Delivery startups have been among the hottest sectors of startup activity in recent years. But entrepreneurs and investors are beginning to find that the economics of making a delivery service work are far from easy.
DoorDash, one of a multitude of startups with a mobile app that lets people order and get food sent to their doorsteps, relies on contract drivers like Brian Navarro to make the deliveries. The problem is that workers like Navarro do not always stick around.
Navarro began driving for DoorDash and another delivery startup, Postmates, in Los Angeles about four months ago.
Navarro, 40, who previously drove for the ride-hailing companies Uber and Lyft, said he had seen plenty of contractors quit DoorDash and other delivery companies during the time he has worked with them.
“Drivers do jump around,” Navarro said. “The general consensus is that drivers really only stick around for three to six months.”
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That churn has become expensive for DoorDash. A large number of drivers left the startup less than a year after they joined, according to two people who have seen the company’s driver data.
DoorDash spends upward of $200 in recruitment and referral bonuses for some drivers, said the people, who spoke on the condition of anonymity because the details are confidential.
Other delivery companies, like Postmates and Instacart, face similar retention challenges, these people said.
The issue is just one headache now troubling delivery startups, which have been among the hottest sectors of startup activity in recent years.
Based on a belief that the companies would succeed once they grew to enormous scale, investors poured more than $730 million into delivery firms like DoorDash, Instacart and Postmates from early 2014 through the first half of 2015, up more than 1,100 percent from the same period a year and a half ago, according to data from CB Insights, a venture-capital analytics firm.
But entrepreneurs and investors are beginning to find that the economics of making a delivery service work are far from easy.
Good Eggs, an organic grocery-delivery service, laid off more than 100 employees and shuttered its offices outside its San Francisco headquarters in August. Instacart, the grocery-delivery service, recently laid off 12 recruiters, which the company said was “part of an overall plan to slow down hiring” after a growth spree last year.
And DoorDash has been turned down by some venture capitalists as it has tried to raise new financing, according to three people familiar with the company’s plans.
The problems are rooted in the high operating costs of the startups, which typically act as middlemen between consumers and restaurants or grocery stores. The companies not only have to pay for large fleets of drivers, they also have big groups of employees who receive customer orders from the apps and who then manually make calls to the restaurants to order food. At the same time, to attract customers, many of the startups offer introductory prices and discounts, often making delivery free for first-time users.
As DoorDash’s experience with drivers shows, the startups’ costs do not necessarily decline over time. For some drivers, who are paid a fee per delivery, it can be difficult to make enough deliveries in an hour to make it financially worthwhile for them. And when drivers move on, the companies must spend again to recruit replacements.
“Ensuring drivers have the best possible experience on the DoorDash platform is one of our top priorities,” Eitan Bencuya, a DoorDash spokesman, said in a statement. He said the company has proprietary technology that helps drivers increase the amount of deliveries they can make in a single trip, increasing their commissions per hour.
Bencuya declined to comment on DoorDash’s fundraising efforts. The Wall Street Journal earlier reported on the startup’s funding hurdles.
For consumers, the delivery services may not seem cheap, either. Customers pay a delivery fee and a service charge on top of the cost of the food, as well as an optional tip to the driver. That has prompted concern that the services will not appeal to less affluent users.
Some investors said the startups have the potential to capture a relatively untapped multibillion-dollar market, one that is also being eyed by tech behemoths like Google, Amazon and Uber. The companies see opportunity in bringing delivery to millions of retailers and restaurants that do not now offer it, all for a slice of the fees.
Alfred Lin, a partner at the venture-capital firm Sequoia Capital, which has invested in DoorDash and Instacart, said the startups are also amassing a very valuable asset: consumers’ purchasing data. “The advent of the smartphone gives a company the ability to track all the information about your purchasing habits, and where you are,” he said. “It’s pretty dramatic what a company can do to utilize that information.”
Bastian Lehmann, chief executive of Postmates, said that delivery businesses face high upfront costs but that his company’s long-term approach will ultimately drive down prices for customers. Postmates has raised more than $100 million from investors including Spark Capital and Tiger Global Management.
“It’s still kind of a premium service,” Lehmann said in an interview. “It’s not unlike the early days of Uber, when they only had black cars.”
To bring prices down, Postmates and DoorDash have assembled teams to forge deals with restaurants that they provide delivery for in their apps. The startups negotiate a fee that a restaurant pays per delivery — in the range of 20 percent — and the savings are passed on to the consumer, who pays a $5 delivery fee. Early retail partners include Chipotle, Starbucks and 7-Eleven, among others.
DoorDash is trying to keep a lid on costs another way: By paying its drivers less per delivery. According to an email from the company to drivers that was reviewed by The New York Times, DoorDash said that starting Monday, it would change the pay per delivery in Los Angeles to $5, down from $6, excluding tips.
The company said drivers would make up what they lose in fee cuts through an increased order volume.
Navarro, the driver in Los Angeles, said he could make only about two deliveries an hour, though that has increased at peak mealtimes. While he is unhappy with the fee change, he said he plans to keep working for DoorDash and Postmates for now because it beats the alternative.
“I’d rather do this than be driving for Lyft or Uber,” he said.