recruitment process they had in place, then figure out how to fit delivery shifts into your schedule – probably making this your only job.

App based delivery services reduce this friction by having an app. This means that a potential customer can download a free app and within 1 min they can see what’s available, get in contact with the restaurant and pay. A potential driver can download an app, fill out a few online forms and within a couple of minutes get dispatched to their first delivery. This reduction of friction leads to an increase in customers and an increase drivers.

The second thing is venture capital and the get big fast strategy.

Get Big Fast is a corporate strategy that is pervasive in the tech sector. Google and Amazon are both famous for it. Simply put it is:

1. Create a product or service that addresses an opening in the market.

2. Pour money into that product or service with the goals of becoming the biggest player in that market and building the largest base of loyal customers to your brand.

3. ???

4. Profit

The idea nities to make money will present themselvis, once you have a large enough user base,themselvnes ĺes. In the case of Amazon, the opportunities they found are selling stuff for third party vendors and selling access to AWS. Neither of these things has much to do with being a cheap bookstore (which was the original Amazon product). But Amazon could only find and exploit those opportunities because of its large number of users who originally came for the bookshop. It’s important that the money makingķ opportunities don’t generally need to be related to the actual uses.

In food delivery particularly, the companies are still in the rapid growth phase. In this phase they aren’t making money but they are trying to win a large customer base. Get big enough (so the theory goes) and a way to make money will present itself. VC keeps this merry go round going.

In 1995 you would have to have a huge staff to answer the phones as well as the infrastructure for all those phone lines.

Today, the presence of smart phones with internet access allows the complete ordering, payment, information distribution, and driving directions processes to be automated. The only “touch” labor involved is the driver. This dramatically reduces overhead and labor costs.