Mad Dog 21/21: Food Chain
July 14, 2014 Hesh Wiener
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The strategy in big retailing, epitomized by the practices of Amazon and home delivery grocers, seems to be about as different from IBM‘s strategy as anything could be. These merchants are unafraid to accept razor-thin margins. IBM pursues high margin endeavors; it sheds operations that fail to yield large profits. Web sellers aggressively promote their prices. IBM is phenomenally secretive about pricing. So, when IBM said it was hooking up with Deliv, which provides rapid delivery services, industry observers were gobsmacked. Sure, Deliv could be the next Amazon. It could also be a rerun of Pets.com. Pets.com arose during the dot com bubble about 15 years ago. It was an online seller of pet food and related products. It had great television ads featuring a sock puppet pup. And, with planning errors not seen since the final days of Joan of Arc, it went from spending more than a million bucks on a Superbowl ad in early 2002 to liquidation before the end of that year. A few hundred people lost their jobs. Investors lost everything. The sock puppet and the pet carrier of intellectual property rights in which it lived was sold to Bar-None, a company that sells car loans to people with credit problems. If you want to know more about Bar-None, stifle your expectations: you might see the 404 on its website’s About Us page.
Pets.com never had a love affair with any blue chip companies, let alone Big Blue. Deliv, launched on venture capital with a crowdsourced booster, has not only promoted its public displays of affection with IBM, it has got backing from some mall operators, who will integrate Deliv’s services with their tenants’ retail businesses. What Deliv does, basically, is to build pools of delivery agents who are essentially freelancers. These freelancers pick up items at one of Deliv’s origination centers. The origination centers can be located in shopping malls, where all participating merchants can drop off orders and also where individual shoppers can leave goods that they would rather not carry but instead are happy to consign to Deliv. Deliv also works out arrangements with client merchants, collecting orders from their shops and delivering locally. The Deliv service is not centralized for control and parcel interchange service the way UPS, Federal Express, and the US Postal Service are. Deliv’s vision isn’t strictly local when it comes to lining up clients. It has forged relationships with some national brands, including 1-800-Flowers and Williams-Sonoma. The IBM connection seems to have helped build trust in Deliv, and made it easier for Deliv to think nationally while acting locally. While Deliv seems to be moving up right now, other players don’t present as positive a picture. At least one prominent entrant, eBay, seems to be agonizing over its venture into rapid delivery service, eBay Now, which is about two years old. The eBay effort began when the online auction and merchandising giant bought Milo. Milo created a system to provide real-time inventory data for shoppers and, incidentally, merchants. Adding delivery services seemed like a natural outgrowth. If a web surfer’s first question is whether an item is available, the next might be, Is it nearby? After that, What’s the price? And then, if a shopper is hot to get the goods, it would surprise nobody if the very next question is, How can I get it right away? But Milo failed to learn from Pets.com and used a cartoon puppy as its mascot. Milo is still open, and its delivery service corporate cousin, eBay Now, says it can deliver very quickly in Manhattan, gentrified Brooklyn, Queens in a region that looks like it’s anchored near the local headquarters of FreshDirect, the San Francisco peninsula, Chicago and Dallas. The charge for delivery is a flat $5 per order. Recently there have been press reports suggesting there’s trouble in eBay’s Deliver City. The speculative articles vary but in aggregate they seem to say what Fortune asserted in late June: Expansion of the delivery service into 25 cities, once proclaimed as a firm plan, has been halted. eBay is trying to figure out what to do with Now and very possibly with Milo, which is providing data services to some very nice, big customers but very possibly not doing much for eBay’s shareholders. eBay is struggling in part because it has so much fierce competition. In San Francisco, the delivery wars have drawn in armies from Amazon, Google, and Walmart. Other companies with an eye on the same target include Costco and Whole Foods. While the tactics vary, one thing the services have in common is the belief that the retail segment offering the best opportunity for transformation into a delivery-based industry is the grocery trade. Deliv hasn’t positioned itself as a contender in the grocery segment, but if it wants to get really big, it might have to. At least that is what most of the other notable players seem to think. That means the revenue and profit connected with delivery has to come out of the revenue and profit of a business that looks radically different from that of IBM and other IT companies. For instance, in the first quarter of this year, which was a good one for grocers but a tough one for IBM, Big Blue’s number nevertheless stood in stark contrast to those of the food purveyors. IBM reported a gross profit margin of 47 percent; grocers, in aggregate, reported gross earnings of about 25 percent, and that is up about 3 points from 2013. IBM’s reported pre-tax margin was 13.3 percent; grocers’ financial results indicate pre-tax margin at a considerably lower level of 1 percent. IBM says its net margin was 10.6 percent; grocers say they eked out a net of only 0.45 percent. Still, even in a business that from a beancounter’s perspective barely seems to scrape by, there is a lot of competition. Something about it is obviously alluring, at least to the league of companies hoping to invent the future of the supermarket.
While none of the intrepid West Coast players has yet gained a decisive lead, on America’s East Coast the situation is quite different. In New York City, FreshDirect is king, while Peapod dreams of growing into a viable contender. FreshDirect is privately owned, so outsiders can’t check out published financial results, but it doesn’t take anyone visiting greater New York and particularly the residential sections of its outer boroughs, very long to spot the fleet of FreshDirect trucks. FreshDirect has a wonderful website and an infrastructure that is currently using a lot of SAP code, suitably customized, to process orders against inventory. FreshDirect seems to be running R3 using servers in an Akamai cloud. The computers are most likely all X86 boxes today; in the past the company used a mix of Sun Sparc and X86 iron. The company’s favored DBMS, last time I looked, is Oracle. If IBM is in there somewhere, it is invisible, which makes one guess that Big Blue isn’t serving the grocer’s fresh greens. Every now and then some IT wag will suggest that Amazon, which seems to be quite interested in rapid delivery in general and groceries in particular, ought to absorb FreshDirect. But any corporate creature that is a local giant in New York City probably has evolved in ways that make it a poor acquisition for a company with national ambitions even it could be prey for another beast in the New York jungle. On the other hand, Amazon did buy shoe giant Zappos, which it has largely preserved as an entity with its own culture, one operating successfully (it seems) in a corporate sanctuary. There is more than enough uncertainty surrounding Amazon’s plans and potential to keep the embers in the forge of speculation white hot. Whatever Amazon does, its practices will have an impact on every other provider of rapid delivery services for food and other merchandise, at least in the locales it serves and possible in every other area that might support an Amazon-like service. If any other company seems to be doing well in an area Amazon doesn’t serve, its presence is bound to show up on Amazon’s expansion radar. How can Amazon’s rivals survive? Well for one thing they probably have to price delivered goods at levels that are not significantly higher than those of Amazon. For another, they might have to find a unique way to provide extra convenience.
Deliv seems to be attempting both. Its service is priced at $5 per shipment and the merchandise it delivers is priced by its clients, the actual sellers. Deliv’s sellers are well aware of Amazon’s pricing, availability and delivery service for all their items. So, however challenging the opportunity may be, Deliv seems to be well-prepared for the obvious problems, and maybe some of the more subtle ones, too. But if Deliv’s focus is currently on the offerings of luxury retailers and relatively small goods outlets rather than businesses with large numbers of regular repeat customers–such as major grocers or large and diverse merchandise retailers–it is very hard to see where its activities could make much of a difference to IBM. What might be a vital part of its business for little Deliv would not involve IT service costs that make a big difference to $100 billion-a-year IBM; for now and maybe forever, the Deliv deal won’t even be roundoff for Big Blue. Nevertheless, if Deliv succeeds and its results are significantly improved because of IBM’s support, the relationship could open up valuable opportunities for Big Blue. Meanwhile, Deliv isn’t the only company imagining a bright future for the delivery business. Notably, there is one outfit that is getting into the delivery business from a different angle. It is called Uber, and while it may soon offer to deliver merchandise in a number of areas where it has a presence, it is most visible due to its application of information and communications technologies for the delivery of people. Uber was initially called UberCab, and when it got off to a start in San Francisco in 2009 it matched passengers to drivers. It arranged individual trips and shared rides. End users at both ends of the hookup used the company’s smartphone app to hook up with Uber’s server. With time the service, at first a provider of rides in luxury cars, gradually expanded the variety of rides it offered and also set up in more cities, including London and other non-US locales. In pretty much every city where Uber is active, ordinary taxicab companies have tried to fight the disruptive delivery company. But Uber has won more battles than it has lost. It is also getting mindshare as well as new business by dreaming up some pretty creative delivery schemes. Last Christmas, it worked with Home Depot to quickly deliver trees in Atlanta, Boston, Chicago, Dallas, Los Angeles, New York City, Philadelphia, San Diego, San Francisco, and Washington, D.C. Going by its most recent round of private equity investment, Uber is worth something like $18 billion. That’s largely a hypothetical number, but because the list of Uber’s backers read like a Who’s Who of venture capital, people seem to be taking the company quite seriously. So, too, is the cloud computing industry, which is keeping an eye on Uber, currently running in Amazon’s AWS, in case it gets fickle like Instagram. IBM is almost certainly one of the cloud service provides watching Uber and its ilk. Its interest in going the extra mile with Deliv is pretty strong evidence that it is hankering for a big role in providing the technological capability for services that can capture the interest of people with mobile client devices. When computers help bring home the bacon, facilitate that impulse buy of a chef’s knife for only two grand, or taking NFL players safely home from a game or post-game spiritual event, IBM wants to be part of things, particularly if the service can deliver the goods to Big Blue’s bottom line.
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