Free Riding And The Rise Of The New Free Radicals

Hosts: Matt Armitage & Richard Bradbury

Produced: Richard Bradbury for BFM89.9

Richard Bradbury: Free. It’s one of our favourite state of being. Free WiFi. Free digital services. The occasional free lunch. What if you could build a business worth hundreds of millions of dollars where other companies pay for the overheads, the stock and the logistics networks your business relies on, and your workers effectively pay you to employ them? Welcome to the world of the new free radicals.

Richard Bradbury: When you said you wanted to talk about free riders this week, I assumed you were trying to abuse your position to take a pot-shot at someone who was jacking your WiFi…

Matt Armitage:

• I know I can be petty but I do hope I'm not that petty.

• There is a story about WIFI jacking that came out this week.

• Amazon’s Sidewalk, which, if you own an Amazon device, will essentially repurpose your home Internet connection to create a mesh network for all the Amazon devices either in or riding through the neighbourhood.

• But more of that next week, when we’ll also try to tackle the Quantum Internet.

• As both are essentially competing sides of the forces looking to shape our digital future.

Richard Bradbury: The Quantum Internet? As in it’s here, it’s there, it’e everywhere. All at the same time?

Matt Armitage:

• Yeah. Quantum anything is always tricky. Especially on radio where you can’t give people anything pretty to look at.

• I thought we’d look at free riders today, because, certainly in terms of the Amazon mesh network, there are parallels with that privacy and infrastructure element.

• Also, so it gives me a bit more time to wrap my head around the idea of a quantum Internet sufficiently that I can explain it to other people.

Richard Bradbury: So you could say that your mind will be in two places at once this weekend?

Matt Armitage:

• That joke's so old I think it's out of copyright.

• Part of the reason for talking about free riders this week isn't just because

• my puny brain is caving in under the weight of the quantum Internet.

• it's also because we find ourselves, at least here in Malaysia, back under lockdown.

• I'll be honest, living in Putrajaya over the last year, changes in the lockdown restrictions haven't made a huge difference.

• Because we've largely been restricted from leaving Putrajaya whether we are under MCO, EMCO, or RMCO.

• That’s been a huge adjustment in itself.

• My wife and I live in putrajaya but our lives are outside it.

• Our work and our clients are outside Putrajaya.

• Before COVID-19, we didn't really shop in Putrajaya, we didn’t really eat out there or do much of anything.

• We don't really have friends in Putrajaya.

• My wife is a hiker, and very much an outdoors kind of person, and that spills over into her working life as well.

• Plenty of bureaucratic mountains to climb but not many physical ones in the country’s administrative capital.

Richard Bradbury: [sarcasm please] Touching but hardly a unique tale. There are millions of people experiencing the similar things across the country.

Matt Armitage:

• Absolutely. Don't get me wrong I'm not trying to invite people to my pity party.

• Like those millions of other people, we've relied on e-commerce and digital tools to connect us to that life we had before the pandemic.

• What's strange is how our perceptions of the world have altered during this time.

• I used to drive into KL pretty much five days a week.

• I think I've been into the city four times this year, for things like medical appointments and servicing the car.

• How I perceive distance and traveling has altered over the last 12 months.

• Now, I try and figure out what day I'm going to go and do my groceries.

• At a mall that's less than two kilometers from my house.

Richard Bradbury: Where do the free riders fit into this story?

Matt Armitage:

• Because of that reliance that many of us have had on digital systems.

• That reduction of our external world.

• Delivery services bring us food from restaurants, from supermarkets.

• Apps let us try clothes on virtually and have them delivered to our door.

• Not that any of these things is new.

• What's new is our reliance on them.

• Knowing that it's no longer a choice between going to that bricks and mortar retail outlet and ordering online.

• Those bricks and mortar stores are closed or are inaccessible again.

• It's been interesting looking at coverage of the loosening up of restrictions in some parts of the world,

• Because of the things that you would never normally expect to see people taking so much pleasure in.

• things like going into fashion stores, not necessarily to buy, but just to be able to try clothes on again.

• Instead of relying on than that risk reward cycle of ordering clothes online and not knowing if they’ll fit or suit you.

• And when you try them at home and you look bad in them, it makes those cracks in your self image run just a little bit deeper.

Richard Bradbury: I'm sensing that this is a little bit personal for you…

Matt Armitage:

• absolutely. Living in Malaysia, sizing is weird.

• I often have to wear an XL an XXL.

• so when I ordered a shirt from a US ecommerce site, I forgot how different the sizings are.

• I thought a large was downsizing enough.

• You could fit two of me in that large and I'm not a small fella.

• On the other hand, when I ordered something in a triple XL that originated from China it was barely big enough to blow my nose on.

• In fact, the last time I came into KL for an appointment, I sweated my way through the day so that I could wearing a new pair of jeans for the first time

• I’d bought them just before the first lockdown and they’d been sitting there scowling at me, unused for over a year.

Richard Bradbury: I'm still not seeing the free riders…

Matt Armitage:

• We've seen this enormous rise in companies and services operating as middlemen over the pandemic.

• if we dial back to the early days of the Internet and online commerce.

• Back in the days when mark zuckerburg was a humble student, probably ordering books from an upstart retailer called Amazon.

• …And it still took you days to torrent music and movie files…

• Part of the promise of the Internet was that, for consumers at least, it represented an opportunity to cut out all of those retailers…

• ...who stood in between the manufacturer and the customer and charged a hefty markup for the privilege.

Richard Bradbury: Was that a reality? Do you think we've really seen that happen?

Matt Armitage:

• Certainly that mid noughties idea of freemium products where everything from noodles to airline seats would be free if we watched a few ads never came to pass.

• You can argue that the competition from online and direct sales has made industries more competitive, made prices more dynamic.

• but we've also seen a downside to those dynamic prices.

• Typically, when we enter a retail store, the price is the same for everyone.

• Online we're never sure that we're getting the same prices.

• Algorithms and retained data allow those sites to price things they market to us most profitably.

• Essentially, we swapped one set of physical intermediaries for another set of digital ones.

• And often those digital operators operate with fewer overheads and fixed costs

Richard Bradbury: You mean, like drop shippers?

Matt Armitage:

• Yes, we've all seen those glossy expensive looking ads for stuff we know is just cheaply made nonsense.

• Most of us know that if you go onto one of the direct sale platforms you can often buy the same thing direct from a manufacturer, often in China,

• for a 10th or sometimes even a 50th of the price you see in the exclusive offer by now drop ship ads.

• because for those drop shippers, those additional bits of their time are the only real costs they incur.

• An order comes in, along with payment upfront, and the drop shipper simply orders that same product from the manufacturer who will ship it direct to you.

• a lot of drop shippers can completely automate these tasks with bots.

• Low cost, low overhead, no inventory and no logistics businesses.

Richard Bradbury: And this is the kind of business we’ve seen on the rise over the pandemic?

Matt Armitage:

• More in terms of principle and ideology.

• With drop shipping you often see the operators complaining that they spend most of their time on customer service, returns and refunds.

• Because the quality of those products is often not high, and the drop shipper has no real relationship with the manufacturer when it comes to maintaining quality and standards.

• which is what you would say in a normal return relationship.

• Often, the drop shipper can't return the product without incurring even more cost, so it's cheaper to simply write off the sale.

• so the manufacturer has no incentive to up its game.

• In fact, they may be benefiting more from drop shipping then the drop shippers themselves.

• What we're seeing with the advent of a lot of delivery-based platforms, is companies that are doing something similar.

• They are now the between the consumer and the retailer.

• They control the relationship and the communication.

Richard Bradbury: In other words, we’re seeing the advent of delivery-based platforms that sit between the consumer and the retailer and control that relationship?

Matt Armitage:

• That's certainly one part of it.

• But I don't see that as problematic.

• Larger companies will tend to want to own or dominate the platforms that they sit on.

• For smaller companies, especially when we're talking about F&B, or small retail and service businesses

• that don't have the resources to market themselves in that way and reach these potentially large national or international audiences

• then a lot of these platforms offer considerable upsides for both the businesses and the consumers that use them.

• Certainly, we see comments and we hear talk about the fees that some of these platforms leverage.

• In situations where there isn't competition, where there aren't alternative platforms,

• then there is certainly the potential for those platforms to essentially set their prices on a take it or leave it basis

• And operate essentially as a monopoly.

• By the way – before we go into the break, tickets to my pity party are available online at www…

• [fade me out mid-sentence]

Richard Bradbury: None of you needs to know that. The end of the world is probably more fun. When we come back, the virtual companies that are taking on traditional retail chains.

BREAK

Richard Bradbury: We’re back in Matt Armitage’s virtual world this week. Looking at the rise of virtual retailers. Before the break we looked at drop shipping and the way that a new generation of app-based delivery companies is using that model to take on traditional retailers.

Richard Bradbury: What’s the sector you have your eye on?

Matt Armitage:

• It's interesting, a few weeks ago we were talking about Apple's new privacy policy.

• And that one of the consequences of that policy could be to favor the kind of loyalty schemes and programs that the big supermarket chains, hypermarkets and big box stores operate.

• That their deposits of personalized data could become a go to commodity for advertisers

• if too many people opt out of data tracking for platforms and companies like Facebook, Google, Twitter etc.

• in a sense this is another side to that same story.

Richard Bradbury: because of the importance that supermarkets have had over the pandemic?

Matt Armitage:

• Partly. And that's very true.

• The first thing people have wanted to know during any lockdown is, are the supermarkets still open, and can I get to one?

• Malaysia has generally allowed a more diverse set of businesses to operate as essential services.

• In some countries, supermarkets have effectively been the only retail businesses allowed to open.

• And while some supermarket chains have experimented with deliveries, as we've talked about on the show before, it's been a difficult space for the supermarkets to make money from.

Richard Bradbury: Because they are essentially running a second business on top of their existing one?

Matt Armitage:

• A business revolving around logistics, that has a separate set of requirements relating to reception, storage and dispatch of goods, cold chain maintenance.

• We've seen Amazon, which has all the logistics expertise and more that you can imagine, dipping its toes in and out of delivery and retail groceries.

• And failing to make the kind of impact and achieve the kind of scale you would imagine is necessary to be sustainable.

• With its latest bet seeming to be automated and largely staff-less convenience stores and supermarkets.

• At the same time, people are a lot more reliant on buying their everyday needs online.

• So, there's been an explosion in grocery delivery services over the past 12 months.

• Not just new companies, although there are plenty of those, but more interest from investors and venture capitalists in funding new and existing grocery platforms.

• There are a bunch in the UK like weezy and chop chop. Bigger international players like Deliveroo have added groceries to their inventory.

• Getir from Turkey. Flink in Germany. Cajoo in France. Instacart in the US, which has been on a hiring spree looking for tens of thousands of service partners over the last year.

• In Malaysia there’s Happy Fresh and a bunch of others, as well as the big players like Foodpanda and grab getting into the space as well.

Richard Bradbury: what advantage do these platforms have over the grocery stores themselves? Wouldn't it make more sense for the grocery chains to own their own delivery and distribution services?

Matt Armitage:

• Part of it comes from the nature of the grocery industry itself.

• It tends to be low margin and high volume.

• That model works when you have a big central store where you pile your produce high and large numbers of people visit you to buy.

• Especially when you have a whole division of highly trained behavioral specialists and scientists helping to nudge those consumers to buy luxury items or items with higher margins.

Richard Bradbury: How do the delivery services avoid the trap of holding inventory and amassing overheads?

Matt Armitage:

• They build partnerships with those existing bricks and mortar retailers and direct business to them from their own digital platforms.

• In a way it serves as an independent sales and marketing channel for those retailers.

• It doesn't compete with the core business of the stores they complement.

• it taps into a class of consumer that may not want to visit the store in person.

• Or, during the pandemic, may not be able to visit in person, or simply wishes to reduce their contact and exposure with the outside world.

• Those delivery services are essentially in the business of connection.

• They take whatever is on the shelves at the supermarket partners and make it available to a wide or dispersed customer base.

• Once an order comes in, a delivery partner will often physically shop on your behalf and take the items from the shelves.

• Obviously, different supermarket chains may have a different methodology.

• Some may have a fulfillment center and the delivery partner simply picks up the completed order from that warehouse location at the designated time.

Richard Bradbury: And where does the revenue stream for the delivery apps come from? The consumer or the retail chain?

Matt Armitage:

• This is essentially the genius of the model, and why I equated it with drop shipping in the first part of the show.

• The supermarkets will normally pay a commission for each item that is sold, and the platform can mark up the prices to the consumer as well.

• Depending on the platform there may be a delivery charge or it may be priced inclusive depending on the value of your order.

• As a new business, it's quite low risk.

• You don't need a lot of staff. you don't need any stock.

• Your investment is in virtual rather than physical logistics.

• The app the consumer uses is essentially an automated platform.

• The customer does all the work of selecting. They pay for the goods upfront.

• Once that payment is made, the app either contacts the supermarket,

• Or as is more common, your shopping list is sent to a delivery partner who picks it all up for you.

Richard Bradbury: You say it's low overhead, but the model I'm hearing is very labor intensive. Surely, that's an enormous cost, especially for a startup company?

Matt Armitage:

• And that's where we see this model that's been pioneered by the E-hailing companies that are also becoming strong players in this market.

• I mentioned Instacart earlier. Because we reported last year on their hiring spree.

• At the beginning of the pandemic as the US economy was contracting,

• Instacart and of course Amazon were among the few companies that were aggressively hiring.

• But often those hires aren't employees. they are independent contractors, theoretically controlling their own hours and working conditions.

• And usually providing their own transport Or leasing transport from an approved and designated third party provider.

• So essentially you now have grocery businesses that don't stock or store food, employ very few people, and don't have to worry about wastage.

• That's a nice position to occupy in a low margin industry with enormous fixed costs.

• And back to what your question about revenue models: the term 4 sided marketplaces is being used for these services.

Richard Bradbury: What are the four sides? I can see two – charging the supermarkets and the consumers. What are the other two?

Matt Armitage:

• That's right. Those are the first two.

• Those non-employees, the delivery partners are also essentially paying the platform.

• By agreeing to work as independent contractors they essentially subsidize their own employment.

• they are paying the platform in the form of the benefits, the safeguards and the place of work that they are forgoing.

• so that's #3.

• And the 4th, as I mentioned earlier, is that these platforms are also in the data business.

• Those data profiles are valuable to the producers and manufacturers of the goods the platform sells.

• What you buy. When you buy it. How long you spend on the app. How you pay for it.

• Over time, as the breadth and depth of those profiles increases, that information will also be valuable to all kinds of 3rd parties.

Richard Bradbury: Effectively we’re saying that it's a mistake to think that these services are in the grocery business?

Matt Armitage:

• Exactly. And that seems to be what investors are betting on as well.

• As I said earlier, grocery chains are typically low margin and the industry itself is highly competitive.

• In a lot of mature markets you're looking at profits from 1% to 3%.

• which helps to explain why a lot of grocery chains are constantly trying to expand.

• because they can't do much to improve their margins, so the only way to generate more profit is to scale.

• And as we've seen with chains like Tesco, that can be a high-risk strategy.

• The new apps are essentially in the data and delivery business.

• Advances in technology will continue to drive down their costs.

• market share and dominance can allow them to negotiate better deals with the grocery chains they partner with.

• data feeds back into that system, allowing you to look at dynamic pricing models for individual customers.

• And that data can also be accessed and sold as a commodity to interested third parties.

• You have essentially built an entirely new business within, or rather on top of, that grocery industry ecosystem.

Richard Bradbury: And, presumably, it's an incredibly flexible model…

Matt Armitage:

• Yes, the same model can be ported rather than pivoted to other sectors.

• we’re seeing that progression from e-hailing to all sorts of retail sectors based around the same model.

• And as we've seen over the pandemic, people have responded to the convenience of online shopping.

• If you were looking for a conspiracy theory you could say that the pandemic was perfectly designed to boost the emerging e-commerce sector.

• before the pandemic, buying online was convenient but it wasn't essential.

• It was something most of us did sometimes but not all of the time.

• Now, we've learned how freeing it can be, which is an odd thing to say at a time when we're desperate to go somewhere, anywhere.

• In a normal world, buying online leaves us more time to do other things.

• And we've done shows before on the science of forming habits and breaking behavior.

• Click to buy has become a habit.

Richard Bradbury: Just to be clear. You're not saying that this is a conspiracy theory.

Matt Armitage:

• I'm saying that if you believed it, it would be a conspiracy theory.

• The technology was simply at the right point in its evolution to both benefit from and to make our lives easier during this strange time.

• Correlation rather than causation.

• And when we talk about forming and breaking habits, the pandemic forced us to break old habits and forged new ones.

• Breaking those new habits will prove hard unless there’s a similar, perhaps existential, external shock.

• And I think the smart money is betting that we don't break the delivery habit once the pandemic passes.

• And that the free riders have a clear path to profitability.