Final mile's final gasps...

Final mile takes its final gasps, at least during this cycle.

As the start-up era of “Get Big Fast” (AKA “growth through any means”) draws to a close, the inevitable WeWork-style commercial hangover begins.

Currently, it is the final mile delivery companies that are being culled. You know – the ones who would take over the world, with fleets of fast food-delivering cyclists swarming through city streets, who would dominate everything and displace all of the “tired old players”.

Sorry, but it’s just not happening. Not at all. If anything, we’re heading in the opposite direction.

Before we unpack that, it is interesting to note some of the most ahead-of-its-time commentary on this has come from the most highly unlikely quarters. Former Aussie comedian, now based in New York,?Ronny Chieng?inadvertently nailed the final mile delivery saga perfectly, two years ago. During?a special?on one particular streaming platform, (also struggling at the moment, incidentally), Ronny sums up one online and delivery behemoth brilliantly with the quip “No item too trivial, no amount to small… to be delivered into my hands like an emperor… I just want one pen, not a box of them, just one, in its own box, which is in a larger box…”

Race to the bottom

Many a true word is said in jest and Ronny makes a good point. When do the hard realities of transaction costs bite? When does it no longer make dollars or sense to deliver everything, every time, all the time, via final mile?

The market has spoken, and answered with its customary frankness: it no longer makes sense…

Last month, VC-backed tech start-up Send collapsed in Australia. In a period of Covid-fuelled demand, and other favourable factors, the fundamentals still didn’t add up.

One of the major aspects of its demise was the simple unit economics of delivery cost.?These are reflected in cash burn rates and so-called “capital intensity”. These costs become turbo-charged when guaranteed delivery times are overlaid on the model, like the 10-minute promise from (currently surviving) delivery rival?Milkrun.

The viability withers even further given the earlier collapse of another local delivery service?Quicko?and the scrutiny is now firmly on remaining players Volly and Milkrun.

Any business model that loses more money with every customer it gains is fundamentally unsustainable at best. There is an old business adage that a company can lose money year after year but can only run out of cash once – in the case of last mile start-ups, when all that investors see is year after year of losses, they eventually pull the cash… and the companies crash.

In the case of Send: “as sales grew, so did the losses. In October last year, Send had sales of $8,113 and made a loss of more than $658,000. By March, sales had exploded by more than 50 times, to almost $417,000 a month, but losses also soared, reaching $2.38m a month.”

Sooner or later the chickens come home to roost…(even local survivor Milkrun had to?apologise recently about it’s inability to deliver to promise).

Greater Markets Greater Scale?

Maybe it’s just an Aussie thing. If we could just get larger markets and greater customer concentration we could get over that start-up hump and make the model work?

But sadly, no. The crop of start-ups mentioned above already stacked the deck in their favour (to some extent) by limiting services to densely populated inner-city areas, limiting product range, and applying minimum spend thresholds.

Further to this, larger order-of-magnitude markets elsewhere are faring little better.

Jokr’s?highly publicised entry into the US (initially focused on New York), recently ended in tears. In addition, it has entirely abandoned Europe and is now confining itself to Latin American locations like Mexico City, Bogotá and S?o Paolo.

Jokr was another cash burn “miracle”. According to?The Information, in the first half of 2021 it generated about $1.7m in revenue but clocked a whopping $14m-odd in losses. (Where can I get a gig like that?).

The situation across the Atlantic is hardly more promising. Last week LSE-listed Deliveroo “slashed”?its full-year revenue forecast?on the back of declining consumer spending from its previous guidance of gross transaction value (GTV) growth of 15-25% down to 4-12%, with Jefferies estimating this would mean a full-year loss of ￡118m.

It IPO’d on the London Stock Exchange in March 2021 at ￡3.90 per share and began trading on 22 July this year at ￡0.94 per share – although that represented a gain from the trough of ￡0.82 per share a few days earlier.

Meanwhile, Gorillas and Getir recently scaled back their business operations, and particularly their European “prime service”. GoPuff, the $14bn market darling of 2021, has not been immune either , closing almost 20% of its Distribution Centres throughout this year, (effectively de-tuning delivery performance).

Smaller players such as Fridge No More, Zero Grocery, and Buyk get the mushroom award, they sprang up fast and in the cold hard light of day, disappeared even faster.

Broken Model

How will final mile ever become viable? If we take Uber as our best case first approximation, then clearly there’s a long way to go.

Uber’s “Eats” division saw a tripling of revenues during the pandemic period.

“Eats” (along with “Freight”, effectively Uber’s “Delivery” division), propped up ride services or “Mobility” throughout the pandemic quite admirably.

Eats still faces fierce competition on its home turf, but has bolstered its position through the acquisition of Postmates in 2020.

Putting all this together, and taking the December 2021 Quarter, “Uber’s delivery unit, largely made up of its Uber Eats restaurant service, posted its?first?adjusted EBITDA profit of $25m”

Bear in mind that this was based on almost $2.5bn in revenue and included what may well prove to be a one-off effect of extended pandemic-induced demand.

Wow! Outstanding result – a 1%?margin!

If the Fed funds rate keeps rising in the US (and it will), before too long it’ll be more profitable to close the business entirely and just park whatever money there is in the bank…(incidentally Q1 2022 results aren’t that different).

This is “Get big fast” eight years on…

We could factor in a plethora of additional points here such as Uber’s?egregiously sharp business practises; the casualisation of its workforce and exploitation of the so-called gig economy; the aggressive squeezing of restaurants and food vendors… and yet for all this it returns a measly 1%.

In any other business context, we would be forced to concede that the model is broken. At this point you’d be placing the business on life support and phoning McKinsey’s for a rescue or break-up plan. But somehow, we just can’t be that rational here…

And speaking of McKinsey, to add insult to injury,?its own research?(The State of Retail 2022), also paints a rather bleak picture. It notes that while the average North American grocery retailer bags 4% profit from in-store sales, they lose 13% with every online order. Other providers like Instacart, which uses a tweaked business model, piggy-backing on the infrastructure and stock of existing stores and partnering with grocery businesses, have fared better, but… Instacart itself is still not profitable.

All of which is brought into even sharper focus with the high-inflation, higher input cost environment that we face globally right now.

What will it take?

This is a tough question. Scale won’t do it. Being small, agile, local and dynamic also doesn’t cut it. And further, technology is no guarantee of success either.

My suspicion is that the final mile fraternity will have to return to sound economics and long-term value creation to solve this conundrum: Welcome to the real world, the world of DHL, FedEx and UPS.

Venture Capital and a “one plus one equals three, or even five” type fantasy will no longer be tolerated. The tide has definitely turned.

Reliable delivery service and logistics will cost. Ramping up expectation with a delivery promise will cost even more. These laws, just like gravity, will apply whether it’s around the corner, or around the globe, whether it’s Amazon or Uncle Joe’s bike courier.

As the mood in the market sobers, and the bias resoundingly returns to value with the chickens ever more comfortable in their familiar roosts, is it possible that good old fashioned service at a fair price (value) might actually become the norm once again?

Could this be the beginnings of a way out and actually breathe new life into this almost flatlining sector? Only time will tell, but it sure looks like the right place to start.