(Gig economy) winter is coming

As service-industry start-ups meet their Darwinian fate and consumers tighten their belts, the 21st century’s servant class will feel the pain

Photo by Fabrice Villard on Unsplash

A bit over a month ago, a client asked me to write a story about two of the ‘Big Four’ rapid grocery delivery businesses in Australia – or, more precisely, inner-city Sydney and Melbourne – collapsing. A few days ago, one of the two remaining players announced it was slashing staff, closing half its warehouse sites and abandoning its commitment to deliver groceries rapidly, which rather undercuts its raison d’etre. (If you’re happy to wait longer than 15-30 minutes to get your groceries delivered, the sensible course of action would seem to be to buy them from one of the big retailers, such as Coles or Woolworths.)

At the time of writing, only one of the Big Four isn’t dead or in what appears to be an inescapable death spiral. Milkrun, the last rapid deliverer standing, is well-capitalised. It was started by Young Rich Lister Dany Milham, who made a motza from his mattress-in-a-box business Koala and has attracted substantial investment from American and local venture capital funds such as Tiger Global Management, AirTree Ventures, Grok Ventures and Skip Capital. But let’s just say that if I was working for Milkrun, I’d be updating my LinkedIn profile to ‘Open to work’ right about now.

What happens to the gig economy when venture capital evaporates and austerity spreads across the land?  

The ‘I told you it would never work’ naysayers have been quick to point out that rapid grocery delivery businesses, both in Australia and other nations, were largely a product of the Covid lockdowns and were always going to struggle once urban professionals were again happy to walk a few minutes to the local convenience store or servo to buy a loaf of bread. That’s true as far as it goes, but I think the near-total collapse of Australia’s rapid-grocery-delivery industry over the last six weeks points to a wider and more worrying problem.

Why being the ‘Uber of X’ isn’t all it’s cracked up to be

Let’s start with the start-up side of the equation. Since the GFC, interest rates have remained at unprecedentedly low rates for an unprecedentedly long amount of time. This has meant it has made little financial sense for any individual or organisation to put money in the bank. The wiser course of action has been to invest any ‘spare money’ in a collection of start-ups and then hope for a handsome return if at least one of those start-ups grows into a unicorn.

Once upon a time, venture capitalists were ruthless about taking unprofitable start-ups behind the barn and shooting them, but Amazon changed that. Arguably, Bezos's greatest accomplishment ever was to convince investors to keep pouring billions into Amazon for the first decade of its existence, during which it consistently failed to make a profit. Bezos’s pitch was that, after burning through mountains of cash setting up highly automated warehouses all over the US, and then much of the world, Amazon would ultimately become hugely profitable.

As is a matter of historical record, Bezos’s prediction was proved spectacularly correct. The lesson many greed-blinded investors took from this was that it didn’t really matter if start-ups weren’t profitable for years because, at some future date, they would probably start generating enormous profits, just like Amazon.

Uber, the paradigmatic digital economy business, is the classic example.

Uber launched in early 2009. It didn’t have its first profitable quarter until late 2021. It may or may not have another one. A not insignificant number of economists have argued the longer-term prospects of ride-hailing businesses are no brighter than those of rapid-grocery-delivery ones. (Long story short, these businesses were only likely to be viable if relatively pricey human drivers could be automated away, allowing the likes of Uber and Lyft to pocket 100 per cent, rather than around 60-70 per cent, of fares paid.)      

As Derek Thompson explains in this excellent Atlantic article, the Ubers of the world have long subsidised their customers. In normal circumstances, a business that is losing money every time it provides a good or service quickly goes bankrupt. But we haven’t been living in normal circumstances since 2007.

In an era where there is lots of cheap money sloshing around, I can convince you to keep investing in my loss-making company for an extraordinarily long time – if I can make a case that I will eventually be able to monetise the millions of enthusiastic customers I’m accumulating. (And why wouldn’t consumers be enthusiastic about, say, being able to get a ride for a fraction of the cost of an old-school taxi trip?)

Of course, there inevitably does come a time where I do have to prove to you that my company actually can make money from its customers, rather than just keep acquiring them by providing below-cost goods and services. If that moment of truth hasn’t already arrived for most of the world’s start-ups during the first half of 2022, it will almost certainly arrive in the second half of this year.

When the moment of truth arrives, start-ups facing existential threats do two things. First, they cut costs to the bone, chiefly by making staff redundant. Second, they raise prices. As Thompson relates, suddenly the 10-minute Uber trip that used to be $25 costs $50 because, as Uber CEO Dara Khosrowshahi has belatedly recognised, “[we need to] make sure our unit economics work”.    

This is what an economic downturn looks like, youngsters   

While younger Americans and Brits got a taste of austerity in the wake of the GFC, no Australian under the age of 50 will remember what life is like in a tough economy.

So, let me sketch out the details, whippersnappers.

First, the central bank raises interest rates. For simplicity’s sake, let’s say you have an $800,000 mortgage or business loan that you have been paying two per cent interest on but which you now must pay five per cent on. Seemingly overnight, your annual interest payment, which has long been $16,000, jumps to $40,000. Just to rub salt in the wounds, higher interest rates mean there are far fewer potential buyers for your home or business. This means it starts depreciating (as unthinkable as that once was in the context of the Australian property market).

So, even presuming you’re still securely employed, you’re now a lot poorer and probably feel even poorer still given the plummeting price of your largest asset. Inevitably, you start to cut back on your discretionary spending. Rather than catching an Uber into the Big Smoke for dinner and drinks with your better half on the weekend, you just order some home delivery.

Then maybe you cut back on the restaurant food and just have one of those rapid grocery delivery services bring some supermarket pizzas and soft drinks to your door.

Finally, you don’t even do that, instead making the effort to go to Aldi yourself and search for the cheapest Margherita pizza and no-name cola you can afford to treat yourself on a Saturday night.

Of course, once you’ve got to the Aldi pizza stage, you’re hardly likely to be paying people to be doing things such as clean your house, mow your lawn or assemble your IKEA furniture. Not are you likely to be renting any Airbnbs for weekend getaways.

It’s a grim existence for you. But it’s even worse for Uber drivers, cleaners, lawnmowers, IKEA furniture assemblers and Airbnb hosts.

In a best-case scenario, after 6-12 months of economic pain, weak businesses hit the wall and healthy businesses scoop up their customers, investors start allocating capital more sensibly, interest rates begin to moderate, consumers start prising open their wallets and, like a forest regenerating after a bush fire, the economy starts to regain some vitality.

In a worst-case scenario, the economic bad times drag on for years, people get increasingly desperate, and the political environment becomes (even more) polarised. Then, at the very least, you end up with a radical change agent like FDR or Reagan. If things really head south, you end up with a maniac like Mussolini or Hitler.