What will 2019 bring to the On-Demand Services Economy?

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The on-demand economy — a digital marketplace offering immediate access to goods and services often delivered by contract, or gig, workers — continues to grow and to expand into new industries. The emergence of on-demand services, particularly in the transportation, retail, lodging, dining, and grocery businesses, is built on mobile technologies that are especially attractive to middle-income Millennials.

Key Takeaways:

The rise of the on-demand economy is changing consumer habits, supply chains, regulations, competition, and investment.

Traditional businesses are grappling with how to respond to shifting consumer expectations and searching for ways to improve their supply chains to deliver goods and services more quickly.

The on-demand economy’s future may include drones or robots handling deliveries and consumers receiving goods even before they realize they need them, based on their buying history.

If any company typifies the legacy economy, it would be General Motors, the century-old automaker that once reigned supreme in Detroit and still outsells all U.S. rivals.

If any company typifies the legacy economy, it would be General Motors. Yet GM’s current leaders are positioning the company to survive in an on-demand economy dominated by consumers who expect rapid satisfaction of their desires. GM owns 9 percent of ride-sharing service Lyft, is talking with Uber about partnering on autonomous vehicles and has started a subscription service that delivers a Cadillac on request and lets users exchange it up to 18 times a year.

GM is hardly alone in traveling this path. Companies of all sizes are adapting — or building from scratch — production and delivery models to meet consumer demand as close to the point of consumption as possible, which lowers inventory and cost and improves cash flow. This change in mindset and associated explosion in the on-demand economy — a digital marketplace of businesses seeking to improve the customer experience by offering immediate access to goods and services — has led to hundreds of new startups looking to upset traditional business models.

While established corporations are playing catch-up, those startups are not focused on the here and now. Instead, adapting to an ever-changing market is causing businesses to think big. Soon, says Jeremiah Owyang, founder of Catalyst Companies, an innovation council of large companies seeking new business models for the on-demand economy, “shopping carts and one-day delivery will be an anachronism. The modern retailer will deliver goods to a consumer’s house or home before they even need it,” based on their past purchasing patterns.

While the on-demand sector is still a relatively small part of the total U.S. economy, it has high growth potential

As consumer expectations continue to evolve, new and existing companies are stepping up to meet the need. But consumers’ growing ability to immediately access goods and services, specifically those delivered by contract workers, invites a number of unanswered questions about how businesses will survive in this new environment and how regulators will respond to the monumental shift in traditional lines of service.

(Terms such as the sharing and gig economy are sometimes used interchangeably with on-demand. The sharing economy relates to digital platforms that facilitate the exchange of material assets between individuals, while the gig economy is the labor market of contract workers. Gig economy members often provide services in the on-demand economy, and some sharing-economy companies also are considered a part of the on-demand economy.)

The On-Demand Evolution

Two factors, in particular, have powered the on-demand economy in the past decade: consumer desire for time-saving ways to procure goods and services, particularly those that are curated and personalized, and innovations in digital app-based matching technology and electronic payment methods.

This economy is shifting power away from businesses large and small and giving it to consumers, who now expect to receive what they want when they want it. No longer does the consumer need to rely on traditional supply chains or broken business models. They can instead look to each other — and their smartphones — to fulfill virtually any need.

The result of this ongoing “rising expectation of consumers, is a collision with “industrial-age manufacturing and transportation practices. As a result, rules are beginning to change. And when rules change, the impossible becomes possible.

This emerging expectation of instant access has allowed companies such as home-sharing service Airbnb, ride-sharers Uber and Lyft, used-goods marketplace Yerdle Recommerce and food services Grubhub, HelloFresh and Instacart to quickly build brand loyalty and reduce consumer dependence on traditional corporations and slower lines of service. The expansion of the on-demand economy has introduced niche and luxury goods to a broader market, It also reaches underserved regions, such as city neighborhoods lacking fresh produce.

Consider the numbers that dramatize the on-demand economy’s growth:

* More than 280 companies now provide on-demand goods and services across 16 industries, up from 76 companies in six industries offering such services in 2014.

* More than 22 million Americans are spending nearly $58 billion per year in the on-demand economy. This spending is not limited to the highest income earners: 46 percent of on-demand consumers have an annual household income below $50,000.

* An estimated one-third of the American workforce is engaged in contract or on-demand work.

* Fueling the growth of the on-demand market is e-commerce, which also is expanding. By 2020, global e-commerce spending will total $4 trillion, or 14.6 percent of all consumer spending, up from an estimated $2 trillion in 2016.

* By the end of 2017, more than 2 billion people worldwide were using their mobile devices to make a purchase.

* In the United States, approximately 27 percent of all dollars spent in retail e-commerce transactions will be done via mobile devices by the end of 2018.

Despite its rapid rise and the significant investments made, some warn the on-demand economy is a bubble waiting to burst. on-demand consumers lack brand loyalty and make infrequent purchases, and that on-demand businesses have precarious business models.

On-demand companies that cannot attract enough venture capital will not be able to hold a customer base because “mainstream customers are not willing to bear the cost for most on-demand services.

Millennials Dominate On-Demand Market
On-demand consumers by age group

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Millennials make up the largest generational slice of on-demand consumers, at 49 percent, followed by Generation-Xers at 29 percent and Baby Boomers at 22 percent.

London-based Edison Investment Research believes that costly labor in the markets where on-demand companies pop up also have a negative impact. “The initial phase of hype and euphoria is properly over and the shake-out has already begun, “Only the strongest with the most money are likely to survive and will do so by buying up the competition or waiting for them to wither on their own.

Nonetheless, many middle-class consumers continue to flock to the on-demand economy, attracted partly by the ability to find deals quickly or to compare prices; but the growth also is closely linked to age. Millennials — now the nation’s largest generation — are the driving force behind market growth and, as digital natives, are more likely to look to their social networks or individual, non-mainstream producers for a product or service they need.

According to the University of Maryland’s National Technology Readiness Survey, 49 percent of customers who purchase on-demand goods and services are ages 18 to 34 while 29 percent are between the ages of 35 and 54.18 Analysts say Millennials will likely continue to be the catalyst for change in the economy.

The on-demand economy’s focus on fast has left companies beholden to consumer “micro-moments” in which a shopper thinks of a need and then immediately tries to fulfill it as quickly as possible, typically through a digital transaction. According to Google, those using a smartphone are 50 percent more likely to expect to be able to purchase something in real time.19 Google mobile searches for the term “same-day shipping” grew 120 percent from 2015 to 2017, while searches for phrases like “flights today” and “hotels tonight” have grown 150 percent.

It is often here where traditional businesses struggle to fulfill customer needs, especially when they have a more conventional supply chain that is based on producing a high quantity of the same thing and then transporting these products through a network built to consolidate thousands of orders. Such a supply chain is “misaligned with the new retail formats that continue to be invented,” wrote Karl Siebrecht, CEO of online warehouse marketplace Flexe. “Customers today have a taste for fast, low-cost delivery and there’s no going back. It’s no longer optional, but essential, to cater to the on-demand expectations of the modern economy.”

To compete in an on-demand world, companies need to do a better job of forecasting customer demand, rethink distribution and use the vast amounts of customer data that can be collected in the e-commerce world to customize consumer experience.

According to industry analyst Brian Solis, this is difficult because you have companies with “people who don’t want to change and are clinging to the way things are and they’re getting in their own way.”

Effectively using consumer data is key for a company that wants to become less linear and more nimble.

Traditional companies that are working to find their place in the on-demand world are looking to retail giant Amazon, which has revolutionized the customer experience, especially in its delivery concept. Amazon has partnered with major shipping companies and leases jets to get its packages where they need to be quickly and is offering two-day and, in some metropolitan areas, one-hour delivery. Fast, efficient shipping has been made possible by a huge warehousing network with products stocked in locations where they are most frequently purchased, based on customer data.

Similarly, Zara, a clothing store based in Europe, revolutionized its supply chain more than three decades ago by relying on consumer data to track preferences and trends, and then provided its producers with limited fabric options to increase the speed at which on-trend clothes hit stores. Zara is able to put new clothes into its stores within 15 days, instead of the industry average six months.

Challenges to Continued Growth and Sustainability

The growth of the on-demand economy has not been free of obstacles. A number of companies have faced lawsuits, tightening regulations or consolidation. “There have been layoffs, shuttered companies, dwindling funding for [venture capital]-backed startups, and a sobering realization among founders that they need to push for profitability to survive.

Others have closed because they lack the capital or customer base to stay afloat. For example, Homejoy, a housecleaning service, shuttered after five years because of legal battles with independent contractors and customers who were unhappy with inconsistent cleaning quality.

Only 15 percent to 20 percent of customers booked a second visit with Homejoy within a month, according to former employees.

BlackJet, the Uber for the jet set, lasted less than four years before the high cost of its private jets and inconvenient scheduling led customers to abandon it. The company closed in 2016.

Take Eat Easy and Ordr.in (later OrdrX) raised enough capital to last a few years, but were ultimately pushed aside by other restaurant delivery apps. Similarly, Tripda, SideCar and RideJoy could not compete with Uber and Lyft and failed to secure adequate funding.

Others, like Vatler and Zirx, both valet companies, ran up against regulators and traditional companies, and without the resources of larger on-demand companies, were shuttered.

These examples indicate that to attract customers and investors, startups must deliver value and have a specific draw to differentiate themselves in already flooded markets.

Legal, Taxes and Policy Issues

A lot of these companies will be in trouble that haven’t built a pathway to profitability, It remains to be seen whether startups entering the market today can succeed in niche markets where customer demand is evolving, or whether regulatory hurdles and increased competition from larger rivals will lead to their demise.

Government at every level is grappling with the rise of on-demand companies and how to treat them. Many on-demand companies do not collect state and local sales and use taxes, arguing in many cases that they are simply digital platforms connecting users to individual service providers and should therefore not be liable for tax collection. In other instances, regulators are questioning employment practices such as companies labeling their workers as contractors who do not become eligible for health insurance or other benefits.

To make itself more palatable to local taxing authorities, Airbnb, for example, offers to collect sales taxes typically applied to traditional hotel lodging. As of December 2017, the company estimated that it was collecting state or local taxes in 38 states and Washington, D.C.

Companies such as Uber and Lyft, in contrast, argue that their transportation services do not fall under the taxing jurisdiction of areas in which they operate because the legislation as written does not apply to them. Less than a dozen states currently apply gross or sales taxes to taxi or other similar hired rides, partly because at the time these tax laws were written, tracking consumer use of such services was difficult.

That is starting to change. In Rhode Island, the state began levying sales tax on taxi fares in 2012, but both Lyft and Uber said that the law was too ambiguous to apply to their companies. In 2016, the state Legislature passed a law clarifying that Uber, Lyft and other digitally connected businesses would have to collect sales taxes. Georgia’s House passed similar legislation in March 2017; the bill is awaiting action in the state Senate.

Policymakers also are questioning how on-demand companies fit into other regulations, such as zoning and rental ordinances. In October 2016, New York Gov. Andrew Cuomo signed a law banning the listing of unoccupied apartments as short-term rentals on sites such as Airbnb, FlipKey and HomeAway in violation of New York City’s rental rules.

Airbnb sued the state but dropped the suit after the parties agreed that New York City — not the state — would be responsible for enforcing the law and that the platform itself would not be found liable for any infractions; instead, the host renting out a space would be subject to penalty.

Overseas, the European Union’s highest court weighed in with a ruling in late December 2017 that Uber was a transportation business, not merely a digital platform, and therefore subject to licensing and other regulations that apply to taxi companies.37

Labor law is of particular concern to legislators and the contract workers who provide services to on-demand companies. These individuals enjoy little job security or protection under current labor law, often receive low wages and have little recourse for demanding higher pay.

Some states have begun amending laws to define who qualifies as an employee rather than an independent contractor, including what are called “presumptive employee status” laws. These laws assume all workers are employees afforded the rights and benefits of full employment, and they leave the burden of proof on the employer to prove otherwise. Such classification has led to litigation against some of the most high-profile on-demand companies.

In February 2017, a Florida state appellate court ruled that Uber drivers were independent contractors and therefore ineligible for unemployment benefits. Such findings are beneficial for the companies but harm the employees they rely on. One on-demand worker said she made $6,000 on the freelance site TaskRabbit the previous year, “but even if I doubled that, that’s still poverty — $12,000 a year. And there are no benefits,” she said.

As more legislative efforts and legal proceedings define who is an employee, on-demand companies may become liable for providing costly benefits to its workforce, something that could push some businesses to their breaking point.

According to a report by Virginia’s Joint Legislative Audit and Review Commission, companies that misclassify their workers as contractors instead of employees save anywhere from 10 percent to 40 percent on overall payroll costs.40 “If you had the liability that we’re talking about … it would shut a lot of these companies down,” said Shelby Clark, the founder of car-sharing service Turo.

But for some companies, taking on higher payroll costs is worth it to build customer and worker loyalty and avoid costly lawsuits. For example, by providing training to ensure all staff deliver the expected level of service, Hello Alfred, a home management service, has built customer loyalty and trust resulting in higher use of the service and positive customer feedback.

Similarly, Mulberrys Garment Care, which offers on-demand laundry and dry-cleaning services, hires full-time staff despite the extra cost. “Because of the fact that you have a more knowledgeable and more productive staff, you end up being able to deliver a better product at a competitive wage,” said CEO Dan Miller. “It’s a long-term play... It’s not the cheap, quick answer.”

U.S. Sen. Mark Warner, D-Va., is seeking ways for independent workers to receive unemployment insurance and other benefits such as 401(k)s and workers’ compensation. In May, Warner and Rep. Suzan DelBene, D-Wash., introduced legislation to establish a $20 million grant fund within the U.S. Labor Department to encourage states, communities and nonprofit organizations to experiment with portable benefit models for independent workers.

As more and more Americans engage in part-time, contract or other alternative worker arrangements, it’s increasingly important that we provide them with an ability to access more flexible, portable benefits that they can carry with them to multiple jobs across a day, a year, and even a career.

Future Trends

Market analysis indicates the on-demand economy has plenty of room to grow. BIA/Kelsey, a marketing and research firm based in suburban Washington, estimates that in 2017, local on-demand service made up only 7 percent of the U.S. market.

Startups that enter the market will face hurdles — as did their predecessors — in establishing themselves as viable investments for large investors. That problem will potentially limit the number and variety of companies offering on-demand services. In fact, venture funding for on-demand startups fell by 35 percent in 2016. This decline comes after venture capitalists invested $12.5 billion in 230 on-demand companies from 2000 to 2015, according to Accenture, the global management consulting firm.

The disruption caused by the on-demand economy is forcing many traditional businesses to scramble to keep up. Accenture found that the transportation/automotive sector received the highest investment from venture capitalists between 2000 and 2015. But all industries are vulnerable to disruption and should be evaluating their business models and considering how to respond to the on-demand threat. No matter how far away from your industry seems to be from digital, there’s a digital disruption on the horizon.

On-Demand Spending Generated $57.6 Billion

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Established corporations seeking to retain their relevancy in an on-demand world have three choices: build, buy or partner. Businesses must identify their shortcomings in the on-demand world, develop new offerings geared toward their current and future customer bases, embrace digital technology — specifically seamless payment systems and services based on a customer’s location — and reimagine their business models to provide the experience and level of service today’s consumer expects.

Existing businesses willing to embrace this new consumer landscape can benefit from established loyalty and trust with their consumers, something startups must — and at times struggle to — quickly develop, but only if they can evolve to become more customer-experience oriented.

Amazon, for example, has positioned itself to compete with delivery companies such as Postmates by expanding its two-day Prime shipping service to one- and two-hour Amazon Prime Now in certain metropolitan areas.

Short of finding ways in-house to meet on-demand consumer expectations, established companies must look to startups for help, as GM has done with Lyft. Partnerships between large, established corporations and startups are already becoming the norm in the grocery and restaurant industries, with companies including McDonald’s, Costco, Target and 7-Eleven partnering with delivery services such as Instacart to make their products more readily accessible.

Companies such as DoorDash and Postmates that traditionally offer restaurant meals are now looking to other goods — hardware, for example — so that they can deliver to consumers any item within minutes to an hour.

Technology companies provide a model for the on-demand economy. The IBMs, Apples, Googles and Microsofts of the world are offering on-demand products, providing platforms that allow independent developers to build new products and giving their customers online space to support one another. This same model shouldn’t be limited to software companies alone.

While success in the new economy will depend on established companies’ ability to re-invent their supply chains to offer instant access to their goods and services, another shift is in the offing. In the not-so-distant future, drones, robots and self-driving cars will likely replace humans as the primary mode of delivery. Already, companies are experimenting with robot and drone delivery for takeout and packages.

And there is the talk of the ultra-high-speed transportation company Hyperloop One not only revolutionizing human transit but changing how freight is moved to better fit into the micro-moment, on-demand expectation of consumers. Such an agglomeration could increase competition, availability, and specialization of limitless goods and services to consumers, no matter where they are located.

Amazon Takes Advantage

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As Amazon has found, however, the evolution of shipping speed and consumer convenience is costly, and the hit its earnings have taken may not be sustainable for everyone. “There’s a lot of things that we’re doing to shorten the time to delivery,” Amazon CFO Brian Olsavsky told reporters in late 2016. “We acknowledge that’s expensive, but it’s certainly a great part of our value proposition, and customers love it, so we take it as a given and then we work very hard to bring down our costs through greater efficiency.”

In an effort to ensure the Seattle-based company can make good on its increasingly demanding product delivery schedule, Amazon is offering to help set you up in the delivery business.

With an initial investment of as little as $10,000, the company says it can get you leased vans, insurance, gas cards and training to launch your own delivery fleet. The site also promises to be your first — and, possibly, only — customer. A delivery fleet owner with 20 to 40 vans can potentially earn $300,000 a year, Amazon says.

“Individual owners can build their business knowing they will have delivery volume from Amazon, access to the company’s sophisticated delivery technology, hands-on training, and discounts on a suite of assets and services, including vehicle leases and comprehensive insurance,” Amazon said in a press release Thursday.

The catch? There’s no guarantee that you’ll make a $300,000 profit — or any profit, for that matter. In fact, you may be able to earn more on an hourly basis by simply delivering packages on your own, without investing the time and money required to start your own enterprise.

The costs of working with Amazon are so substantial that independent delivery companies are increasingly turning away Amazon’s business, says Peter Schlactus, co-founder of the Association for Delivery Drivers. The reason: Amazon requires that delivery companies hire their drivers as employees, rather than work with independent contractors.

“The challenges of doing delivery work for Amazon have taken many dozens of delivery owners by surprise,” Schlactus says. “My read is that Amazon is doing this to address a dwindling supply of independent delivery companies who are willing and able to work with them.”

Why is Amazon’s requirement that you hire, rather than contract with, drivers so onerous? Because it subjects the delivery company to a wide array of expenses, from employment taxes, workers compensation and unemployment insurance levies, as well as to substantial additional liability.

“If an independent contractor gets into an accident, they cover the damages and liability from their own insurance,” says Schlactus. “If they are your employee, you are liable.”

Worse, he says, if your van is emblazoned with an Amazon logo, it may put a target on your back.

“When people see a major company’s logo on your van, they won’t hesitate to make a claim and to make a claim more aggressively than if they think they are dealing with a small business with limited resources,” he says.

Then, too, to make the kind of money Amazon is talking about requires an extraordinary amount of work. You’ve got to find 20 to 40 fit and responsible individuals with good driving records to operate your vans, do background checks and process employment paperwork and then manage the mind-boggling job of scheduling not only their time but the delivery of thousands of packages per month within tight allotted time frames.

“It is a 24/7 management commitment,” he says. “It would be interesting to see what your pay would work out to on an hourly basis.”

That said, Schlactus says there’s never been a better time to be a delivery driver or operate a delivery business. Because more sales are happening online and more companies are trying to compete on service as well as sales, delivery drivers are in high demand.

“There is a shortage of commercial drivers, which means they can command better terms and better conditions than any time in recent memory,” he adds.

Solo delivery drivers can earn $30,000 to $50,000 annually with nothing more than a passenger car, he says. If you have a van, you can earn twice as much.

Notably, you can even drive for Amazon without starting a business. Amazon Flex hires independent contractors to deliver packages and pays between $18 and $25 per hour, according to job rating and review site SideHusl.com.

Consumer Demands

The difficulty in making the moves necessary to reach this autonomous world — or even one that can just respond to consumer demands faster — is difficult for startups and traditional companies alike. Agreeing on strategic actions while not being able to agree on what the consumer product landscape will likely look like in five years is challenging in itself; concurrently moving rapidly with thoroughgoing actions is even more difficult.

Whether the future involves self-driving rideshares or automatic delivery of groceries, the biggest issue for startups and established corporations will be resilience, Consumers have been empowered, and they are unlikely to turn back to older ways. Companies that can remain relevant are those that will not only be prepared to fulfill immediate needs with the right goods and services but will prioritize customer service and continue to adapt and change alongside consumer needs. It’s inevitable that change is going to happen, You need to be able to pivot.

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