Why are food delivery businesses so troubled?

Why is it that all the guys in the food delivery business seem to be experiencing problems?

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By Vivek Srinivasan

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Most delivery related startups in the food space have been having trouble over the past year and by the looks of it, we seem to be ushering in the new year with news of more firings. Why is it that all the guys in the food delivery business seem to be experiencing problems?

The cause of their troubles is to do with a more fundamental question that they need to understand -- what is a startup?

According to me, Startups are businesses that have an asymmetry between manpower needed per unit of additional income.

If you run an agency engaged in building websites, there are only so many websites that you can build simultaneously with a team of 10 developers. In order to increase your income, you need to be able to do more which means bringing in more people. There is hence a symmetry between the human resources needed to grow income. Of course, you will find efficiencies as you scale, but those will be to the tune of 10%-20%; not 70%.

Unless, some part of it can be automated.

The current trouble with the delivery business is that they do not possess this asymmetry at all. They run much like the website developer where one needs to recruit more people to take on more deliveries. This fact coupled with the challenges of recruiting and retaining manpower has resulted in ballooning salaries.

Currently, the delivery boys are getting paid to the tune of Rs. 25,000 per month (base+incentive). This implies Rs. 1,000 per day being paid to delivery boys (assuming 5 days off). Let us suppose a 10% delivery charge on the products that these boys deliver; implies, they need to be delivering goods worth Rs. 10,000/day. If an average parcel is priced at Rs. 1000, they need to make 10 deliveries a day. In all that I have heard, on an average they do about 8.

To make matters worse, the average price of the parcel is rarely Rs. 1000. Invariably the average price is in the range of Rs. 150 - 300. This implies that the financial model is stacked firmly against the business. They need to pick up 4 or 5 parcels at the same time to make it work. The reason they cannot pick up as many distinct parcels is because, they need to meet the 30 minute delivery deadline.

When you have to deliver food, you are not just taking a package from point to point, you are in fact on a timer to fill an empty tummy. The longer the tummy stays empty, the angrier it gets.

The only way to make hyper-local business work to the advantage of the service provider is to undertake the business in an extremely clustered manner. Much like the postman, if a delivery boy can cover hundreds of addresses in a small area, and the pick-up locations are also in the very same area; the cost of logistics would come down dramatically and also the time taken to deliver.

This will in turn cause an increase in the capacity that one can carry, since the time taken to pick up multiple order will be much lower.

Now this requires a company to have almost a monopoly position in the market to have such a large user base.

A company can focus on building a monopoly or work with Drones.

Going back to the beginning of the article, we spoke about asymmetry between manpower needed and income. Drones can create this asymmetry by automating the delivery part of the business. A drone can fly from point to point on auto-pilot. Software can take care of pick-up, destination, and flight as well. They use electricity and hence are far more cheaper and hopefully, drone traffic will be lower than road traffic.

There is certainly an initial capital expenditure in terms of acquisition of equipments but thereafter the cost of operations are significantly reduced. The cost of manpower is almost completely eliminated. Also the nature of manpower required will change. Instead of skilled individuals who are riding bikes, the company would have engineers who program drones.

Scaling the business to multiple cities and gaining a monopoly position would become much easier since the only factors holding back growth would be capital and scalable software architecture.

It may seem like science fiction but autonomous drones are the way of the future. The sooner it's realised, the sooner these company can start burning their cash on the right things.

Vivek Srinivasan

Managing Director, VS Prudence Advisors

Vivek Srinivasan is a Startup Mentor who works extensively with early stage start-ups.

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