The recent explosion of e-commerce driven by COVID-induced lockdowns around the world has been met with almost unanimous and giddy excitement. I have been thinking a lot about why, as a society, we seem to be so invested in e-commerce? What is the price we will pay for the convenience of not leaving home when it is time to stock up the refrigerator, or to satisfy a craving for your favorite restaurant? The previous waves of digital saw the demise of neighborhood bookstores and video rental stores, among others, changing the character of communities everywhere.
To be candid, in my role, I stand to gain from this explosion in so much as demand for our services will increase. But I continue to ponder the costs and benefits for consumers, along with the question, “what more are we willing as a society to sacrifice at the altar of e-commerce?”
Like SARS and MERS did for Asia before it, the pandemic has removed the last guardrails for U.S. consumers who just months before were still unwilling to be lured into ordering their food and groceries online. All that changed overnight with COVID-19. In just a month, online grocery went from accounting for less than five percent of all grocery trips to jumping up to nearly 30% today. Bolstered by the pandemic and to keep pace with surging demand, Uber just partnered with Cornershop and acquired Postmates to take 37% share in the rapidly expanding food delivery market.
The appeal of e-commerce doesn’t need much diagnosing. The convenience of having things turn up at your home when you want or being able to pick them up at your leisure has propelled Amazon to dizzying heights. In addition to convenience, the other big benefit for customers is the cost. Customers today are sheltered from the true cost of delivery through subsidies provided by shareholders in the case of publicly traded companies like Walmart and McDonald’s or private equity and venture capital for startups like Instacart and DoorDash. Independent restaurant owners or franchisees also pay sizable commissions on each order to the delivery companies.
If both benefits remain intact, e-commerce will remain a very compelling proposition that will continue to expand as long as consumers believe it outweighs the joy derived from shopping and eating out.
The not-so-hidden costs
E-commerce is an expensive game, between the technology and the labor required to fill a basket/order and deliver it. In the grocery world, Walmart is said to have lost an eye-watering $2 billion in 2019 as it aims to keep pace with Amazon, while in the delivery world DoorDash lost a reported $450 million and Uber Eats lost $461 million.
But, it’s not just the main players that are losing money. Independent operators and franchisees are also being squeezed, with many restaurants fearing for their future as they pay as much as 60% of each order, or up to 27% just for processing orders through GrubHub, as reported by the Washington Post. Meanwhile, franchisees bear the burden of these fees at large national chains like McDonald’s.
Additionally, desperate workers have rushed to delivery jobs to find low pay and punishing rules, a result of pressure on delivery companies to turn a profit and a glut of available workers in the market.
The current rules of engagement suggest that winning in the e-commerce space requires scale to reduce unit economics and market share to be able to raise prices, although the latter may prove to be a pipe dream if Amazon continues to dominate.
If the above holds true, we could see a precipitation of the demise of the traditional retailer, a channel that has lost 13 percentage points in share from its high point, as well as independent restaurants. We may not have shed too many tears for video and book stores, or even department stores, but how will we feel about our favorite local restaurant going out of business?
What happens when we think we are helping by ordering from them, but in reality, we are doing the opposite?
And what about the quality of the jobs we are creating? Unlike retail jobs that have seen investment from major retailers like Target in hourly wages, healthcare, and educational programs that equal a $20 per hour wage, delivery jobs are paying around $15 per hour before tips and expenses. However, that number can fall to $7 per hour when you factor in hours workers wanted to work and couldn’t find a profitable gig.
What price are we paying for the convenience of e-commerce, and are customers fully aware of those costs? Only time will tell, but I for one am going to make sure I reward businesses I value in a way that benefits both of us. It’s simple. If you want to support an independent or regional grocery chain, consider going into the store as much as you can versus ordering delivery or curb-side pickups. To support your favorite neighborhood restaurant ask whether they have a preference for you to order online or pick up on location. In other words, if you want to preserve local independent businesses, understand how best to give them your business and balance that with your needs to find the happy medium that works for you both.
Jose Gomes is President of North America at Dunnhumby.