The seamy underbelly of food delivery

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.