Disruptive intermediaries squeezing everyone else to make an unsustainable business
It wasn’t that long ago when disintermediation was all the fashion in business. Businesses were keen to work directly with their customers, develop relationships, etc. Now the new business models are all about intermediation and aggregation – Uber Eats, Menulog, Trip Advisor, and so on are all about putting themselves between the business and the customer. In economic terms that introduces an inefficiency into the transaction, so why does it work? Well it only works for the intermediary and the customer by squeezing other parts of the supply chain.
So when Uber Eats, as an example, slides itself in between the customer and the restaurant and takes a cut of the transaction there are only a few things that could happen. The first is that prices go up for the customer and that does happen slightly through a nominal delivery fee. But that’s not enough to base a business on. So the second thing is that the restaurant has to give up some of its profit to pay Uber Eats – and clearly that is what is going on and it is squeezing the restaurants.
The argument that the intermediaries increase the market size can only run up to a point. Yes the ease of access and the wide marketing might help make some additional sales. But most of these services are for things that have a natural limitation (would you order food from a restaurant that is 40 minutes drive away?). In any case, say, the intermediary is taking a 30% cut from the restaurant you would need to increase sales by something like 45% just to get back to a neutral position. I have no idea, but I question if that’s what’s happening.
The fourth player in the transaction is the gig-economy driver who does the deliveries – and again they’re getting squeezed along the way. While there was enough money to be earned many didn’t seem to worry about this. But now the lack of rules, minimum pay, holidays and so on are beginning to bite and it’s clear that for many the words ‘gig economy’ translate directly into exploitation.
Even with the squeezing of the supplier and the deliverer, all the intermediaries appear to be losing money, especially as the market floods with competition. In the short-term they are buoyed up by investors willing to take a risk that short-term pain will translate into long-term customer loyalty that will see a winner emerge. But it’s getting harder and harder to see how this is a sustainable business model that delivers value that people will be willing to pay for.
It’s certainly a terrible business model for restaurants who are being reduced to gig-economy suppliers with no relationship with their customers – they can’t even control the delivery conditions. It’s awful for the delivery people who are the obvious cost to be cut along the way. Right now it’s pretty good for the customer, but can that last?
As margins get tight, quality has to suffer – that’s simply economic common-sense. If you make restaurants give up a significant percentage of their profits, something has to give. And if you pay the drivers less than a living wage, again something will give along the way.
It’s not quite the same but I believe I have seen this in the service offered by Uber. When they launched in Australia the drivers were, time after time, attentive, polite and interested. They almost always offered a bottle of water or a mint. The cars were almost always spotless. But these days the cars are increasingly grubby, the drivers smelly after a 12-hour shift and the overall experience poorer – and offers of a bottle of water are few and far between. Now, I’m not looking for a bottle of water – but it’s not a bad marker for people who feel financially squeezed starting to chip away at the service they offer to increase their margins.
The other factor that lets this work at the moment is that for some services this is new money. Uber drivers or AirBnB landlords are earning money they didn’t earn before (in contrast to the restaurant for example). But as more people enter the fray as intermediaries, drivers, or landlords the disruptive nature of the business changes – the established drivers and landlords start to suffer from competition and eroding margins. The disruptors are being disrupted.
Something is going to have to give. The current business models are unsustainable, once you blow through the investment float – if for no other reason than too many of the people involved in the transaction are losing out. But from the end-users point of view it’s fabulous having a car on call or ordering a meal from your phone: We’re all getting used to that level of service. We just need to find a way to do that in a sustainable model which isn’t doing so much damage along the way.
One thought on “Disruptive intermediaries squeezing everyone else to make an unsustainable business”
Excellent article Evan.