Thinking Economic Transformation, by Mitch Ratcliffe
Author: Mitch Ratcliffe
Mitch Ratcliffe is a veteran entrepreneur, journalist and business model hacker. He operates this site, which is a collection of the blogs he's published over the years, as well as an archive of his professional publishing record. As always, this is a work in progress. Such is life.
Uber today added another commodity service to its quiver of mobility services with its acquisition of Jump, a New York-based provider of dockless ebikes that had previously raised $11.6 million. The deal was reported to be worth more than $100 million.
The 10x premium on capital raised to date, including $10 million from Menlo Ventures in January of this year, buys Uber a fleet of motorized bicycles that can be grabbed from one location and left at another in 40 cities. San Franciscans reportedly love the bikes on the city’s steep hills. Jump, which spent almost a decade using the brand Social Bicycles, charges $2 for 30 minutes, making it a viable alternative for short drives in an Uber, or walking. Here is founder Ryan Rzepecki’s story of the company’s long genesis.
Uber’s strategy is falling back on U.S. markets and focusing more on commodity services rather than increasing specialization, UberEATS notwithstanding because it relies still on a driver and a car more than ensuring meals arrive hot and edible. U.S. cities have struggled to bring sharable bicycles into city centers, but Jump’s “dockless” bikes solve a significant problem. Instead of having to find a bike dock to return a borrowed bike, Jump’s bikes can be parked and left anywhere.
“[O]ur ultimate goal is one we share with cities around the world: making it easier to live without owning a personal car,” said Uber CEO Dara Khosrowshahi in a blog posting. “Achieving that goal ultimately means improving urban life by reducing congestion, pollution and the need for parking spaces.”
Like a car-and-driver awaiting a fare, Jump bikes are a local commodity easily organized by Uber. The acquisition makes sense and plugs an urban customer requirement.
Continuing our look at the on-demand delivery of food, which is becoming mainstream in 2018, it is time to explore subscription food delivery pioneered by publicly traded Blue Apron and HelloFresh in the U.S. and Europe, respectively.
Boxed meals provide curated ingredients and recipes to cooks who prepare the food at home. It is the second leg of a growing home delivery industry, one that provides potentially powerful marketing advantages compared to grocery delivery (see the previous installment). Like groceries-on-demand, these companies seek to relieve the customer of shopping for the raw materials of a meal. Restaurant delivery, which will be our next subject, seeks to displace food preparation altogether.
The meal-in-a-box model has even captured President Donald Trump’s attention. His administration has suggested “Harvest Boxes” of produce and cheese have been suggested as a new alternative to food stamp programs in the United States. Trump’s idea may be a prescription for monotonous eating straight out of the 1960s, but commercial food boxes have focused on providing variety, intriguing culinary choices, and add-on products, such as wine.
We believe subscription food services are the most flexible marketing platform among the food delivery competitors.
Born when there was an Uber for everything
The subscription food segment emerged in 2012, when HelloFresh and Blue Apron were founded on early enthusiasm for the Uber model. Like other on-demand businesses, these companies built deliberately as the infrastructure and data tools needed to coordinate logistics across the food preparation industry evolved.
HelloFresh, based in Berlin, raised $364.5 million in seven rounds before launching an $393 million IPO in November 2017. HelloFresh stock has added 47.5 percent since its debut. Last month, the company acquired GreenChef, a Denver-based sustainable ingredients subscription food company in its first acquisition.
Blue Apron, which went public in June 2017, has struggled by comparison. It’s shares are down almost 37 percent since its IPO. The New York-based company had collected $199.4 million in funding over six rounds. The company lost customers during 2017, falling 27.9 percent from 1.036 million customers in the first quarter of 2017 to 746,000 as of December 31, 2017. This may be due to seasonality in Blue Apron’s business – cooks may prefer to shop for holiday meals.
However, HelloFresh says its active customer based increased by 68.6 percent in 2017 to 1.45 million across the U.S. and European markets. For now, HelloFresh is certainly the market leader.
Unlike the market for grocery and restaurant delivery, the boxed food business is not primarily a time-saver at meal-time. As noted previously, shopping takes between 4.45 hours (among men) and 6.35 hours (among women) of time each week.
Boxed food is designed for people who savor cooking and the time it takes. It represents an opportunity to change the mix of products a cook uses, and so should be considered a direct competitor to high-end grocers, such as Whole Foods or Trader Joe’s.
Scale & Optimization
The on-demand economy is the result of converging logistical, marketing, and data management capabilities. The boxed food delivery model is the most dependent of the emerging food businesses on continuous optimization of its processes because of the higher fixed costs of operating food processing and distribution centers.
Unlike grocery delivery, which is dependent on the stock at a local supermarket, or restaurant deliveries, which also rely on a third-party to gather and prepare food, boxed deliveries are a closed supply chain to be managed. New categories of food may be added, but at the cost of added management overhead associated with food production and safety regulation. Where Instacart can add a product for a consumer by having a contractor-shopper toss it in a grocery cart, box food suppliers must plan to modify their recipes, acquire food, and plan for weekly acquisitions to make a change to their offerings.
Boxed food delivery enjoys few of the scale benefits of on-demand businesses such as Instacart and Uber. Full-time staffing in food delivery is tightly linked to the number of partnerships and supply chain sources that must be managed. Built around distribution centers, these organizations must staff heavily to certify food safety, manage preparation, and ensure timely delivery. Blue Apron reported 3,938 full-time employees in January, 2018, three months after laying off six percent of its workforce. HelloFresh employed 2,715 at the end of 2017 and added 600 employees with the GreenChef acquisition in March.
HelloFresh, Blue Apron, GreenChef, and others, such as Chef’d, which markets top chef-recommended recipes, or Martha Stewart’s Marley Spoon, which delivers seasonal ingredients, must engage in deep partnerships with growers, distributors and shipping partners to ensure profitability. Like a grocery store, the box delivery companies must work to minimize food waste, which can be a crippling cost. And the boxes used represent a sustainability issue, as they become waste in the consumer’s home after only one use.
Compared to the average revenue per employee in the grocery industry in the fourth quarter of 2017, which was $438,138 according to CSIMarket.com, HelloFresh and Blue Apron have made excellent progress. HelloFresh, at $333,296 per employee, and Blue Apron’s $221,238 per employee are progressing toward parity with grocers. This suggests that with a full range of differentiated menus and established supplier relationships, the companies can compete effectively with both grocery and restaurant delivery as consumers’ eating habits change.
A marketing platform, not simply a fulfillment system
Boxed food is curated food, making the industry a natural marketing platform. Because the delivery box is a marketing stage, in which the customer must be delighted and surprised to feel they’ve received their money’s worth, HelloFresh and its competitors are better positioned to increase sales per customer and to introduce variety into their product.
Being able to add new ingredients, mix in novel recipes, and up-sell complementary products, such as wine to go with a boxed meal, these companies can market more effectively than grocery delivery competitors. By contrast, a grocery delivery company cannot pull out an item their customer explicitly ordered to provide an alternative sample, even if it’s a better flavor or deal. Customers don’t want their choices overruled.
Ingredient box customer engagements are defined by the number of servings to be produced using the ingredients in a box. Two- and four-person packages are the norm in boxed delivery, but the variety of ingredients can be changed daily to accommodate changing tastes. The model also does not rely on the cook to select foods, but offers a “best-of” experience that cooks expect to see change. GreenChef, for example, varies ingredients by season and is exploring local food sourcing in some regions.
HelloFresh reports that it currently is “mostly focused on weeknight dinners” and is experimenting with breakfast, lunch, and weekend premium meals. It distributes seven to 12 different recipes and plans to expand the options. Growing variety will be essential to retaining customers, who can become bored eating the same foods. Selection of more profitable products, premium programs with higher price points, and in-box offers provide subscription box food companies with greater marketing power than delivery-only providers in the grocery and restaurant markets.
The human touch defines curation and it is the soul of marketing. Boxing foods and recipes, adjusting delivery timing and personalization of box contents to address food allergies, and integrating content, such as chef-lead cooking programs, are pathways to introducing many more products to the customer. These moves will come at scale, as HelloFresh and other experiment with segmentation and improved meal planning, which will amplify the variety of food experiences available.
The box may contain the seeds of a transformation in food marketing. Because of the planning and merchandizing involved in box food delivery, we believe it will remain an important part of alternative food distribution for years to come. Now, newer companies are emphasizing specific cuisines, for example, or the use of sustainable sources. We believe local food boxes can become successful based on direct-selling and grocery partnerships.
Yet the boxed food market will take time to evolve, perhaps more slowly than the contractor-based alternatives. But the prospect of deep curation of food, which can cut waste, improve diet, and reduce the complexity and cost of food supply planning make this a compelling sector for continued investment.
Over the next several postings, we’ll examine the state of food delivery, how the competition has played out, consolidated, and morphed into several distinct flavors of food-to-the-doorstep. Groceries, pre-packaged foods for preparation, and prepared foods have each spawned intense experimentation to conveniently reach, by our estimate, more than 65 percent of the U.S. population. Compared to only two years ago, when I assessed the availability of on-demand services in the U.S. for BIAKelsey, at a time when only densely urban areas were served, the accessibility of grocery delivery and other on-demand services has increased by twelve-fold from 5.1 percent of Americans.
In 2016, the U.S. American Time Use Survey found that 44.6 percent of Americans (40.3 percent of men and 48.6 percent of women) spent part of each weekday purchasing goods and services, and about 10 percent more time during weekends. The average time a week spend shopping by women that year was 6.35 hours and 4.45 hours among men.
Taking the total employed adult population, approximately 126.4 million people as a base, the time spent on shopping by people who could pay for delivery to use their time in other ways represents 2.17 billion hours of addressable service time for food delivery companies. We feel this is a conservative estimate, as the partly employed (those working in the gig economy) and retired may be able to trade reasonable delivery fees for additional free time.
Instacart has stayed a determined course, refining its home delivery and shopping experience to establish delivery services in 4,500+ U.S. cities and towns, from Alabaster, Alabama, to Waunakee, Wisconsin.
Instacart raised $200 million in February 2018 to bring its funding to date on a to $874.8 million with a valuation of $4.2 billion. Having started out as a Y Combinator company in 2012, Instacart has kept a small group of top-tier VCs engaged in each round, adding Sequoia Capital, Andreessen Horowitz, and Kleiner Perkins, followed in the February round by two private equity firms. These are patient investors who poised for a huge payday when the company goes public. Instacart remains quiet on its IPO plans.
Relative to other on-demand companies that continue to burn money to acquire market share, Instacart is an efficient operation because it builds on grocer partnerships that give it access to millions of customers, instead of relying solely on consumers to discover and use the service. The partners launch in-store marketing for Instacart, complemented by Instacart’s online outreach.
Ravi Gupta, Instacart’s CFO told CNBC on the latest funding that the company has “more money than we need” to compete effectively. The reason is simple: Instacart is the promiscuous delivery partner. Instacart has partnered with grocery chains large and small, including Safeway, Costco, Whole Foods, and many others. Amazon and Walmart, by contrast, must rely on their own chains’ traffic to get consumer delivery orders.
Grocery delivery is repeating an earlier platform economy pattern, the walled garden. Amazon and WalMart are seeking to enclose their shoppers in a comfortable but closed garden of consumer delights while Instacart can burst through brand limitations to shop multiple stores, if necessary, to cater to exactly what the consumer wants.
Personalization also brings us to the challenge we see for grocery delivery in particular. Instart has limited promotional capabilities and suggesting products to a shopper using their phone to repeat an order can be perceived as interruptive, using their time to say “No” to things they don’t want.
Traditional marketing by grocery stores tended to rely on weekly pricing cadences supported by mailers and inserts in local papers. Effective though it was, it also produced over-stocking of some items and understocking of others, delivering waste and dissatisfaction among shoppers who couldn’t get what they wanted when visiting the store. Rain-checks for sale prices still take time at the cashier counter, and food rots in bins behind the store when it turns out shoppers didn’t want as much produce or specially priced bread as planned.
Instacart’s challenge will be how to provide their shopping staff insights into suggesting products to consumers to anticipate their willingness to try a new fruit or a different, more sustainable packaging for meat, milk, or other wasteful containers. Marketers will also need to understand how to use sampling — dropping “Try Me” products into an order with a simple mechanism for adding it to future orders if the consumer likes it. Searching for a new product will not be attractive. If a customer wants a sample flatbread pizza they received as a promotion, it must be suggested the next time they pick up their phone to shop.
This brings Instacart back to an element of traditional groceries which keeps people coming in to query the butcher, the produce staff, and in-store experts about how to prepare a meal or a new ingredient. Instacart will need to enable its delivery staff with contextual information to help improve the shopper’s experience politely and successfully. The oceans of transactional data already piled up in grocery chain systems will need to be analyzed and linked to the conversation Instacart has with shoppers through its app and when the Instacarter is standing at the customer’s front door.
The myth of perfect safety in a world transported by autonomous cars has endured until today. A pedestrian in Tempe, Arizona, was killed by an Uber autonomous car with a driver at the wheel on Sunday night. The company suspended testing throughout the U.S. and Canada as a result.
Perfect safety in complex systems is impossible, yet autonomous car developers have insisted that no one could be hurt by a computer-controlled car as a matter of faith. Visions of perfectly ordered autonomous vehicles avoiding humans without fail set safety expectations far too high, and the industry, not just Uber, will pay for dealing in superlatives instead of reality.
Reality bites hard. Uber CEO Dara Kosrowshahi tweeted his regrets to the victim and their family. He needs to visit the site of the accident, get a complete review of the circumstances, and reset safety expectations accordingly. This may require the company fallback to emphasizing human drivers over self-driving cars for the time being.
Autonomous car safety is in its infancy. Now that a real-world death has proven the technology needs to advance substantially to best human driving safety, ridesharing and delivery services will need to reconsider the scope of testing, and the timelines promised for the general introduction of the technology.
This is not an-anti technology view, it’s a realistic product safety criticism that will deeply affect people’s views of the companies hoping to deliver autonomous vehicles over the next couple years. Stop marketing autonomous vehicles until they can beat human drivers consistently, but keep developing and testing in safe situations.
As autonomous cars become available, we think many consumers will depend on local influencers who experience the rides, share their stories, and package mobility for the consumer’s comfort level. If a person is afraid of being in a self-driving car, there is still an opportunity to provide products or services delivered by autonomous vehicles. The solution will be person-to-person marketing that finds those first uses for smart vehicles that consumers will accept.
Lyft is reportedly testing consumer subscriptions for rides in several price ranges designed to get people to skip using a personal car. Trips included in the subscription must be for distances that cost less than $15 for non-subscribers, according to Mashable. You can check how far you can get for $15 using the Lyft Fare Estimator.
Subscribers whose rides cost more than $15 would receive discounts of $15 off longer rides. Lyft’s target audience is the urban and suburban consumer who would instead leave their car at home. Some of the offers made to users featured a monthly $199 plan that includes 30 rides (Las Vegas) while others received up-front payment offers for seven rides for $50 and $400 for 60 trips.
Lyft is taking this model seriously. It may provide the kind of simple calculation that consumers can adopt when they compare the cost of using a car to get around town in a Lyft. The subscription model, which expires monthly, may look like the better deal.
But “breakage,” the write-off of unused service each month, could result in substantial revenue for Lyft that consumers see as lost value because they spend the money without getting the benefit of rides. There is no way for consumers to squeeze every cent of value out of the system without assiduously scheduling rides up to, but not over, the Lyft limits.
Breakage is a familiar pricing model in online services. For example, Dropbox For Business Standard costs $12.50/mo./user for two TB storage. However, most users won’t store anywhere near two TB of data in Dropbox, creating breakage that can be worth up to $10 a month to the company. That difference between the storage capacity paid for and what is used — the breakage – subsidizes the free Dropbox offer of two GB for that draws in paid users. Lyft is taking a page from an old playbook, and it is likely to work.
Up-front pricing, such as $400 for 60 rides, preserves the rider’s spending for actual use. But these steeper prices can be designed to push consumers to the more profitable breakage model.
While Uber has started to build its car service into consumer product and personal services programs, such as its partnership with bgx, a salon company that will send a stylist via Uber to the customer or ferry the customer to a salon, Lyft is focused on a more tangible feature, the consumer’s budget. Uber’s approach will drive costs toward service providers who bundle mobility while Lyft’s will insulate ride
This marks a significant moment in the mobility wars. It shifts the convenience value proposition toward a price-based value proposition. Lyft’s subscription model makes choosing to forgo owning a car for people who need some rides in an urban area a simple matter of budgeting. Choosing to spend $199 a month to have a car available or trips of four or five miles, which approximates most urban travel needs, is more straightforward than buying, parking, servicing, and fueling a car.
Where is your place in the on-demand economy? Many workers and small businesses, including retailers, see the encroachment of Amazon, WalMart, and myriad other services as destructive. Yet media-enabled global brands are consistently challenged when engaging home- and office-based customers. The future of your business, whether a physical location or as an independent contractor, depends upon finding new niches where human expertise overwhelms online-only engagement.
Non-manufacturing businesses account for about 80 percent of the U.S. economy and are reported by the Institute for Supply Management as growing strongly for 97 consecutive months. Amazon, Uber, Lyft, TaskRabbit, Instacart and other services seem poised to steal business from local experts, but we think that by studying their approaches, small business and independent businesspeople will find greater revenue opportunities and a foundation for maintaining a trusted relationship with consumers. There are many new niches in the ever-specializing economy.
Last week, Uber announced beauty salon network bgX had become the first “business that has fully integrated with Uber for Business.” If you are seeking styling or a blow-out before an important meeting, “The platform will provide the convenience of having premium salon styling delivered directly to women at home, work or at a hotel.” The stylist comes to the customer if they happen to be in London, Paris, or Dubai. It’s a small footprint, but bgX could build geographic presence with time and marketing, adding cities with high concentrations of luxury styling customers.
Likewise, Amazon extended its Whole Foods home delivery service last week. Adding San Francisco and Atlanta, as well as adding a Prime discount of five percent on Whole Foods purchase, the once virtual giant is developing a physical footprint in local markets. With Amazon Go stores prepped to serve walk-in-walk-out shoppers, potentially as ubiquitously as 7-Eleven does today, the Bezos machine is targeting the consumer on the go while catering to their home and office needs with Prime and Prime for Business memberships.
As a small business or an independent worker thinking about how to compete against these global brands, focus on where the human-to-human gap has opened as a consequence of automation. Logistics have been improved dramatically, but feedback, recycling, and recirculation of products all remain stubbornly local in nature. A salesperson is still the best way to capture feedback because they bring the ability to ask questions and report back non-verbal signals. This is where a massive opportunity remains for individuals in the gig economy.
Scale, surprisingly, is the reason the Small Business opportunity is growing. The delivery of services and products-as-a-service require deep personalization. Mass personalization will remain a matter of demographic or psychographic templates that must be tuned in the last-mile to engage the specific customer’s values.
The Minte, an apartment cleaning service in Chicago, demonstrates how small businesses can find and fill gaps by selecting a target market to serve better than national brands can today. The company identified apartment buildings as a market where it could rapidly lower the cost of service by increasing customer penetration in a single location.
“Once you’re in one building, all the others start coming to you,” The Minte CEO Kathleen Wilson told BuiltInChicago. “It really just exploded.” Call it “share of locality” thinking. Instead of simply thinking of gaining more of a consumer’s wallet, look to expand a business’ relationship with customers’ neighbors.
Word-of-mouth and local selling of these services don’t happen entirely online. People make the sale and pass customers along based on their satisfaction with a service. The focus on increasing Share of Locality inverts the marketing challenge. Small promotional and direct-sales engagements can kickstart a local on-demand business. If you are looking at the on-demand economy as a looming threat that will wipe out your local services market, study the gaps opening between big brands and local buyers to find a new niche.
SMBs should position themselves as a local connector between global brands and customers. Uber, for example, has a massive local targeting investment that relies on its teams localizing and distributing marketing offers based on geotagging and artificial intelligence.SMBs have extensive insight into local demand and can tap into, for example, mobility services such as Lyft, Maven, and Uber, providing deeply contextualized local offers.One small business may offer Lyft rides to customers who want to shop at their location while another may choose to offer in-home delivery. Both, however, bring a local customer to the relationship with a mobility provider that can be mined for additional service opportunities. If a customer likes dinner delivered every evening, would they also like a housecleaner to come tidy up after the meal? Assembling these local services, consolidating them into a single point of contact and feedback for global brands, is a defensible position in the market.
Shopping destinations should consider aggregating delivery opportunities. Amazon has begun installing Amazon Lockers in Whole Foods stores, allowing shoppers to pick up online orders while at the store. Groups of retailers and service providers need to look at the businesses near them to understand where they can consolidate the delivery of goods and services. With improved logistics and retail management systems, a local store could become the destination for picking up a new product and receiving hands-on support and training for the consumer. Expertise is the rarest commodity. Small business is the most distributed approach to expertise delivery, which has been the foundation of consumer trust for generations. If your small business is isolated from others but draws regular customer traffic, can you use Uber or Lyft to “do the shopping” for a customer while they have their hair cut, their car serviced, or while they learn a new skill in a small training center attached to a local mall?
SMBs and workers should focus on excellent service and enduring customer relationships. Today, gig work is treated as a commodity, and it results in lower wages as more workers join. However, consumers prefer trusted providers, especially for personal services. As the on-demand approach to work expands, small business and labor both need to leverage the trust they develop with local consumers in order to build their pricing power.Differentiation based on service level and trust will increase earnings. At the very least, a highly regarded local source of service or product expertise — the person who sold the customer their last three lawn and yard tools or the regular provider of the perfect massage — can earn more based on increased demand. Going further, the local expert service provider can follow the “breakage model” adopted by many companies, such as DropBox. They charge a little more for a lot more service on the bet that most of the services will not be consumed. A local SMB service provider, for example, could offer priority callback and service visits to “members” who pay a small monthly fee to jump to the front of the line when they need help.
Tie into the on-demand economy and push the limits. Uber for Business, for instance, has extensive information about the routes and timing for deliveries but does not have a personal relationship with local consumers outside the Uber app. Like salon company bgX, look at what your business, or you as a service provider, can deliver and seek to be the local partner for on-demand product manufacturers and local mobility providers. You will find that there is no local sales interface to collect feedback from potential customers and expertise is unevenly distributed.Your ability to use multiple on-demand services is critical to success, so mix and match aggressively. Attack the problem of how to get a product from point A to point B, to onboard a customer to a new service, such as home security DIY installers who need to train customers to manage their security systems, or the need to efficiently deliver for hands-on expertise, whether a doctor, lawyer, auto mechanic, or any other person-to-person service. Small business and individual workers can take a robust part in extending services revenue, by tying expertise to products, fulfilling delivery, service, and post-purchase support locally, and thinking systematically about where value can be added in the on-demand economy.
Here is the damning summary of the paper’s findings:
Results show that per hour worked, median profit from driving is $3.37/hour before taxes, and 74% of drivers earn less than the minimum wage in their state. 30% of drivers are actually losing money once vehicle expenses are included. On a per-mile basis, median gross driver revenue is $0.59/mile but vehicle operating expenses reduce real driver profit to a median of $0.29/mile. For tax purposes the $0.54/mile standard mileage deduction in 2016 means that nearly half of drivers can declare a loss on their taxes. If drivers are fully able to capitalize on these losses for tax purposes, 73.5% of an estimated U.S. market $4.8B in annual ride-hailing driver profit is untaxed.
There are several underlying problems with these findings, ranging from the way that the researchers characterized the share of earnings from driving to the research team’s conclusion that because drivers can take the standard mileage deduction when calculating their taxes the on-demand mobility business goes mostly untaxed. Uber’s chief economist, Johnathan Hall, examined the report’s findings in a Medium posting on Sunday, suggesting the estimated earnings are deeply flawed.
The authors fail to note that every transportation provider, from a Lyft driver and local taxi to a long-haul trucker or local salesperson, may take a $0.54 cents-per-mile deduction on every mile they drive. By extension, the MIT research is arguing that all mileage deductions are a form of subsidy rather than a recognized cost of doing business. There is a substantial debate to be had about the mileage deduction’s sustainability, but these research judges that policy debate with an emphatic assessment of its own that is not supported by the data or current law.
The full research report will not be available for six months, as it has been distributed to CEEPR’s sponsors and remains inaccessible to the public. We think that’s counter-productive, as it prevents a full assessment of the data gathering and findings.
What stands out for us is CEEPR’s comparison of Driving Costs and Driving Revenue without regard for the number of hours driven in the available data. Uber’s critique of the research revolves around how drivers characterized the share of revenue they earn from driving. CEEPR’s methodology uses qualitative expressions, e.g., “very little” or “around half” of the respondent’s income attributed to the share of income earned from driving both with and without distinctions between all income from on-demand work or any questions about the specific number of hours driving.
We need to see the full data set and the research paper. However, it appears that based on these qualitative assessments by drivers, the MIT team used hard statistical categories to discount reported earnings, apparently by 50 percent or more from what drivers said. Uber argues that the methodology builds in a 58.5 percent discount on actual earnings. We understand this is a conservative statistical approach to take. However, it seems to have reduced the real income reported because the number of hours driven to earn any income isn’t factored in. MIT CEEPR should release the full report so that others can review the methodology.
Drivers in Las Vegas responded to the report in this ABC15 news report. Admittedly, this is anectdotal feedback, but it does reflect the fact that drivers who treat their on-demand work as a business appear to be earning more than minimum wage. Infrequent drivers, who cannot expense much of their automotive financing and care costs, certainly don’t make as much after deductions as full-time drivers.
In more than 100 conversations with Lyft and Uber drivers, I’ve found that the drivers typically earn more than $18 an hour, and those who drive full-time or near that level do report having an economically satisfying experience in most cases. More drivers report that ride-sharing is their primary job, as well. That said, a significant minority of these drivers reported that they commuted 100 miles or more to major cities to work for three-to-five days straight, while sleeping in their cars, to earn a viable living for their family back home.
Gigging isn’t perfect, there is plenty of room for improvement. This paper adds to the controversy and requires full disclosure of the data to support the discussion about how the economy can evolve for fairness and prosperity among workers.
Every driver should be treating their ride-sharing work as a business, taking the maximum appropriate tax benefits for mileage, writing off car payments and repair to the extent that they are attributable to ride-sharing revenue.
CNBC explores the “greased slide” created by the new tax law, which encourages independent workers to embrace freelance work. Now those small businesses run by individuals can “pass-through” 20 percent of revenue untaxed to the business owner. It appears to be a great time to become a gig worker. However, the lost benefits that come with traditional employment more than offset the tax savings, Miguel Centeno of Shared Economy CPA told CNBC.
The article details the cost of going gig and demonstrates that contingent work is the source of all growth in the economy since the Crash. Besides lost health and life insurance benefits, the gigger gives up paid leave, sick days, and employer contributions to Social Security, among other valuable aspects of a regular job.
It is sobering reading for potential giggers. More importantly, it is a wake-up call for companies who have viewed the On-Demand Economy as a way of cutting costs and obligations to workers. The formulae for loyalty used to lie in the job benefits society seems to be abandoning. Worker retention and job performance excellence are still the keys to good customer experience and valuable products and services.
On-Demand companies must tackle the problem of portable benefits and the establishment of a meaningful relationship with workers that allows them to identify with the brand they currently represent happily. A worker may rep multiple brands during a single workday, but they still need to feel the pride and opportunity provided by a satisfying living wage with a path to retirement.
If companies treat On-Demand solely has a cost-saving strategy, they will drain the economy of consumers. That will backfire on everyone.
Although Uber and Waymo settled there intellectual property case last week, the status of workers as independent contractors took a new twist in a California court. Worker payment, training, retention, and earnings drove much of this week’s on-demand news. During 2018, worker retention will be a major issue for on-demand companies.
Wirecard, a German payment card vendor, is bringing pre-paid cards for on-demand work to the United States, Payment Source reports. As we noted recently, payment cards are a lever for bringing the unbanked out of the gray economy. The technology avoids engaging with the payee’s bank account. Direct-deposits add costs to payments while prepaid cards are easily distributed, Wirecard argues. Kate Fitzgerald writes: “Wirecard’s ability to function as both an issuer and acquirer enables customized disbursement programs ranging from reimbursements to rebates and rewards, is a positive, but not entirely unique.”
Waymo-Uber Settlement: After months of tense preparation, an appearance by former Uber CEO Travis Kalanick, and a couple days of courtroom testimony, the Battle of Autonomous Cars Case came to a close. Uber has agreed to transfer slightly more than one-third-of-one-percent of its shares to Alphabet, Waymo’s parent company, and to submit to ongoing reviews by Waymo of its autonomous car developments. That stock, valued at $244 million, based on Uber’s largely fictitous $72 billion valuation, which was deeply diluted by SoftBank’s recent investment, Uber settled for about a quarter of the damages Waymo had been seeking.
We believe the significant move in the case came from new Uber CEO Dara Khosrowshahi, who has made apologizing for, and improvement of, Uber’s behavior the hallmark of his leadership.“While I cannot erase the past, I can commit, on behalf of every Uber employee, that we will learn from it, and it will inform our actions going forward,” Khosrowshahi wrote in a statement. Again, this is Uber growing up.
Women see Uber pay gaps, despite algorithmic work assignments. The wage gap persists in the on-demand economy, partly due to the duration of their Uber driving career. Forbes’ Erik Sherman reports that researchers at Stanford University and the University of Chicago found in separate reports that women consistently earn seven percent less than men. Part of the difference is accounted for in shorter driving engagements by women generally — female drivers churn out of the fleet faster than men, reducing their compensation over their Uber earnings lifetime. However, the culprit appears to be in the cost and time involved in training to become a driver, use the Uber apps, and build a consistent practice of driving.
Grubhub gets Yum-y. The holding company that operates Kentucky Fried Chicken and Taco Bell, Yum Brands, is investing $200 million in Grubhub, by buying the stock on the open market. The company will also sign an agreement with Grubhub to deliver KFC and Taco Bell food from 5,000 locations in the United States. Yum will take a board seat. Grubhub shares shot up 27 percent on the news., and have given back much of the gain in the market correction.
Quartzy says hairstyling is all about relationships. In a piece that details the rise and fall of several on-demand beauty companies, Noël Duan details the travails of hair care in the jet set, suggesting it does not translate to the consumer needs of the average person needing a “blow out” at work or home. She concludes that customers want to go to salons because it is a special occasion and that the relationsjip with the stylist is central to the perceived value of a beauty experience. That last element, the personal relationship is the deciding factor in most home and on-demand services: People want to know their preferences are understood.
Duan conflates in-salon experience, like the free glass of champagne proferred to guests, with the intimacy of the experience. The edge of the network is made of human relationships, not just the details of the engagements that justify an on-demand hairstyling that is twice the price of a salon. On-demand is poised to deliver the same experience as the salon for the same or a lower price, because there is no overhead for the A-list location of a high-end salong. But Duan is right that if the human connection is missing, the industry will fail.
Deliveroo faces union showdown. The Independent Workers’ Union of Great Britain has requested a review of a November ruling that denied its riders holiday pay, the national living wage, and the right to bargain as a collective. The case now revolves around a clause in the Deliveroo contract relating to the rider’s obligation to provide a substitute if they cannot make a delivery, which the union says was misinterpreted by the court last year. The disputed clause makes the rider responsible to vet the replacement’s right to work and conformity with health and safety laws, a role traditionally relegated to the employer. The outcome, along with the results of other British, European, and U.S. cases, continues the debate about the nature of work and employment.
Amazon’s attack on grocery stores ramps up. Building on its Whole Foods acquisition last year, Amazon has tapped the Dallas and Austin, Texas, Virginia Beach, Virginia, and Cincinnati markets for free two-hour delivery of groceries. Bloomberg Technology reports the twist is that the Whole Foods locations will provide the inventory instead of relying on a regional warehouse. Known as Prime Now (apps are available on Apple and Google devices), the service is the first to combine Amazon’s Prime program with grocery delivery. Philadelphia grocers are preparing for the Amazon Prime onslaught with Instacart partnerships, The Inquirer reports.
Shipping By Amazon, for Amazon. The news that Amazon will build its own in-sourced shipping capability shocked the shares of United Parcel Service and FedEx last week. This makes sense from a local perspective, as much of the last-mile delivery traffic is outsourced to the United States Postal Service, FedEx, and UPS today. However, Amazon’s inventory systems will be the ultimate driver of shipping strategy, and most inventory needs to be near big cities. Amazon’s extensive regional warehousing system is in place to support Prime two-day and other shipping. Getting inventory to the warehouses, however, if an inter-modal shipping problem that requires multiple carriers and alternative routes if one mode of shipping is unavailable. This is not the death knell for traditional shipping, but it does place the focus in traditional shipping on the longest hops in the supply chain.
Instacart is slashing delivery fees.The Buffalo News reports that Instacart drivers and shoppers in the region are seeing their compensation cut by more than 50 percent. Just six months after launching with a $10 payment for each order delivered, shopper/drivers now average $4.75 a delivery plus $0.40 per item. It would require an order of 13 items to reach the previous $10/delivery level. Instacart offered a rich bonus for early delivery staff, but has failed to explain why its fees to drivers appear to be falling. The company is hoping repeat orders will include more items, and that may be an erroneous assumption.
Facebook doles out $5 million to community leaders. The story of local markets, which Facebook would like to support through improved storytelling and local advertising, will get a big boost from its selection of as many as five people to receive $1-million grants to “bring people closer together.” We recomnmend starting with local news and that Facebook refrain from seven-figure contributions to kick-start community engagement; Instead, find 200 journalists in local markets who will cover those markets closely and with real engagement with the citizens, business, and government issues. Pay them $50,000 a year to launch local Facebook-hosted communities and the results will be better.
Every week sees a new “peak” or “maximally absurd” on-demand economy story, and this was no exception. As I rundown of recent news and data points of interest to on-demand companies, investors, and workers, I keep in mind that this transformation of our economy remains controversial.
It’s a commonplace to argue that “We get the society we’re born into,” but in this era, we can redesign society during our lifetimes. The vast majority of human generations have been stuck in their times because of the slow advance of knowledge and technology. The on-demand economy is only one aspect of a renegotiation of social value, and it can do far better than the first generation of companies if we keep worker retention based on fairness. We need to argue about this passionately and patiently to evolve a more sustainable and equitable economy in the era of technological acceleration.
Send your “Human Uber” instead of going yourself.New York Magazine points to the announcement that Japanese researchers have developed an iPad-based solution to sending someone in your stead. Dubbed a “human Uber” and announced at an MIT form, this may be the most ridiculous and dehumanizing gig economy idea yet, as proved by an Arrested Development running gag based on the idea during its first run on television.
Slapping an iPad over a person’s face to send them to be present for you is stupid and dehumanizing. The joke on Arrested Development revolved around a rich man sending a shlub to attend meetings while he was in prison. Telepresence, on the other hand, makes sense. Scott Hanselman, a former colleague at Microsoft, accomplished a proxy presence without subjecting a human to serving as a meat puppet. Scott worked remotely, sending “Hanselbot,” a rolling platform with a screen, to meetings in Redmond. We don’t need to subject people to this.
Josephine announced it will be shutting down in March. Founder Charley Wang, co-founder of the Oakland-based community cooking service, announced the move on the company’s blog Thursday. “We knew that Josephine was an ambitious idea from day one and, as you all know, there have been many highs and lows over the years,” Wang wrote. “At this point, our team has simply run out of the resources to continue to drive the legislative change, business innovation, and broader cultural shift needed to build this business.” Enabling neighbors to cook for one another, Josephine invested in changing California law to allow home-based cooks to sell their food. The site will operate for 60 days, free to the cooks. Wang also said Josephine will transfer cooks’ business information and recommendations for next steps to their members.
Centralized kitchens bets are growing.Kitchen United, a Pasadena kitchen designed to support restaurant delivery and catering services, raised additional funding this month, according to Pasadena Business Now. Combining food preparation with order and delivery infrastructure, the company offers kitchen space by the hour or month to restaurants.
Evernote CEO predicts multi-role software services for on-demand workers. In a short piece on Business News Daily, Chris O’Neill, CEO of Evernote, described an emerging software environment based on users with many work and organizational roles rather than one. He is betting his company on understanding small business’ use of services to establish networks of “products and services.” We wholeheartedly agree with this philosophy at Gig Economy Group. Integration of services will be essential to consumers, as well, because the prospect of managing multiple on-demand services through dedicated apps will be too complicated. “The biggest bid we’re making as a company is to make the product more powerful when you use it with other people, team settings, group settings, nonprofits,” O’Neill said.
African household labor market points to lower marketplace fees. Workclick, a U.S.-Nigerian startup said it will take only 20 percent of worker revenue as a fee for connecting them with customers. Workclick’s app is offered in the U.S., but the workers appear to be only in Nigeria, where it has about 5,000 people on the platform. Low-income countries may be where lower marketplace fees initially take hold in on-demand work. U.S. companies like Uber have taken between 25 percent and 30 percent of revenue. In an age when Amazon and Wal-Mart thrive on sub-10 percent margins, on-demand marketplaces should expect to see their share of revenue under pressure. In low-income countries, labor marketplaces will not support high fees. Workclick’s initial fee structure hasn’t gone that far, but it’s a step in an inevitable direction for on-demand companies.
Careem, the Dubai-based competitor of Uber, Didi Chuxing, and Ola, among others, is profiled by Bloomberg Businessweek. Of note: Careem, currently worth $1.2 billion, is active in 80 cities across 13 countries. Four out of five Saudi Arabian women have used the service, which is training female drivers in the country. The story does a good job of exposing the difficulties of social transformation in the Arab World.
Ford takes Chariot to London.Engadget reports on the expansion of the carmaker’s first on-demand van service to the U.K. Focusing on South London, which is less well served by the Tube, with fares for daily rides between $3.41 and $2.27 after an initial two-week free offer.
Allygator Shuttle, a Berlin on-demand van service, has launched. Smart Cities World describes the service as a partnership between door2door and the Allgemeiner Deutscher Automil-Club, the German auto club and driver services company. The trial will consist of 25 vans running on Fridays and Saturdays only.
Speaking of auto clubs, Jrop wants to obsolete the monthly membership in favor of on-demand tow and roadside repair services. TechStartups.com has a summary. We think
Another flavor of robot. They are already wandering the sidewalk in many cities, and delivery robots are evolving into specialized breeds that will take to the streets. Robomart has a concept design for a fruit-and-vegetable delivery service that brings the produce department to the consumer’s door. Robomart’s concept is a problematic model for two reasons: 1.) It depends on the customer being at home and willing to walk to a van, rain or shine, to select their produce. On-demand services will not monopolize the customer’s time like this. 2.) The produce robot will suffer from the same problem consumers identify at the store, a lack of selection if the van has been picked over by previous customers. Optimizing routes to provide stock refreshment during a day will be challenging.
Crypto your tip? Finally, WIRED’s Zohar Lazar asks why Kudos, a blockchain-based system created by “Uber for buses” company Skedaddle to replace traditional tipping, makes any sense. With so many newly minted crypto billionaires, the solution to tipping isn’t to create a new currency to solve the problem, because the billionaires have a troubling habit of taking their cut first.