Network economy – Unicorns and donkeys Pt. IV

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Inability to reach scale is killing the delivery start-ups.

• The highway of 2016 is being littered on a daily with the crashes of start-ups that have been so focused on obtaining huge network scale that they forgot the basics of economics.
• Almost exclusively, it is the start-ups that involve pick-ups or drop-offs of an asset that have got into trouble.
• This is because of the high level of fixed costs that these companies incur as a result of requiring lots of employees or contractors to do the picking-up or dropping off.
• Both on demand valet parking and food delivery services have been in the spotlight recently with SpoonRocket closing and almost all of the on demand valet industry imploding (Luxe, Zirx, Valet Anywhere) or exiting the on-demand model (Caarbon and Vatler).
• I think that the single biggest problem that all of these start-ups have faced is that labour is expensive in developed markets.
• In the start-up phase it is very difficult for these companies to make any money because they do not have enough scale to efficiently use the resources that they have.
• For example, delivery personnel and car valets have to be paid whether they are out doing deliveries or simply sitting around waiting for a job.
• Most importantly though, the network effect has not kicked in for anyone and this has caused substantial problems.
• A food delivery or valet company that is the go-to place can charge higher prices to diners and also demand higher commissions from the restaurants.
• In order to get to this hallowed position I think that a networked business needs to have 60% market share or be double the size of its next competitor.
• Even Munchery which is one of the best financed start-ups in this area is not immune as its Chief Customer Experience Officer has just resigned after only 5 months in the job.
• Although, it would appear that there has been some personality clash, I suspect that he has also been prevented from developing the customer experience due to monetary pressures.
• Even India, where personnel are much cheaper, has not been immune as there are so many of them all fighting each other that the network economics are unable to emerge.
• What usually happens in these situations is that several will fall by the wayside and the strongest will buy up the rest and obtain the scale necessary to make the network economics work.
• This is exactly what Zomato is doing with its strategic investments in Pickingo and Grab, but whether it has the financial clout and execution capability to consolidate the sector remains to be seen.
• However, I am pretty sure that as a classifieds website for restaurants that has been around since 2008, it understands how critical the network effect is.
• The end result is that the initial phase of hype and euphoria is properly over and the shake-out has already begun.
• Only the strongest with the most money are likely to survive and will do so by buying up the competition or waiting for them to wither on their own.
• For the rest, the unicorn disguises are already slipping revealing the true colours of the donkeys underneath.