After those insider insights from Tony, things are starting to become a little more clearer. He also mentioned that it is possible to be profitable without necessarily having to scale the business to large order numbers or more cities (at the time of the podcast two of his delivery centres were already profitable).
Two other major challenges with delivery services are:
- Psychologically customers aren't ready to pay high delivery fees on food. (DoorDash edits the restaurant menu with an additional 20% listing fee for restaurant added to its prices, so that the customers don't fall prey to a 'sticker shock'.)
- A big monetary expense is in recruiting delivery driver. These costs keep piling up as the company grows.
On Recruiting Expenses:
DoorDash spends more than $200 recruiting each delivery driver, and according to the New York Times, those drivers usually only work three to six months for the company. Multiply $200 by 25,000 drivers (a conservative estimate), and that's a $5,000,000 expense, every few months, just to get DoorDashers on the road.(source)
Side-effect Of Pumping Growth Money:
So when the investors pump more money to help delivery companies scale, overtake their competitor, and establish a monopoly, the companies tend to grow very quickly. But at the same time the losses go up quickly too. You must be thinking where does this investor money go, right? Well, the money goes into giving heavy discounts to allure new customers and recruit new delivery staff.
This is a general phenomenon observed in the on-demand world, in other businesses as well like on-demand cab services (Uber and Lyft).
Lyft reportedly loses $50M a month, while Uber loses about $700M a quarter.
Bento, was a food delivery company that also incurred heavy losses after having raised $2 million dollars in funding. You can read their story here