Comment by ruddct | Hacker News Reader

Comment by ruddct | Hacker News Reader

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Reminds me of recent Instacart news.

http://www.bloomberg.com/news/articles/2016-03-11/instacart-...

Here's the money quote: "[Instacart] said 40% of the company's volume is profitable - meaning most orders still lose money. It also said that it will be profitable globally by summer. However, its calculation for profitability doesn't include the cost of office space, the cost of acquiring shopper workers, or the salaries of its executives, engineers, designers or other employees..."

In other words, a $2b company figured out how to "not lose money" 40% of the time when their lowest paid workers deliver things. Ignoring those pesky cost centers that are developers, designers, hiring managers and executives. When every corner deli within 10 miles of me delivers (often for free) and presumably does so profitably (disclaimer: I live in a major metro area).

Technology has a peculiar ability to light gigantic piles of money on fire. These are strange times we live in.

At traditional restaurants and cafes, not every item on the menu is a profitable one.

Often some items are actually loss-leaders, enticing you to come in more often, or to pair it with a more profitable item that makes up for its cost.

Sometimes it is, even more, obvious that something is a 'loss leader'; such as at fancy dinners where they'll simply give you bread for free while you wait for your meal or bars where they give you salty snacks like popcorn to encourage you to buy more beer and not leave to have a real meal somewhere else.

A loss leader is one thing, but imagine a restaurant that only sold 40% of their meals above cost, and the 40% that are above cost only have enough margin to cover the minimum wages owed to the waiters.

I think part of the problem here is failing to use correct terminology. We might say, in GAAP terms:

* For 40% of the orders, they achieve a positive gross margin * We anticipate reaching positive gross margin on 100% of orders by the end of year * Even after reaching positive gross margins, non-COGS operating costs are sufficiently high to result in a negative EBITDA

To expand: non-COGS operating costs would include SG&A costs (Selling, General, and Administrative), among others. It's how a company like Box might have healthy gross margins on its unit sales but be unprofitable due to considerable marketing expenses as it tries to capture market share in a growing market.

That sounds taken out of context, or misquoted. Its reasonable to talk about the marginal profitability of an activity. E.g. Given employee base (shopper workers already hired), current app and backend (no marginal cost for developers/executives) then the sales price minus cost-of-sale was positive. Very important number! Means the company would be profitable after scaling that part of the business enough to cover fixed costs.

Most startups are actually looking for that magic formula. They spend spend spend until they find it, then scale scale scale to become a profitable business as a whole.

Doesn't look like a misquote to me. And while, yes, unit economics are a thing, there can be a huge gap between being unit profitable and profitable as an organization. A bunch of delivery companies flew into the ground during the first crash under the same circumstances (including a few grocery delivery companies).

If you're running a company with 500 employees an a big office in San Francisco (where employees average ~$100k a year, fully loaded), and each of your deliveries nets 1% of a $50 order, on average ($0.50; not a ridiculously low net margin for the grocery industry, even in logistically optimal scenarios -- which delivery is not), you've gotta be doing (500 * $100,000) / .5 = 100 million sales a year just to break even. AKA, $5 billion a year revenue run rate.

So then you say: "OK, we'll just cut some of those expensive SF people, and we'll bring the curves closer together!" And that could happen. Or you could discover that getting those margins was only possible with X million sales a year, and getting those requires at least 500 employees to run operations without dropping the ball. And then your investors stop throwing money at you, because the business economics look scary, and the funding climate has changed. And then you die.

Again, this is not a made-up story.

When huge investors get involved in land-grab businesses before they're profitable, they're all betting that their horse will be the next Amazon. But there's only one Amazon. And even Amazon isn't that profitable. And Amazon started by competing in a high-margin industry.

$100K fully loaded sounds low for SF.

Agreed. I was trying to low-ball it, just to head off the criticism that I'm exaggerating.

Yeah it was a pretty big stretch.

While I agree that marginal probability is important, I think it is a fallacy to assume all of those other costs don't have some variable component as well. There will always be shopper worker churn that will grow as the business grows, additional (albeit low) costs in software to scale and add new regions, etc.

In a business with sizable margins, it may be OK to discount some of these other things, but in a business with teeny tiny razor thin margins like grocery delivery, one should have a very healthy skepticism about hand-waving away real costs.

Yeah their story was a pretty big stretch.

"Technology has a peculiar ability to light gigantic piles of money on fire."

Just wanted to say thanks for the laugh! It's not often than a comment on HN makes me laugh out loud. As in laughing with you, not at you...

Peapod looks like it hasn't changed in 10 years and basically does the same thing as instacart but cheaper and better.

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