Could The Delivery App Boom End Up A Bust?

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Drizly is a smartphone app for alcohol delivery.  The company is expanding into Chicago, in addition to its service in New York City and Boston. (Drizly/PRNewsFoto)
Drizly is a smartphone app for alcohol delivery. The company is expanding into Chicago, in addition to its service in New York City and Boston. (Drizly/PRNewsFoto)

You know the old iPhone ad? Checking snow conditions — there's an app for that. Counting calories — there's an app for that. Checking where you parked your car — there's an app for that, too.

There's an app for just about anything, and since the ad came out in 2009, smart phone apps have multiplied and expanded to not only provide more information, but also to deliver things right to your door.

Groceries, takeout, booze, ice cream, clothes, handymen, cars and — in San Francisco — medical marijuana — it's all available at the touch of a button.

Though this may look like a whole new world of convenience, it's actually the second rise of such startups. On-demand delivery services Kozmo and Webvan were among the many failed companies of the early 2000s tech crash. But now, with over 60 percent of Americans using smart phones and the prevalence of the "sharing economy" — could the new delivery boom actually be sustainable?


John Deighton, professor of business administration at Harvard Business School. He tweets @HBSmktg.


On what Webvan was trying to do:
John Deighton:
"I think of Webvan as the Titanic of my age. No one actually drowned, although a lot of people were underwater. It was a brief two and a half year experiment with massive investment in infrastructure to make the everyday life — the life off the web — benefit from some of the advantages of the web...Not a great idea as it turned out, because that very large investment — it was a $2 billion contract signed with Bechtel to build warehouses — those warehouses were colossal, and they really didn't generate the demand."

On the puzzle Webvan's founders couldn't figure out:
"It failed, very simply, because it couldn't get enough people to subscribe to the service to warrant the volume of delivery that could happen. These warehouses — one was, in fact, built and it was capable of delivering 3 million grocery deliveries a year. Turns out there just weren't that many people wanting their groceries delivered. The issue kind of crystallized in the last leg of the journey...It was automatic digital picking of groceries, terrifically efficient. It could deliver them to hubs, that was pretty efficient. But then little trucks picked them up and took them to your house...You could call it the last mile, the last five miles."

On how modern delivery apps are different than Webvan and Kozmo:
"Amazon started about the same time, Amazon started with a particular product — in a way, the perfect product, books — tremendously large assortment, very hard to keep in one place, but easy to keep in a warehouse. And it left the delivery problem to somebody else. Essentially, that was a FedEx [and] UPS problem. That grew — it survived beyond the death of Webvan and went on to the point now where the number of things they sell is much larger and the proportion of deliveries that are happening with direct action on the part of Amazon is increasing. So they've slowly crept into what I think of as the customer-facing end of the channel. Webvan tried to, almost in USSR, military-style, try to build the entire supply chain. Amazon said, let's start at the profitable end, which is where the retail margins are, and slowly, increment down toward [what] I think we have to agree is the unprofitable end. So when I look at Uber or the [other new delivery apps], I wonder why they're entering the business at the end that we all kind of understand doesn't make money."

On what has to happen to make these companies profitable:
"We, as consumers, have to start to become interested in making significant parts of our purchase patterns online. It's not affiliate purchase. It's not, 'Gosh, I'm out of diapers, let's try that new free service.' This is putting our routine purchases onto the web with interfaces that simplify the shopping list and then allow someone to fill those orders efficiently. And then comes the real opportunity, which is the data that is being revealed in those individual-level customer histories that are accumulating. And that's why Google and Amazon are seriously in this business — it's harder for me to understand why Uber is there unless the taxi business just isn't as exciting as it seemed to be."

On student reaction to the Webvan case study:
"I wrote the case, as it were, as the Titanic was leaving on its maiden voyage. So, nobody really was looking for the flaws. No one had the iceberg on the radar. But within a year, it had failed. Companies like Goldman Sachs and Sequoia Capital had had their investments disappear...but by that point everyone had a theory of why it had failed and the case became less interesting as a teaching device. What's happened, somewhat to my surprise, is in the last year or so, with this flood of activity in the delivery end of the business, people have come back and said, 'Why don't we just look at Webvan again and see exactly where it went wrong?'"


The New York Times Magazine: Delivery Start-Ups Are Back Like It’s 1999

  • "In the tech crash of the early 2000s, on-demand delivery services like Kozmo and Webvan weren’t just among the most colossal failures. They also became a sort of grim joke, symbolizing the excess that portended the bust."

The Boston Globe: In The Sharing Economy, A Rift Over Worker Classification

  • "the worker of the future will not be an employee — at least if some of today’s fastest-growing and best-funded startups have their way. They’re positioning themselves as “technology platforms” that simply connect people with independent chauffeurs, house cleaners, or errand-runners."

This article was originally published on September 03, 2014.

This segment aired on September 3, 2014.


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