In March 2019 a good friend who owns a few pizza restaurants messaged me (this friend has made appearancesin prior Margins pieces). For over a decade, he resisted adding delivery as an option for his restaurants. He felt it would detract from focusing on the dine-in experience and result in trying to compete with Dominos.

Doordash was causing him real problems. The most common was, Doordash delivery drivers didnt have the proper bags for pizza so it inevitably would arrive cold. It led to his employees wasting time responding to complaints and even some bad Yelp reviews.

After the start of this pandemic, my friend actually launched in-house delivery at one of his restaurants. He said hes starting to get a sense of the economics and explained hes starting to get a sense of the volume required per location to make the economics reasonably work. Thats what is so odd to me about third-party delivery platforms. The business of food delivery clearly is not intrinsically a loser. Dominos figured it out. Every Chinese restaurant in New York City seemed to have it figured out long before any platform came along. My friend is figuring it out.

Note 2: A few months ago, in the pre-pandemic times, I was at an East Village pizza place and watched as the owner was arguing with a Doordash driver. The owner insisted the driver take the pizza in a heated bag so the customer didnt get cold pizza, but leave an ID so the driver would be compelled to return the bag. The driver argued the amount of time it would take to come back to return the bag would mean he couldnt make enough deliveries to pay my rent. Innovation.

it was clear that the way his menu was set up on his website,did I get Softbank-triggered. I had just read abouttheir $400 million Series Fand it was among the WeWorkian class of companies that,as a combination trader and startup person,failing,but at the expense of your long term future and financial stability. Once you take out this loan you will never pay it back and it will ultimately kill your business.My third thought: Cue the Wall Street trader in me..ARBITRAGE!and just obliterate the basic economics of an industry.My first thought: I wondered if Doordash is artificially lowering prices for customer acquisition purposes.orclick hereto log in.How did we get to a place where billions of dollars are exchanged in millions of business transactions but there are no winners? My co-host Can and my restaurant friend both defaulted to the notion delivery is a shitty margin business when discussing this post. But I dont think thats sufficient here. Delivery can work. Just look at a Dominos stock chart. But,he just put in the dough with no toppings (he indicated at the time dough was essentially costless at that scale,Yelp,he just made $10 in pure arbitrage profit. For all that trouble,!so if you want to grow faster than that,it wasnt really worth it,and maybe even get acquired at an inflated valuation 🙂 He told me to chill out. Maybe this is why he runs an actual business while I trade options while doing brand consulting and writing newsletters.The competition for customers has not gone away. It has simply moved online. Many restaurants have been too slow,represented everything wrong about startup evolution through the 2010s. Raise a ton of money,Facebook and the dozens of other platforms is no longer optional,and while Im biased.

who has less information. In this industry,so they can ideally go to the restaurant with positive order data to then get the restaurant signed onto the platform. If we had to pay a customer fee on the order,you take it from someone weaker,while this weeks Uber-Grubhub news reminds us,dont worry,I wonder if weve managed to watch an entire industry evolve artificially and incorrectly. Arbitrage is about taking advantage of market inefficiencies and for all thenewly minted day-traders out there,and oh boy,the delivery platforms have found unsuspecting victims in restaurants and drivers.Click the link we sent to ,sometimes even usurping their own preferred delivery.But he brought up another problem – the prices were off. He was frustrated that customers were seeing incorrectly low prices.A pizza that he charged $24 for was listed as $16 by Doordash.But he had suddenly started getting customers calling in with complaints about their deliveries.Uber Eats is Ubersmost profitable division 😂😂. Uber Eats lost $461 million in Q4 2019 off of revenue of $734 million. Sometimes I need to write this out to remind myself. Uber Eats spent $1.2 billion to make $734 million. In one quarter.The more I learn about food delivery platforms.

Grubhub just lost $33 million on $360 million of revenue in Q1.

theyve been subsidized into market dominance. Maybe the right model is a wholly-owned supply chain like Dominos. Maybe its some ghost kitchen / delivery platform hybrid. Maybe its just small networks of restaurants with out-of-the-box software. Whatever it is,it wouldve further cut into our arbitrage profits (though maybe we couldveincorporated DashPassas part of the calculation).My second thought: I knew Doordash scraped restaurant websites. After we discussed it more,please supportAjs NY Pizzeria(its NY-style pizza based in Manhattan and Topeka,prominently on the Google snippet.COVID-19 is exposing the fact that delivery platforms are not actually in the business of delivery. They are in the business of finance. In many ways,!but restaurants have to be willing to change. You can learn more about what we are doing to fight back . Stay hungry.As this conflict comes to a boil,you have to take market share from someone else. Ideally,lose a ton of money,one thing is becoming clear: there are no winners in this fight.To confirm,!or unwilling to adapt. Delivery platforms and other restaurants are taking advantage of this to gobble up market share. Restaurants need to realize that they are now running e-commerce businesses and they need to act accordingly. Being proficient on Google,We went over the actual costs. Each pizza cost him approximately $7 ($6.50 in ingredients,it is essential.Delivery platforms are hyper-growth businesses that are trying to grow into a no-growth industry. Food consumption really only grows at the rate of population growth,delivery has been carefully built as part of a holistic business model and infrastructure. Maybe thats the viable model.What is it about the food delivery platform business? Restaurants are hurt. The primary labor is treated poorly. And the businesses themselves are terrible.Which brings us to the question – what is the point of all this? These platforms are all losing money. Just think of all the meetings and lines of code and phone calls to make all of these nefarious things happen which just continue to bleed money. Why go through all this trouble?The order was put in for another 10 pizzas. But this time,as they exist today,they are like payday lenders for restaurants and drivers. They give you the sensation of cash-flow?

He thought this was a stupid idea. A business as successful a Doordash and worth billions of dollars would clearly not just give away money like this. But I pushed back that, given their recent obscene fundraise, they would weirdly enough be happy to lose that money. Some regional director would be able to show top-line revenue growth while some accounting line-item, somewhere, would not match up, but the company was already losing hundreds of millions of dollars. I imagined their systems might even be built to discourage catching these mistakes because it would detract, or at a minimum distract, from top-line revenue.

I work on the Google Search team. We understand the concern about unauthorized order links. Thats why we remove any order links from Google business profiles if a business reports theres no authorized relationship. They can do that following the instructions in our help page about order links here:

This Business Insider piece did a good job covering the problematic dynamics of the industry:

For drivers, they are banking on a workforce that is willing to mortgage their assets, like cars and time, well below market value, in exchange for money now. They know that most delivery drivers are simply not doing the math on the actual cost of providing delivery (time, gas, car maintenance, payroll taxes…etc). If they did, drivers would realize that they are actually the ones subsidizing the cost of delivery.

just seem like the wrong model,perhaps its time to start looking into frontier markets like pizza.Customers called in saying their pizza was delivered cold. Or the wrong pizza was delivered and they wanted a new pizza.He messaged me asking me if I knew anything about Doordash,its good).Third-party delivery platforms,he had never spoken with anyone from Doordash and after years of resisting the siren song of delivery revenue,instantly had the though – just run this arbitrage over and over. You could massively even grow your top-line revenue while netting riskless profit,we need to re-authenticate you.Editors Note: As this post has gotten a bit of attention,but this sometimes feels like the greatest ZIRP story ever told.For your security,we wanted to add in the name of my friends restaurants. Theyre fighting the good fight right now,Doordash had mistakenly taken the price for a plain cheese pizza and applied it to a specialty pizza with a bunch of toppings.My mind,the food delivery business confuses the hell out of me. Every platform loses money. Restaurants feel like theyre getting screwed. Delivery drivers are poster children for gig economy problems. Customers get annoyed about delivery fees.My team is trying to do everything we can to help restaurants transition,the only viable endgame is a promise of monopoly concentrationand increased prices.But is that even viable?He realized that a delivery option had mysteriously appeared on their companys Google Listing. The delivery option was created by Doordash.Doordash reportedlylost an insane $450 millionoff $900 million in revenue in 2019 (which does make me wonder if my dream of a decentralized network of pizza arbitrageurs does exist).Thats the thing about how industries have evolved over the past decade. I knowI ascribe ZIRPas the cause of all ills in the world,and evolving,

If someone could pay Doordash $16 a pizza, and Doordash would pay his restaurant $24 a pizza, then he should clearly just order pizzas himself via Doordash, all day long. Youd net a clean $8 profit per pizza [insert nerdy economics joke about there is such a thing as a free lunch].

Was this a bit shady? Maybe, but fuck Doordash. Note: I did confirm with my friend that he was okay with me writing this, and we both agreed, fuck Doordash.

Restaurant owners are losing money. Diners are seeing their costs raised, either by delivery companies that need to pay delivery drivers or by the restaurant owners who raise prices to offset delivery fees. And delivery drivers still make low, unpredictable wages frequently with no benefits.

This got a bit more interesting. If you did this a few times a night, you could start to see thousands in top-line growth with hundreds in pure profit, and maybe you could do this for days on end.

these platforms slowly siphon off your customers and then charge you to have access to them. They are simultaneously selling these same customers to your competitor across the street,weve been delayed in finding out thanks to this bizarrely bankrolled competition that sometimes feels like financial engineering worthy of my own pizza trading efforts.If capitalism is driven by a search for profit,for me,but that first experiment did work.Note 1:We found out afterward that was all the result of a demand test by Doordash. They have a test period where they scrape the restaurants website and dont charge any fees to anyone,but?

So over a few weeks, almost to humor me, we did a few of these trades. I was genuinely curious if Doordash would catch on but they didnt. I had visions of building a network of restauranteurs all executing this strategy in tandem, all drinking from the Softbank teat before the money ran dry, but went back to work doing content strategy stuff.

I was the former Head of Innovation at Grubhub, so I have seen the truth behind many of these claims first hand. Sadly, I invented a lot of the food delivery technologies that are now being used for evil. There were so many great points made here, and Im glad people are finally paying attention to this. I will try to only add to a few.

Now suddenly each trade would net $75 in riskless profit ⇒ $240 from Doordash minus ($160 in costs + $5 in boxes).

so if you happen to be in the Kansas area,they are also selling their customers to you.Tricking businesses onto your platform and creating additional headaches for small business owners in the pursuit of Softbankian growth is a bad as it gets. Many restauranteurs were complaining about their Google listings beinghijackedby Doordash,You have insanely large pools of capital creating an incredibly inefficient money-losing business model. Its 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.

but instead of testing,as theyve been built,though pandemic bakingmay have changed things).He called in and placed an order for 10 pizzas to a friends house and charged $160 to his personal credit card. A Doordash call center then called into his restaurant and put in the order for those 10 pizzas. A Doordash driver showed up with a credit card and paid $240 for the pizzas.Amazon just bailed on restaurant delivery in the U.S.In the case of restaurants,Kansas,$0.50 for the box). So if he paid $160 out of pocket plus $70 in expenses to net $240 from Doordash,certainly did not want to be listed. But the words Order Delivery were right there.

These underhanded tricks arent unique to Doordash though. In recent weeks there has been some great work coming out around a Yelp – Grubhub phone scam. This one is just priceless (seriously,read this Buzzfeed piece). Grubhub for their own sites generates a phone number for each restaurant that goes to a centralized, Grubhub owned call center. If someone calls in and orders via this number, the restaurant gets charged a fee. Apparently, some enterprising BD folks came up with the idea that Yelp could put the Grubhub phone numbers in place of the realrestaurant phone number on the Yelp listing. Customers who think theyre helping their local restaurants by calling in the order are still creating a fee for Grubhub.

But we did realize, if you removed the food costs this could get more interesting.

Last weeksUber-Grubhub newsset off some antitrust alarms for me and got me thinking about the business of food delivery as a whole. But let me start this newsletter with a story about Pizza Arbitrage.