The world is replete with stories of people who regret not
buying things when they could have, like stock in IBM or Amazon. Everyone is looking for that high-risk investment
that, in retrospect, was a sure thing. The
latest in the “Boy, if only I had known about this sooner I would have bought
that” file--Uber
has picked up food delivery service Postmates for only $2.7 billion!
The amazing thing about this news? It comes right on the heels of several reports
that these
businesses will never make a profit, they can’t turn a profit even
with a captive audience, and they are beset by legal
difficulties involving fraud.
I find the conclusion in the Newshour report the funniest,
that people are investing billions of dollars in some pie-in-the-sky scheme
that will probably fail because throwing a couple of billion of dollars at a
plan that will probably fail is better than putting that money in a nice index
fund that is certain to return a solid 4% - 5% per year, or even a moderately risky
investment that might return 7% - 10%.
This demonstrates some sort of psychopathy on the part of
investors. Following on the heels if the
tech bubble, then the housing bubble, investors are conditioned to expect
excessively high returns as the norm. It
is almost as if investors think “high risk means high reward” and they think it
means that making a risky investment is certain to produce a high return. That is not what high risk means; in fact, it
is the opposite of what high risk means.
This reminds me of the TV series Suits when the lead
character quit being a fake lawyer and became an investment banker, and his
boss complained that he only “hit doubles” and he wanted “home runs.” First of all, any baseball player who hit
only doubles when he batted would be in the Hall of Fame after his first
year. Second, this again reinforces the
idea that taking bigger risks always produces bigger rewards. Riskier investments will, more often than not,
fail; that is what it means to be risky.
To cite another lovable TV character, Tom on Parks and
Recreation was devastated when his business (which produced absolutely no marketable
product) went bankrupt. He was puzzled
because, as he put it, “They say you have to spend money to make money. Well, we spent money like crazy!”
I have to admit there is not a lot about the food delivery
business I understand. I read that delivery
sites can force restaurants to use them without their knowledge. Delivery services have been accused of charging
restaurants for phone calls. There are a whole host of actions by delivery
services that restaurants don't
appreciate. My response would be, if
the apps are so bad, don’t use them, but apparently that
isn't an option.
This is obviously a breakdown of free-market economics of
the highest order. One of the principles
of capitalism is that both parties agree (in theory) to the exchange that takes
place, but news articles seem to imply (actually, they assert boldly) that
restaurants have no choice but to do business with delivery services that
eliminate their profit margin. How can
any disciple of Adam Smith condone one party to a transaction imposing
a 13.5% to 40% surcharge on the other party without the other party’s
consent?
I was skeptical of food delivery services’ profitability
when I thought the fee was being paid entirely by the end consumer; why would
anyone pay someone $10 to deliver a $5 chalupa box from Taco Bell? But after looking at all the short cuts,
ethically dubious actions, misrepresentations, and business
models dependent on underpaying workers, I am even more convinced that this
business cannot legally make a profit.
If it could, it wouldn’t resort to setting up fake websites and stealing
its employee's tips.
A major test will come in November, when California voters will
decide if gig workers are employees or independent contractors. If the proposition fails, and the gig
companies have to treat their employees with dignity and pay them minimum wage
and carry workers’ compensation insurance, there should be a significant market
correction. My guess? The vast majority of Californians who don’t
use Uber, or Lyft, or DoorDash will shrug their shoulders, vote no, and let the
chips fall where they may.
In the meantime, do your favorite restaurant a favor and order
delivery from them directly, or order take out and pick it up yourself.
