Saturday, May 23, 2020
The Meaning of We, Part Deux
So, this blog post about DoorDash and pizza arbitrage has been making the internet rounds; you’ve probably already seen it, but if not, it’s well worth a read. It highlights some of the irrationalities of the platform-food-delivery business – irrationalities that have resulted in losses despite the fact that the pandemic has caused business to boom. UberEats and GrubHub are now considering a merger, and I suppose their lack of profit might be interpreted as the result of predatory pricing, which would raise antitrust concerns, but honestly it looks more like they are just having trouble making the business model work.
So what struck me about the blog post was this:
You have insanely large pools of capital creating an incredibly inefficient money-losing business model. It's used to subsidize an untenable customer expectation. You leverage a broken workforce to minimize your genuine labor expenses. The companies unload their capital cannons on customer acquisition, while this week’s Uber-Grubhub news reminds us, the only viable endgame is a promise of monopoly concentration and increased prices. But is that even viable?
Third-party delivery platforms, as they’ve been built, just seem like the wrong model, but instead of testing, failing, and evolving, they’ve been subsidized into market dominance. Maybe the right model is a wholly-owned supply chain like Domino’s. Maybe it’s some ghost kitchen / delivery platform hybrid. Maybe it’s just small networks of restaurants with out-of-the-box software. Whatever it is, we’ve been delayed in finding out thanks to this bizarrely bankrolled competition that sometimes feels like financial engineering worthy of my own pizza trading efforts.
The more I learn about food delivery platforms, as they exist today, I wonder if we’ve managed to watch an entire industry evolve artificially and incorrectly.
That’s pretty much the argument I made in my earlier post, The Meaning of We. Loosening of the securities laws has, I think, resulted in a distorted and inefficient allocation of capital toward exploitative and ultimately unproductive businesses. Now, it’s true – GrubHub and Uber are both publicly traded companies today – but they got their start due to piles of private investment, and that momentum has carried them through into the public markets. From where I sit, the expanded ability of companies to raise capital privately has only facilitated particular kinds of biases and short-sightedness among a very small segment of the investor base, resulting in real, and damaging, effects in the broader economy. Perhaps this is a problem that will resolve itself - with the implosion of SoftBank, perhaps private markets will simply get smarter - but I suspect that this is more a problem of the people who make decisions in private markets, and their biases and incentives. Regulators are increasingly focusing their attention on investor sophistication with respect to individual transactions, and neglecting the broader macroeconomic purposes of the securities regulation regime.