Today's Proposal by Labor Department Is a Threat to Conventional 3PL Model

The proposal by the Labor Department on October 11 of a reclassification of gig workers as employees rather than independent contractors is an extension of a Policy Statement on Enforcement Related to Gig Work announced by the Federal Trade Commission on September 15. The 17-page FTC statement was blunt in both in its intention and its opinion of the gig industry.

"Companies frequently promote gig work as a flexible opportunity for people to set their own hours and work on their own terms. These companies often categorize their workers as independent contractors. Yet in practice these firms may tightly prescribe and control their workers' tasks in ways that run counter to the promise of independence and an alternative to traditional jobs. This tension has contributed to litigation across the country over allegations that gig workers are being misclassified as independent contractors rather than employees. When misclassification occurs, workers are often deprived of critical rights to which they are entitled under law (such as the right to organize, overtime pay, and health and safety protections), and saddled with inordinate risks (such as unclear and nstable pay, or responsibility for a vehicle, equipment or supplies) and business expenses that employers commonly bear (such as insurance, gas, maintenance and taxes). At the same time, gig companies may use non transparent algorithms to capture more revenue from customer payments for workers' services than customers or workers understand. This dynamic calls for scrutiny of promises gig platforms make, or information they fail to disclose, about the financial proposition of gig work."

The document concludes in what is, frankly, rather menacing fashion: "Successfully addressing the range of consumer protection and competition challenges associated with the gig economy requires innovative and collaborative approaches by governmental enforcers that are responsive to the public's concerns and input. The Commission will continue to capitalize on its broad jurisdiction and interdisciplinary expertise to combat unlawful practices that harm gig workers."

The new rule proposed today effectively would replace a regulation promulgated by the Trump Administration that says that workers who have the ability to work for other competing companies, can be treated as contractors. The proposal would restore the legal guidelines established under the Obama Administartion.

No investor can claim they were not forewarned. The following selection of firms have shown declines in their stock prices since the close of September 15 as follows:

Ocado -39.4%

Lyft -33.3%

DoorDash -32.6%

Uber - 27.5%

JustEatTakeaway (owns Grubhub) -26.1%

S&P 500 -8.5%

Given the inherent volatility of most of these stocks, the fact that they underperformed the market averages during a severe correction is not surprising. Nevertheless, the decline in values is remarkable in a short time span. I include Ocado in the group, though they do not operate food delivery in the United States. I wrote in July that the company faced an "existential threat" from recent SPAC offering Symbotic, and that competitive risk persists.

A 45-day period for comments will begin on October 13. If implemented, the new rulings will go into effect in early 2023. The new

One likely consequence of the new proposals will be a postponement of the IPO by Instacart that was widely anticipated to occur before the end of the year. A second probable result will be vindication of privately-held Gopuff's Senior Vice President Daniel Folkman's prediction at a Bloomberg Forum on September 29 that "The majority if not all of Gopuff's direct rapid delivery competitors will be extinct within the next six to 12 months."

Readers of my books and articles will know that I have frequently stated that "Rapid delivery is not a solution in search of a problem: it's worse. It's a non-solution in search of VC funding."

No food delivery strategy that employs a "Taxi" or "Courier" model is profitable in the U.S. The industry has variously estimated that being forced to adopt an employer model will raise labor cost by 20-30%.

DoorDash had cash and marketable securities of $4.0 billion at the end of June and generated cash from operations in the first six months of 2022 of $145 million. Moreover, it will eventually figure out how to monetize its extensive customer data by creating a lucrative advertising model. The point is that it will survive.

There is an alternative to the unprofitable taxi model, and that is to adopt the "Bus" or "Milkman" strategy originally created by Dutch free grocery delivery startup Picnic. The firm recently received a $706 million from the Gates Foundation. The Picnic system remains unprofisble because groceries are such a low-margin business.

Using the "Milkman" strategy works very effectively, however, for high end prepared meal delivery provider Feast & Fettle. Feast & Fettle ( located in Providence, Rhode Island) operates its own fleet of drivers who operate 30 trucks that make more than 1,200 deliveries per day of meals priced at around $42.00 for two people. Working with its own fleet (and using the tag line "Delivered, Not Shipped" in its marketing materials) allows the firm to develop a dedicated team of well-paid full-time employees.

WhatsGood, originally created in Rhode Island and more recently focused on Chicago, is an online farmer's market. It, too, is able to compensate its drivers generously hwile making between 16 and 20 deliveries per hour. That may sound like a lot, but it's acutally a bit less than the typical FEDEX or UPS driver.

More recently, Muncho has expanded to its third zip code in Philadelphia to deliver pizza cooked in the van on the way to the customer's home. Here, too, the drivers are well-compensated employees.

One final note on food delivery models that do not work. Meal kit provider Blue Apron, which has been manipulated as a meme stock from time to time in recent months, recently warned in an SEC filing that it may not continue as "a going concern." Nevertheless, the company continues to attract a recurring lifeline in the form of additional investments by Mr. Joseph Sanberg, who now controls more than 51% of the company. Why Mr. Sanberg continues to make investments in the comapny at a premium to the open market price remains elusive, at least to this bserver. This is pure speculation on my part, but it may be that the $659 million in operating loss carryforwards may prove to be of value, if not to Mr. Sanberg, perhaps to a strategic buyer. There appears to be little else of fundamental value in the situation.