1099 DELIVERY MODELS ARE NOT SCALABLE SOLUTIONS
I have been running a delivery logistics startup for the last year. We are a B2B, outsourced delivery solution that doesn’t face the consumer. We haven’t spent a single dollar on marketing or advertising, and deliver thousands upon thousands of orders per month. Our entire focus has strictly been limited to efficient fulfillment methods in this space. I go to sleep thinking about fleet utilization, demand forecasting, and ways to shave seconds off of every delivery. Throughout this endeavor, I have been exposed to almost every delivery model around, and I have drawn one key conclusion: As the current labor laws are written, 1099 labor forces are not a scalable way to create an efficient and reliable logistics infrastructure in certain verticals. The main trait of these verticals where 1099 models won’t work are delivery of goods and services costing less than $50 and desired delivery fulfillment windows less than 2 hours. The following key reasons outline why I think this is the case:
1. Limit on efficiency — I talk about this in my last post. The legal definition separating a W2 from a 1099/Independent Contractor has to do with the amount of control you exert on the worker. In the delivery fulfillment space, the degree of control you exert is directly proportional to the efficiency you can obtain. If you cannot position workers in certain areas, explicitly assign and rely on them for multiple orders based on variables like current/future locations and current/future tasks, you simply can’t create an efficient delivery infrastructure in this quick pace environment. All of these variables I just mentioned cross the “control” threshold of the labor classification for 1099s and makes this impossible. Is a less efficient fulfillment structure going to kill these businesses? The real problem is that efficiency is inversely related to fulfillment cost. Therefore, the less efficient the delivery process, the higher the delivery fee to the business or consumer. In turn, you rule yourself out of certain verticals because your fulfillment fees are too expensive relative to the product cost and consumer/business willingness to pay the delivery fee. Additionally, with a fulfillment process that can’t operate efficiently, you are always susceptible to a competitor coming along and undercutting your business by being more efficient.
2. Demand of a vertical is predictable, not flexible — When you look under the hiring sections of companies that use 1099 work forces, you see things like “Work on your time” or “Schedule your own hours”. The flexibility of hours is a big thing these companies tout in order to recruit labor as well as dance the legal line of the 1099/W2 classification line (you can’t legally schedule 1099 workers). However, this is a very narrow view on the actual customer base and demand that occurs. People are creatures of habit. No matter how beautiful an App may be, it is not going to change engrained habit cycles that have been formed over 1000s of years. These habits control when we eat, when we sleep, and what inputs trigger our brain to recall information or needs. Why does this matter? Consumers are willing to pay a premium for delivery when it services a need or convenience. These needs or conveniences are the result of habits occurring in predictable and repeatable patterns. They may occur once a month (like buying flowers or getting a massage), or three times a day (like eating food). The point is, even though these companies tout flexibility of hours, that’s not what is going on in the demand side of this equation. Take food for example. People eat at lunch and dinner. Clearly, the demand for delivery labor is much higher during those times compared to others. Guess what? You can’t legally schedule 1099s. So instead, the companies using these 1099s are left with poor consistency, slow response times during peak demand, very low reliability at scale, and high workforce turnover.
3. Lack of partner integration — This item is really focused on ordering platform models with delivery marketplaces. These platforms connect consumers to a business and then provide the delivery component on the backend. The main pitfall I have seen on these models is a lack of integration with the business they are connecting the consumer with, and the complications that results in. The primary complication is that the product handoff from business to delivery person is very uncoordinated and inefficient. Often times, delivery people can show up early or late, or sometimes have to wait for an item to be found or made in the store. This obviously hurts overall delivery times, but there is a less noticeable, but much more important impact here affecting the delivery person. The economics of the time it takes them to execute fulfillment start to be very poor, and unless the delivery fee is extremely high (which doesn’t make sense at low cost goods), it doesn’t make financial sense for the delivery person.
4. Lack of brand representation/uniformity/training — One of the great advantages that controlling a large delivery infrastructure provides is the omnipresent workforce in the environment. People know you because they see the company everywhere when you are making a lot of deliveries. Creating a branded and uniform look is critical to leveraging this presence for future growth and product/service offerings. However, you can’t legally train/brand 1099 contractors. Some companies are finding innovative work arounds to this by paying “brand representation fees” on top of other pay to encourage uniforms, but you still can’t create a consistent customer experience through continued training. Therefore, these models will have limited chances to grow based on brand power outside of some small startup-aware communities (cough, SF and NYC, cough).