“Why Would The Investor Will Pay $20 For Your Lunch”: Why Services Are Closing Food Delivery

“We are mathematicians, and we dont know anything about how to make food,” says Tony Xu, founder and CEO of the American service, food delivery DoorDash. “Its not what you expect to hear from the head of such a popular service, but maybe thats what you need to hear,” writes the author of the note. 31-year-old businessman Tony Xu grew up in Silicon valley — his parents kept here Chinese restaurant. Now the service DoorDash uses every third family in the Valley “Is much more than the number of customers in the restaurant his parents,” says the author of the note.

The company was founded in 2013. The organization employs more than 700 people — not including couriers. The service has already attracted more than 180 million financing. Every month the number of customers and orders grow.

“Xu is a living example of a young inhabitant of the Valley, who achieved success thanks to modern technology market — as mark Zuckerberg. Assessment DoorDash has reached dizzying heights. Xu and his team give lectures to residents of accelerator Y Combinator. They give advice to the startups in speeches and podcasts. They are planning international expansion”.

However, in contrast to the Chinese restaurant his parents, Tony Xu and his company is losing money on almost every completed order. Over the past few years, the author continues, technology investors have invested billions of dollars in services, food delivery, in the hope that one of them will grow to such a size to obtain a monopoly in the market and start to make a profit — as Uber in transportation, Google in search or Amazon in e-Commerce.

“Most of the services for the service offer the same service. The user selects the lunch through the application, pays for it and gets your order within 10-100 minutes. Some, like DoorDash or Postmates, offer delivery and one of those schools that have no corresponding service. Bring some cold food ready that only need to warm up. Others use artificial intelligence technology to work on orders and some robots to deliver,” writes The California Review.

“There are dozens (if not hundreds) of services that deliver food. À La Carte Express, Bento, Deliveroo, Deliverd, DeliveryHero, EatFirst, Hill Farm, Favor, Foodora, FreshMint, Gourmaleo, Radish, Spicy Radish, SupperBell, Runnr, Thistle, Wizrd, Zomato, Zoomer, Zume. The fight join sites that have not previously own couriers, as well as giants like Google, Uber and Amazon. Everyone wants to bite off a piece of the pie”.

“In 2014 and 2015, the market food delivery called one of the most saturated segments. But in 2016, the competition is only growing. And the more startups joining this war, the lower prices offer the services in order to spite the competition and take their market share,” continues the author of the note.

Soon, he would be caught, there were the first victims. Service Sprig, has attracted $57 million investment, was forced to stop working in Palo Alto and Chicago, which received $13.5 million of investments closed SpoonRocket, DoorDash investors reduced the evaluation of the project, the service Caviar was purchased GrubHub, Postmates and the management, on hearings, tried to sell the company — before you raise an additional $141 million in early November 2016. Startup managed not to lower rating, but to increase it did not work.

As noted by the editors of The California Review, 2016 was cold from the point of view of the investment climate — and this affected the services and food delivery. The New York Times called the situation a “sunset model on-demand”. Edition Pando expressed more categorical. She described the situation as “podocalyxin”.

“So what happened. Why is the market so quickly “cooled down”. This is a complex issue, and no less difficult to find the answer. We must start with the San Francisco service, which is called Bento”.

“Good day. We attracted $2 million investment, has earned the attention of such media as TechCrunch, CNBC and San Francisco Chronicle. Now we have the account remains $350 thousand will be enough until April. We need to raise additional funds — otherwise we will die” — says the founder and CEO of Bento Jason Demant in talks with his wife and co-founder of the project.

These conversations Demant recorded on tape and published on the website on which podcasts are usually placed with the participation of entrepreneurs. “A surprisingly Frank for the head. He is either too young and inexperienced or he just didnt have other options,” writes The California Review.

Before starting your project Demant worked in a restaurant. In 2015, he and his friend Vincent Cardillo decided to create a service to order food. In the application, Bento users could self-assemble Japanese-Lunches”Bento”. The creators have presented the project at the Launch festival in 2015, hosted by one of the investors in Uber Jason Calacanis. Company, writes the author of the note, accepted enthusiastically, and soon the team raised $2 million first investment.

After five and a half months after launch, with Demant contacted his accountant and said that the company spent $70 million more than expected — that is, exceeded anticipated expenses by about 30-40%. “No one understood how it happened,” says the founder of Bento. It turned out that the delivery of one box-“Bento” for $12, the company spends $32.

Given the cost of ingredients, kitchen equipment, wages of cooks and drivers, as well as the costs of developing applications and firmware, the company was losing $20 on each fulfilled order. “Worst of all, the company has grown on average by 15% per week. Usually it says about the success of the service, but for us, this meant a growth loss”.

The company has reduced costs, fired staff and set a higher price on shipping — but revenue still was low. “We made a profit, but it was a penny,” says technical Director of the project Vincent Cardillo. In the end the company abandoned the development of applications and shut down the delivery — now all orders are brought by couriers from Postmates. The service attracted an additional $100 thousand funding, but founder Jason Demant still speaks of the company with disappointment.

“Everything we learned is to start a business in this area was fantastically silly. We were supported by wise mentors, and it seemed to us that we do everything right”. “Why would the investor will pay $20 to sponsor your lunch. This idea seems absurd.

But the strategy here is the same as the investors of Amazon, Uber and Postmates now — they provide a project of such amount of cash that they could literally sink their competitors. Chests with billions of dollars to allow services like Uber to offer services below cost and thus destroy competitors” — explains the author of the note. After they establish a monopoly, they can raise prices and increase margins.

“Ubers strategy is to become the death Star for its competitors. As weapons the company uses its money, and it is perfectly possible. I think this is unprecedented,” says CEO of Postmates Bastian Lehmann. However, in the case of services for the delivery of food, writes the editors of the California Review to apply this strategy much more risky, and investors understand this.

Among the problems faced by such projects is the increasing number of actors in the chain. Uber, you need to associate the driver with the client. Services food delivery have to worry about working with the kitchens and chefs. The additional stage brings with it additional costs and reduce the revenues.

“Users are willing to pay the Uber driver $30 for what he takes out to the place — but very few would agree to pay $30 for the Uber driver drove to the place their sandwich. Although the cost of shipping comparable, guide services, food delivery cannot charge more”. Working in these conditions forces the services to look for new sources of income. For example, DoorDash self-edit restaurant menus-partners — and includes the cost of meals is additional 20% tax.

According to General Director of the project, this practice helps not to shock customers with a price for delivery. Other companies charge extra Commission from restaurants for each order. With the services operating model on-demand, now there are over million drivers. Technically they are not considered employees, but that they Uber, Postmates, Lyft, DoorDash and others spend most of their money.

“What if all these drivers will be able to fire”. Uber and Lyft plan to replace their drivers in self-driving cars. “Refusing the services of drivers, DoorDash, and other delivery services will get even bigger than Uber,” — said the author of the material. He mentions that hiring one courier DoorDash spends about $200.

One driver works for a company three to six months. That is, every few months the company spends $5 million to update the state couriers (assuming the service runs for about 25 thousand drivers, although this estimate is underestimated, writes the author of the material). With the expansion of the company, these costs are only growing. According to reports from analyst firms, Lyft is losing up to $50 million per month, and Uber — of about $700 million in the quarter.

In terms of unit of output services food delivery lose more. “And how do these companies expect to achieve profitability?”. “Increasingly, it seems that the stability of the company in the future depends on the proliferation of unmanned vehicles. The investors help startups to lose a lot of money in the short term in the hope that with the robotic delivery these companies will finally be earning. And the day will soon come.

Companies increasingly invest in the development of delivery drones and robot teaching pizza making,” writes the editors of The California Review. However to the purpose, the author notes, is still far. Robots can deliver products only at limited distances, drones are unsuitable for use in urban environments. Predictions about the spread of self-driving cars differ — Elon Musk believes that it will take two years, and the founder of Uber Travis Kalanick puts for 15 years.

And yet the robots and artificial intelligence technologies are already helping to heads of services for the delivery of food to cut costs, writes the author of the note. For example, the service Forkable with the help of artificial intelligence algorithms helping office Manager and other employees to choose and order Lunches for entire offices and workspaces on the basis of the preferences of the workers. Service brings a lot of servings at a time.

Forkable receives large similar orders over and over again — and builds your business. The service already has made great strides in the European and Asian markets, says the editors of the California Review. “Many investors naively believed that to create an Uber for food is as simple as Uber — just need to add into the equation the sandwiches. Obviously, thats not true,” writes the author of the note.

However, some market experts still look at similar companies with optimism, he continues. So, Morgan Stanley analysts believe that soon the market volume will reach $210 billion a year. “That the demand for services will only grow, no doubt. The question is, who will take over this industry.

The stakes are high, the competition is huge and the small. Some fail, some get tired of waiting. But several companies, perhaps in the end will earn billions”, — the author notes.

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