Once, long ago, but not that long ago, like the late nineties, in cities around the country, there was a startup that delivered groceries to people’s houses within thirty minutes — as fast as a Domino’s pizza, wow, amazing. It was such a great idea that this company was valued at almost five billion dollars after raising hundreds of millions of dollars in an IPO. But it turned out that building the infrastructure to run this service cost far more money than the company could make from charging people a reasonable fee to delivery the groceries they were too busy to retrieve, because they were doing things like going to restaurants or trying to beat out scalper bots to get Beyonce tickets. And so this startup, called Webvan, went bankrupt in what is generally considered one of the most violent incidents in the orgy of death that was the first dot-com implosion.
Roughly ten years, or two internets and one successful FreshDirect later, delivering groceries seemed like a great idea again, great enough to be its own company and not a side business like AmazonFresh, great enough to once again attempt to spread to every city in America, great enough to sweep aside the problems that killed it last time, great enough to merit hundreds of millions of dollars in venture capital. But this time, it would be different, because instead of building warehouses and hiring employees, the idea would be built on the shelves of existing grocery stores and the backs of a servile labor force left rattled and underemployed by the Great Recession, unlike the people whose groceries an army of independent contractors would be retrieving and delivering:
“Instacart is a crowdsourced model for the home delivery of groceries, and it offers a way to escape the enormous capital infrastructure burden that was so tricky and complicated about Webvan. Weebvan was a company that, in computer parlance, was trying to design the underlying computer architecture, the operating system and a whole bunch of apps on top of it. Think of Instacart in a similar manner to a company like Uber where you have a lot of independent contractors who, instead of driving cars, will attend to your grocery shopping needs.”
With Webvan’s Implosion as Cautionary Tale, Instacart Slowly Begins to Expand, Starting With Chicago
So, as Instacart contemplated when and where to expand first, CEO Apoorva Mehta said he called on Moritz for advice. “One of the main reasons that Webvan failed was that it expanded too quickly,” Mehta said in an interview yesterday. “Mike really encouraged us to get a lot of the important things right in San Francisco before considering expanding into a new city.” …
But Instacart is different from those competitors, as well as Webvan, in many ways. Instacart does not carry any inventory, while the others do, or did. Instead, Instacart hires a network of shoppers who pick up and deliver the goods once an order has been placed. As a result, it does not need to open new warehouses when it moves into new cities, nor worry about how much demand there is for a given product.
Instacart and Postmates have studied the history of home delivery. They are avoiding mistake Nos. 1 and 2 that Webvan made. Now only two questions remain. How profitable will their models be? And how quickly will they expand nationally. Stated otherwise, will they avoid mistake No. 3? Time will tell.
Instacart has a far different approach, taking advantage of existing grocery stores by dispatching couriers to Whole Foods or Safeway and delivering goods within an hour. The drivers are independent contractors, meaning Instacart doesn’t have to provide them with salaries or costly benefits.
Many investors are betting on Instacart Inc., a San Francisco company that calls to mind Webvan if only for its soaring sales and surging valuation. … Webvan grew at a faster clip, generating $178.5 million in sales in 2000, its second year in operation. Shortly after its IPO in November 1999, it was valued at $8 billion.
Still, much is different about these two companies. And in that way, Instacart stands as a metaphor for how the online business has evolved over the course of a generation, driven by the rise of the smartphone. In particular, Instacart, like many online businesses today, vigorously pushes out costs and risks to others.
So, roughly two years later, how different has it been this time? Well, let’s ask a partner at Greylock Partners, a leading venture capital firm*:
Which brings me back to the “on demand economy”. The challenge I see with so many of these services is that most often, 1) they are new costs, and 2) they don’t fundamentally recast cost structures like Uber did — instead, many of them are an arbitrage on the cost of wealthy people’s time vs the less wealthy.
Would I like something that’s more convenient? Sure. But how much will I pay for it? The very wealthy might pay $20 for a surge delivery fee, but there aren’t a lot of those people. And how do unit economics shake out when you need to pay delivery people enough money to attract them, but not too much that only the top 1% can afford the service?
Hmm. Well, what has the New York Times found?
Good Eggs, an organic grocery delivery service, laid off more than 100 employees and shuttered its offices outside its San Francisco headquarters in August. Instacart, the grocery delivery service, recently laid off 12 recruiters, which the company said was “part of an overall plan to slow down hiring” after a growth spree last year. And DoorDash has been turned down by some venture capitalists as it has tried to raise new financing, according to three people familiar with the company’s plans.
The problems are rooted in the high operating costs of the start-ups, which typically act as middlemen between consumers and restaurants or grocery stores. The companies not only have to pay for large fleets of drivers, they also have big groups of employees who receive customer orders from the apps and who then manually make calls to the restaurants to order food. At the same time, to attract customers, many of the start-ups offer introductory prices and discounts, often making delivery free for first-time users.
As DoorDash’s experience with drivers shows, the start-ups’ costs don’t necessarily decline over time. For some drivers, who are paid a fee per delivery, it can be difficult to make enough deliveries in an hour to make it financially worthwhile for them. And when drivers move on, the companies must spend again to recruit replacements.
Well, maybe next time — with an even more broken labor force willing to accept even less from its employers, or drones, or as just another button in the Uber app — it will be different. It’s a great idea, after all. 🙃