S1: This episode starts with the story of two friends, Ron, John, Roy and his buddy Adam. Ron Jones in his 30s. Now, he’s a content strategist, used to be a Wall Street trader, and he writes a newsletter about tech and business. He and Adam met in college doing a semester abroad in Rome. And after graduation, they shared an apartment in New York.
S2: And Adam actually worked in fashion. He was at Barneys as a buyer of women’s denim.
S3: That’s Ron John. I asked him to tell me about Adam because recently the pair of them ran a little experiment that got a lot of attention. It was an experiment with pizza. Which is what Adam does. Now he owns a pizza place. Well, two of them actually in Kansas. They’re called Agee’s New York Pizzeria. Do you know why he wanted to open a pizzeria?
S2: He actually doesn’t even like food, which is always a running joke among our friends. And that was actually why it did make sense to me when he said that he wanted to open a pizzeria because he was like, this is just pure business. Just something I’m not even passionate about. Just I want to I think this is the opportunity to bring New York style pizza to Gans’s.
S3: Adam noticed that in Kansas you couldn’t get a good New York style slice for a reasonable amount of money.
S2: That style of pizza actually wasn’t really in Kansas at the time. It’s mainly Domino’s, Papa John’s or kind of much higher end. But that middle ground was the opportunity to avoid competing with chains like Domino’s and Papa John’s.
S3: Adam decided not to deliver its food. Instead, he’d serve pizzas in the restaurant, do some takeout and really focus on building the restaurant’s brand. And that decision paid off. His restaurant expanded to two locations. The strategy was working.
S4: Then in March, the phone started ringing. Customers were calling Agee’s to complain.
S2: There were complaining about cold pizza being delivered, the wrong pizza being delivered. And he is telling me that on his Google listing, there’s a big button blue. It says order for delivery.
S1: Remember, Adam’s restaurant didn’t do delivery. He quickly figured out that the orders were coming from door dash. A food delivery app that private investors valued at twelve point seven billion dollars last year. Customers saw The Age’s listing on door. Dash placed an order and a delivery driver went to pick up the pizza. The thing is, Adam had never listed his business on Jordache. That seems so crazy to sort of wrap your head around that people could be ordering from a place and the place has no clue that that that’s happening, that this whole kind of ecosystem of getting their food to a consumer is even taking place.
S3: Was that a mad when you guys figured this out?
S2: Yeah, he was pissed. He was pissed because, one, it’s without his permission to his employees were having to waste time answering calls from angry customers. Three customers were being affected negatively towards his brand. But then also he was just more fascinated and annoyed by the fact that a company worth billions of dollars supposedly would bother doing this to a restaurant. My kids.
S3: This strategy is not all that unusual. It’s a tactic the door dash and other delivery apps use to gauge demand, then convince restaurants to sign up for the platform. Adam could have complained to door dash or ask to have the listing taken down, but instead he called up Brownjohn and they came up with a plan to outsmart Dornbusch at its own game.
S5: Today on the show, the weird world of food delivery apps. Who makes money? Who doesn’t? And what happens when countless restaurants are forced to depend on companies like Jordache in the middle of a pandemic? Protests and police lockdowns. I’m Lizzie O’Leary and you’re listening to What Next TBD, a show about technology, power and how the future will be determined. Stay with us.
S3: When Adam found out the door, Nash was delivering his food poorly and without his knowledge, he asked Ronge on for more information on the company. Not only were they delivering without his permission, they’d gotten the prices wrong.
S2: So another complaint of his was a lot of the pieces that were supposed to be twenty four dollars were listed on the door dash menu for 16. He assumes that they’re undercutting the price to generate more demand like Uber. All these companies were used to just getting amazing discounts, as consumers say.
S3: His assumption is that but Brownjohn wasn’t so sure that was the case. He thought the pricing discrepancy might be an accident.
S2: Jordache was known. They go into a new market. They don’t even spend time sitting there copying menus. They use a web scraping bar to just kind of pull all the menus into their system. You take one look at his menu and you see the way the 16 dollar prices next to the 24 dollar price in which columns are in web scraping but could easily confuse the two. So instantly it becomes clear that no one sat there and even made this mistake. It was just a technical error.
S3: And this gave Ron John an idea.
S2: So I previously worked as a trader for a Wall Street bank. And there’s a term called arbitrage, which is essentially the idea of buying and selling an asset at the exact same time for a Risk-Free profit. It’s magic gold that every trader in the world seeks out. Clearly, if you can buy a pizza from Jordache for sixteen dollars and sell it and get paid twenty four dollars, you would make a dollars with no problem.
S4: So Adam and around John decided to try what they called pizza arbitrage. Adam ordered 10 pizzas from Jordache for one hundred and sixty dollars. The price that was listed on Jordache. Jordache called his restaurant and placed the order 20 minutes later. A driver showed up with door dashes money and paid two hundred forty dollars. The actual price? It worked. Adam instantly made an eight dollar profit for each pizza. But Brownjohn didn’t want to stop the experiment there.
S2: The ingredients cost him six or seven dollars. So in reality, you’re not making a clean eight dollar profit. But then you even suggest maybe we just put in dough instead of all the actual ingredients, because dough basically costs nothing. So then we try another order and just have boxes full of dough.
S4: This also worked. They made more money, but soon after the second experiment, they stopped for Ronge on an atom. This arbitrage scheme was never about profit. It was about testing door dashes, system didor dash. Ever catch on? No, no.
S2: There was. There’s not. They still were trying to actually sell him to come on the platform afterwards for a long time. It would be kind of like generic sales email sent from whatever regional salesperson.
S3: I want to kind of broaden out and move beyond the mechanics here and understand the basics. I’m wondering if you could just tell me how Doordarshan companies like that work.
S2: You know, the pitch to a restaurant could make a lot of sense. It’s the idea that you’re already operating, but you don’t have delivery. Doordarshan, come in, your staff, Sadeh there, you’ve already paid rent. All your fixed costs are already done. So this is basically just free money where it’s incremental revenue. So then 30 percent commission does not seem so bad.
S1: And that’s a commission that the restaurants pay to door dash or Uber eats or one of these other companies.
S2: Yeah, and that’s what the restaurant would pay. Say, one hundred dollar order comes in. You pay Jordache or GrubHub or whoever. Thirty bucks if you already have your staff and your rent paid. This seems like a pretty good deal. And that’s where Jordache. If they go to you and show that without you almost even knowing it gained all this extra revenue, it seems like a pretty good pitch to a restaurant.
S3: This specific example with Adam’s restaurant was the result of the company running something called a demand test. And I wonder if you could describe the specifics of that tactic to me.
S2: So a demand test is they called it a non partner restaurant. If you actually go through their documentation, a partner restaurant has signed on, a non partner restaurant is effectively not a partner. Imagine if it worked out Adam’s restaurant would get a ton of business. Let’s call it a good few thousand extra dollars a month. Two to three months later, Door Dash representative would go to them and say, look, you just made three thousand dollars. Now, going forward, you can have all that extra revenue, but just pay us 30 percent. And the Jordache CEO, Tony Schuh, actually has said that their strategy is to go to the restaurant with a check in hand. It’s a powerful sales tactic.
S1: Yeah. So you want a little taste of the sugar? Well, you like that.
S3: Exactly. Do other companies in in this space do this as well?
S2: From Hubbins has started doing a lot of things around listing restaurants and knowingly changing the phone numbers to GrubHub generated phone numbers. The argument from the platform side is that competition is so fierce that they have to do these kind of things. GrubHub CEO Matt Maloney publicly said that these things are not sustainable, these kind of practices, but it’s the weight of competition in the industry that forces these kinds of things.
S1: I wanted to ask you a question about GrubHub, because they had this letter to shareholders at the end of twenty nineteen and they called the delivery part of their business, which also includes seamless a means to an end, saying that real profits would come from marketing on the platform. And this kind of blew my mind because it’s this idea that like, oh no, we’re not a delivery business at all. We’re an advertising platform.
S2: So I think that could be a compelling story to shareholders. I guess that the idea that once we get everyone on our platform and then they’re competing with each other, then we can start charging them ads for placement. And digital ads are always very, very high margin. So, I mean, it seems like it could be a compelling story, but especially for an already public company to not have an established business model. Blows my mind.
S3: Yeah. I think one of the things about this business model, if you’re a consumer, you know that all these companies are out there, people use them, you might use them yourself. People just kind of assume they’re making money. Is this at all profitable for these companies?
S2: Every single platform is losing a ton of money. In the hundreds of millions, Jordache lost 450 million dollars on nine hundred million dollars revenue. And again, just to spell it out that they send one point three billion to make nine hundred million. But to the average consumer, clearly, you assume a business that’s that highly valued and prestigious and has all these very fancy investors is doing good business.
S3: Why do big investors throw money after companies like this if they are spending a ton of money to lose even more?
S2: So the open it’s not even a secret. Here is the only way to turn this into a profitable model is through monopoly power and concentration and raising prices. They will increase prices on customers and restaurants and they will reduce bonuses and fees to drivers and lay off additional employees in the mergers.
S6: And that’s how investors will have the last laugh over right now is considering a deal that would give it control over the majority of food deliveries in the US, that the rights our company is looking to join forces with GrubHub. Now come back.
S4: Concentration of power has become more. Visible recently with reports that Uber is in talks to acquire GrubHub Feron John. It’s just a natural next step for delivery startups.
S2: This is where we’re seeing something that a couple of years ago would probably have just sailed through without any scrutiny. And it’s really important that there is a bit of an outcry that senators are coming out and saying we need to at least question the merger because Uber and GrubHub combined owned 48 percent of the entire food delivery market. Door Dash currently owns 42 percent combined. Yeah, 90 percent. So already you now have a duopoly. These companies have already effectively said that the only way these models work is winner takes all that. You concentrate power and then you raise prices. So it seems like the inevitable the only inevitable result of a merger is increased prices for everyone.
S3: One thing we’ve talked about on this show is the growth of contract labor and contract labor forces. How much of this model is built on the idea of cheap independent contractor workers?
S2: I mean, it has to be completely because if these platforms are already losing money, which most of them are with the cost structure of very cheap labor and gig workers, the idea of hiring full time workers is an impossibility and paying benefits and their cost structures can never handle it. I don’t know how any of these companies could operate if they actually had to pay workers as full time employees with benefits.
S3: When we think about what’s happening now and kind of what people are doing during this pandemic, obviously the usage of a lot of these platforms has increased. And there was, I think, an assumption among some people that that would be good for both the delivery apps and for the restaurants. But that doesn’t seem to be the case.
S2: Do you know why this is a very important point restaurant typically making three to five percent profit margins. That assumes that all their customers are dying and most of the customers and then the incremental door, Dash or GrubHub revenue, you can pay 30 percent on that. And it’s not too big of a deal when suddenly the delivery platform becomes 90 percent of your business or 100 percent. And even as we start reopening, it’s going to not go down to what it was. It’ll be 70 percent, still 50 percent. The numbers just don’t add up. For most restaurants and I think we’re going to unfortunately see a lot of them closing. That’s the really sad part about how the model has been developed vs. something that was more cost effective or friendly or just kind of took into account the real costs involved.
S3: When we think about the bigger picture here. If the companies aren’t profitable, the restaurants are paying money and sometimes quite a bit to be on these platforms and the workers are just on contract. Who is benefiting from this model as customers?
S2: We certainly are. We’re not paying the right price. I mean, that’s like I remind myself of that, that this entire behavior has been subsidized. But we see that in a lot of industries, ridesharing. When Uber loses eight and a half billion dollars in 2019, that means all those Uber rides I took were not at the correct price and I was getting a pretty good deal. In fact, a deal that was too good to be true.
S7: Brownjohn Right.
S4: Thank you very much for talking with me. Thank you for having me. Ranjan Orie is the founder and CEO of the Edge Group. He writes the newsletter Margins, which covers business and technology, and where you can read more about his experiment with Adam. Adam’s restaurant is called Ajay’s New York Pizzeria. They have locations in Topeka and Manhattan, Kansas. Adam never signed up with door to Ash and the listing eventually went away. But since the coronavirus pandemic began, his restaurants have started delivering with both in-house staff and through a smaller food delivery service called Eat Stream. Currently, his sales are flat compared to last year. And considering the pandemic, Adam thinks that’s pretty incredible. That’s it for the show today. TBD is produced by Ethan Brooks and hosted by me, Lizzie O’Leary, and is part of a larger What Next family. TBD is also part of Future Tense, a partnership of Slate, Arizona State University and New America. I want to take a minute and recommend you listen to this past Monday is what next? Mary Harris talked to a longtime Minneapolis justice reporter about the fractured relationship between the city’s police and its citizens, something that helped set the conditions for what we’re seeing now. What next? We back in two feet on Monday. Have a great weekend. Talk to you next week.