By: Santosh Sankar
Looking back at 2016, the team at Dynamo and I have spent the better part of the year looking at nascent on-demand/last mile opportunities amid concerns of weak unit economics in the industry. In our view, this is driven by targeting price-sensitive end users, volume concerns, and underpriced offerings.
Ultimately, technology solved the dispatching problem — finding available drivers and routing them to the proper pickups/drop offs. That alone, however, does not afford platforms the ability to charge little to nothing for delivery. So what’s it going to take to be successful on a sustainable basis?
Product vs. market: don’t focus on mass expansion, focus on profitable expansion.
At the front-end of the business, discounted pricing to gain users and drive usage was sensible, but the experiment was run too long to the detriment of unit economics. The cost of a delivery person — depending on market — is in the neighborhood $15/delivery. This was masked with “free” or “$1” deals. I would be willing to bet that on-demand offerings at an economically sensible price will be positioned against a market that’s different from current users.
Given it’s a premium service, it requires intentional expansion where users will be less subject to sticker shock given they have ample disposable income. These users are likely in suburbs where distance makes retail more inconvenient, and they are purchasing items where cost is greater than the delivery fee. The focus on each geographic or industry expansion should be pinned on charging a price satiable to users without forsaking the margins of the business.
Volume expansion will be a result of batching deliveries.
Once there’s a baseline business at proper unit economics, there are ways to drive further volumes by expanding the user base. The key is technology that prioritizes batching of deliveries- the strategic assignment of many deliveries to one driver. It’s something many platforms have come to realize. For example, Skydrop, (Disclosure: Dynamo Accelerator is an investor in Skydrop) is focused on Mexican delivery and prioritizes this to the point that is turning into a core part of their value proposition.
The sequence of events is also critical given that it’s difficult to take prices up whereas, it’s easier to reduce them. The result of higher volumes will be reduced pricing. Even with batching, many platforms are likely operating at a per-delivery loss.
Reset expectations and look to traditional trucking to set them.
The big folly with the way on-demand delivery is currently structured is that it underestimates the cost of humans. This bloats a cost structure that relies on human operations, ranging from customer success, overseeing dispatching, and the actual delivery of goods. Slowly, technology is automating certain processes like driver validation with a service like Emptor (shout our to Gabriel Puliatti), real time dispatching/route optimization with Wise Systems, (Disclosure: Dynamo Accelerator is an investor in Wise), and ever-hyped autonomous delivery.
In the medium-term, though, it might not be a bad idea to use traditional trucking to set expectations as it relates to the demands of scaling operations and associated impact on margins (operating margins in the industry tend to be in the high single digits to low teens). As a founder, it is important to manage expectations and to understand that there’s likely only going to be upside in using trucking to calibrate them.
Rethink sources of capital.
Related to the previous point, identify capital providers who understand the complexities involved with building such a business. The right venture investors, with the right patience and understanding of what’s required could generate substantial gains.
In the current form, we have some of the necessary platform technologies in place to drive the rapid growth that venture investors are used to. The missing piece is end-to-end automation. That being said, it is worth considering more traditional private equity, which has long loved the cash-generative nature of trucking and associated brokerage services.
The most recent case-in-point is Warburg Pincus’ backing of Coyote Logistics, which sold to UPS for $1.8B. Warburg followed up with, by purchasing BlueGrace Logistics this fall. I suspect existing players will need to take this type of traditional private capital with painful pricing and cost-related decisions remaining an ongoing concern. The timing of these activities is still TBD — perhaps a 2018 occurrence?
We are never say never around here and are interested in meeting founders solving hard problems in thoughtful ways that generate venture-type returns. Ultimately, we might view 2016 as a year everyone got more educated on the trials and tribulations of on-demand delivery.