Grab reported its 2QFY2024 results in August. While it still makes an operating loss, it has projected positive adjusted free cash flow for the current year, unlike in previous years.
However, this will continue to be a challenging business model. These gig economy firms, beloved by consumers and responsible for creating substantial employment, have generally received a free pass with respect to profits, people, planet and privacy.
Delivery apps struggle with profitability for several reasons. First, they lack differentiation, which gives the platforms limited pricing power. Everyone engages in “multi-homing”. As a consumer, you have multiple apps and you check prices on each before ordering, thus limiting what an app can charge.
On the supplier side, any increase in commission leads the restaurant to switch providers. Ride-sharing drivers often carry two smartphones with two different apps (e.g. Uber and Lyft in the US; Grab and Gojek in Singapore) and opt for the more lucrative option to pick up orders, forcing the platforms to create rider incentive programmes.
Secondly, as the pioneer in home delivery of online orders, Amazon has led the way in forming customer expectations of “free” delivery.
Customers are resistant to paying the full costs of delivery. Why? In general, shoppers are ignorant of the full costs of picking, packing and delivery. Furthermore, customers perceive these logistical activities as being of low value because they do not place a large enough monetary value on their own labour, time and transportation costs.
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Finally, competition between these firms is often on how little shoppers will be charged for delivery and how fast they will receive their orders.
Despite their unprofitable operations, the firms are often criticised for charging too much by those they serve — such as restaurants and retailers — paying too little to those they employ — the freelance gig workforce — and levying high fees on consumers.
Restaurants complain that they lose money on online orders because of the 30% in commissions charged by the apps and the extra packaging costs. Consumers feel extorted due to surge pricing and have pushed for regulations in some countries to limit it.
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Compared to, say, a waiter at a restaurant, the app-based worker must navigate restaurant delays, congested traffic, climbing up staircases, unsafe neighbourhoods, barking dogs, spilled food and impatient customers. All this while under pressure of meeting delivery time, constant evaluation via customer ratings, costs of maintaining the vehicle and unpredictable earnings.
Then there is the problem of accessing facilities to meet such basic needs as restrooms and affordable places to eat or rest. In addition, there is the fear that mistakes in delivery or customer complaints can quickly result in being barred from the app.
As would be expected, regulators, courts and legislators have waded in to offer adequate protection to the workforce. In 2019, the EU passed a law guaranteeing minimum rights for casual workers, specifically mentioning Deliveroo and Uber. As a result, Delivery Hero withdrew from Germany in 2021.
Ride-sharing and delivery apps have led to a higher number of vehicles on busy urban roads. This has increased energy consumption, congestion and reduced available space on curbsides. In addition, because of ride-sharing services, use of public transportation has declined, resulting in detrimental effects such as higher carbon emissions and implicitly putting pressure on public transportation fares.
Anyone who has had food delivered is aware of the “plastics problem” relative to consuming food prepared at home or eating out. The most frequent packaging materials are single-use plastics, which are not biodegradable, or made of styrofoam that takes some five hundred years to decompose.
What are the options for these firms to achieve profitability? They are raising prices and fees. Lowering employee costs is not an option as the increasing popularity of the services as increased competition for staff. Yes, optimisation of logistics with bundled and multiple deliveries is a constant feature.
But the salvation lies, as Amazon demonstrated with its US$47 billion ($60.87 billion) advertising revenues last year, in selling eyeballs. However, the potential of the customer data to generate revenues is not equal across platforms.
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Relative to Amazon or Instacart, it is harder for ride-sharing and food delivery apps to drive substantial advertising revenues. While on a retailer’s site, the consumer’s mindset is one of making purchases. In contrast, while taking a ride or ordering a meal, the cross-selling opportunities are limited as customers close the app once the order is placed or the ride arrives.
Even while on the app, the consumer’s focus is on where the ride or food delivery is — compared to a retail site, where the focus is on what to buy. Neither are users open to ordering the next ride or meal on the app while it is in use.
In conclusion, gig economy firms involved in last-mile delivery will continue to struggle with profitability, and more if they are forced to consider full employment and environmental costs. Hope is not a strategy!
Nirmalya Kumar is Professor of Marketing at the Singapore Management University’s Lee Kong Chian School of Business.
