Our readers, as well as those of FT Alphaville and naked capitalism know this stuff but it is still nice to see it wrapped up in a tight little package.
From Data Driven Investor at Medium, June 29:
DoorDash was selling pizzas from the restaurant for $16 while paying the restaurant $24 per pizza. Bird was losing $27 for every $10 it made on rides. There are a lot of examples of companies providing an investor-subsidized service: Uber, Lift, Life, We Work, AirBnB and others. All their “disruption” consisted in selling a dollar for half price.
This article was motivated by an excellent publication in The New York Times with the headline “Farewell, Millennial Lifestyle Subsidy”. The author of this work describes a golden time when everyone rode an extremely cheap Uber, got their laundry delivered by Washio, and their house cleaned by Homejoy. He recalls valets from Luxe and his experience of buying a used car, delivered to him in a giant bow by Beepi at a mystically low price. All these companies provided “investor-subsidized service”. Most of them simply burned tens of millions of venture dollars and closed, the survivors are raising prices.
For years, these subsidies allowed us to live Balenciaga lifestyles on Banana Republic budgets. Collectively, we took millions of cheap Uber and Lyft rides, shuttling ourselves around like bourgeois royalty while splitting the bill with those companies’ investors.
Back in 2018, the same author wrote that the entire economy was starting to resemble MoviePass, the subscription service whose irresistible, deeply unprofitable offer of daily movie tickets for a flat $9.95 subscription fee paved the way for its decline. Such companies trying to defy the laws of gravity with business models that assumed that if they achieved enormous scale, they’d be able to flip a switch and start making money at some point down the line. This strategy is called “blitzscaling” and only a few manage to implement it, but many want to try it.
The columnist’s culminating thought is refined especially: “hiring a private driver to shuttle you across Los Angeles during rush hour should cost more than $16, if everyone in that transaction is being fairly compensated. Getting someone to clean your house, do your laundry or deliver your dinner should be a luxury, if there’s no exploitation involved. The fact that some high-end services are no longer easily affordable by the merely semi-affluent may seem like a worrying development, but maybe it’s a sign of progress.”
Continuing the topic, there is an interesting article “DoorDash and Pizza Arbitrage”. One man noticed that DoorDash was selling pizza from a friend’s restaurant for $ 16, even though it cost $ 24. The service paid the restaurant the full amount and there were dozens of such orders. That is, DoorDash actually subsidized 30% of the cost of pizza to its customers. How do you like this growth hack?
It’s no wonder that the historically profitable GrubHub has gradually gone show losses in income statements. I wrote about the wild dumping by Uber Eats, Postmates, DoorDash in vc.ru (like TechCrunch in Russia) yet in 2019. This was evident from the numbers and statistics, but many pointed out to me the network effect and other fantasies of exclusivity that theorists make up about “unicorns” that grew up in a couple of years in order to somehow justify their chronic losses.
Two years have passed, and now food delivery services are intensively raising commissions along with the prices of the menu itself. Their service fee, depending on the location, has increased by tens and even hundreds of percent. However, DoorDash is still in terrible losses. And many people continue to believe in the network effect and the permanent improvement of the business model due to this, but it seems more that the “disruption” consisted only in selling $1 for 70 cents.___________I have already mentioned many companies with a similar growth strategy, but in order not to repeat myself, I will give another illustrative example of the “investor-subsidized service”.Since its introduction in 2017, Bird charged $1 to start a ride, and then 15 cents a minute. But in April 2019 per-minute fee was increased to 25 cents in cities like Austin, Texas and Los Angeles, to 29 cents in Baltimore, and to 33 cents in Detroit and Charlotte. That is, in large cities, the company raised the rental price by one-and-a-half to two times.
However, Bird was losing $9.66 for every $10 it made on rides in the last quarter of 2019, according to a recent investor presentation. And if you think that such losses in the model itself were due to investments in the future and rapid growth, you are mistaken, because for the same quarter, the Gross Transaction Value was $37 million, and the net loss was $100 million.....
....MUCH MORE, including a handy list of names for that time, somewhere in the future when we are not in an ever-ascending market and the second half of our dictum, "Only short frauds in a bull market" comes into play:
"Short 'em all"
