Are delivery start-ups in trouble?
In late December, Instacart fired much of its recruiting staff as it slowed hiring, and also raised fees in what many saw as a sign of new pressures facing delivery start-ups.
Those developments were followed by an article in The Wall Street Journal about DoorDash seeking a $600 million valuation in a new funding round, down from hopes for $1 billion. While a poor IPO market was also seen undermining growth, questions are arising whether the new delivery start-ups are headed for flameouts à la Webvan and Kozmo.
“Many of these companies have struggled to demonstrate they can operate profitably, and lawsuits attempting to reclassify independent contractors as employees have threatened to raise labor costs,” the Journal stated.
An article last week in The New York Times spelled out the challenging economics in the business models of these services:
- The costs of drivers, who are paid a fee for delivery;
- High recruitment costs, given the high turnover rates;
- Paying associates, who receive customer orders from apps and then make calls to the restaurants/retailers;
- Covering staff negotiating deals with restaurants/stores over fees (typically in the range of 20 percent);
- Overcoming the resistance in less-affluent areas from consumers to fees and optional tips;
- Absorbing discounts required to attract first-time users.
At the same time, the Times article pointed out the opportunity to act as delivery middlemen for retailers and restaurants, one that has attracted Postmates, Blue Apron, and countless other start-ups, as well as the likes of Google, Amazon and Uber. Amassing consumers’ purchasing data is seen as particularly valuable.
Uber announced in late January it was significantly expanding its UberRUSH API service through expanded partnerships with Nordstrom, 1-800-Flowers, T-Mobile, Rent the Runway and Google Express.
Jason Droege, head of UberEverything, wrote in a blog, “We’re hoping that one day through the UberRUSH API, getting anything in your city will be more affordable and reliable than getting in your car to pick it up yourself.”
- DoorDash Struggles in Quest for $1 Billion Valuation – The Wall Street Journal (sub. required)
- Delivery Start-Ups Face Road Bumps in Quest to Capture Untapped Market – The New York Times (tiered sub.)
- Instacart, the $2 Billion Grocery Delivery Startup, Lays Off 12 In-House Recruiters – Re/Code
- We’ve Updated Our Delivery Prices – Instacart
- A Custom Delivery Solution, Powered By UberRUSH – Uber
DISCUSSION QUESTIONS: Do you see a consolidation or other fallout ahead for delivery start-ups? How may the business model of delivery start-ups have to change for long-term stability?