Thanx Shows 3rd Party Delivery Is Existential Threat to Entire Industry, But POS Deserves Blame

Zach Goldstein, founder and CEO at Thanx, wrote an epic piece on the meteoric rise of third party delivery (what he terms 3PD). It’s a long post (estimated read time of 33 minutes) and it’s full of great insight. Zach did break the article down into six sections to make it a bit easier to digest.

Zach echoes a lot of the things we’ve said before:

• Nobody is really proving if these delivery customers are “incremental”
• Shelling out 30% commissions for existing customers is a loser strategy of epic proportions
• There are tons of parallels between what happened to hotels (and airlines) in the 1990’s and what’s happening to restaurants today

These points and more all deserve serious investigation by restaurants and retailers. But as far as we’re concerned there’s something more harrowing underneath of all Zach’s observations.

3PD (if we may borrow Zach’s term) is an existential threat to all offline commerce, even if it’s chronologically front-weighted towards foodservice.

Here’s what might come to pass, in sequential order, if this industry doesn’t wake up.

First, the 3PD companies work their way further into the merchant technology stack, displacing entire ecosystems. It’s been estimated that half of all US restaurants use at least one 3PD provider today, and that number isn’t slowing down. DoorDash alone boasts over 300,000 North American restaurants on their platform, with a true partnership relationship with about 240,000 of those (remember, 3PD can scrape a menu and surface it to customers without having a true business relationship with the merchant).

Those are 240,000 merchants where DoorDash has a direct relationship, often with a DoorDash tablet already sitting on the countertop. DoorDash, like Grubhub, UberEats, Postmates, and other regional players, are analyzing all of the ordering data they receive. In some cases the 3PDs are even extracting all of the data on a merchant’s POS – so not just the 3PD orders but in-store orders as well.

Using this data the 3PD can walk in and offer superior products over most of what the brick and mortar ecosystem can do today. That’s because the 3PD players not only have massive R&D budgets and a true software culture (i.e. they’re not a bunch of payments bros who happen to own POS assets to protect their dwindling processing business lines) but highly valuable item-level transaction data at scale. Want to know how you should price your pad thai? Ask your 3PD. Overstaffed? 3PD will be able to solve that for you as well. Marketing funds burning a hole in your pocket? Enter the 3PD’s CRM and marketing tools – see the LevelUp acquisition by Grubhub and, as rumored, the failed Punchh acquisition by DoorDash.

3PD becomes a distribution vehicle for any number of additional merchant products one can think of. And because POS companies have been so myopic in their thinking they’ve created a void where even a mediocre 3PD product will be well received. Explicitly, POS companies are so focused on trying to monopolize the stack that merchants have suffered from crappy POS bolt-ons for a long time. What happens when a 3PD makes a moderately decent alternative and already has merchant relationships that the POS can’t block out with their walled garden?

Next, 3PD begins to replace the very merchants they sought to support. This operates under two models: one where the 3PD directly spends the CAPEX and opens up their own storefronts, and the other where the 3PD effectively neuters the merchant and pimps them out. Neither scenario is rosy for the merchant.

We’ve shown some of the math on the first option, and it looks pretty compelling. Granted it would require a drastic reallocation of capital but the 3PDs are much better capital allocators than payments processors have shown themselves to be, and they’re inarguably better stewards of capital than merchants will ever be. In owning the manufacturing facilities (i.e. kitchens) 3PDs would be able to dictate tech adoption, like robotics, which should make their food production operations higher margin over time.

The second option saves the 3PDs the initial CAPEX but it still puts merchants over the barrel. The US restaurant market is overbuilt and the 3PDs know this. They can leverage this to their advantage and put pressure on merchants in all sorts of ways: “Hey, whatever burger restaurant gives me the highest take rate is going to get the highest listing in my portal.” As 3PD order volume increases these merchants become ever more dependent on the 3PD partners to survive. Per these two Thanx graphics 3PD order volume is only increasing.

If you think this is all make-believe why don’t we look at the leaked Deliveroo deck. Here are the highlights you need to know:

• Deliveroo will use the order data it’s been collecting to make their own food for customers
• Deliveroo will use AI and technology to halve the current price of a delivered meal from 24 pounds to about 12. Deliveroo executives expect restaurant visits to become limited to special occasions, likely relegated to white table cloth establishments
• Long term, Deliveroo expects to make food for a pound and deliver it for a pound, drastically increasing their margins

The growth of 3PD will pretty much collapse an entire industry. Just like Google, Facebook, and Amazon have become winner-take-all participants in their respective categories, the same will happen with offline commerce, with foodservice as the first victim. Why would an investor put money into a software company targeting restaurants if 3PD already has the distribution, data, and baseline products covered? At that point it’s a prayer that the 3PD would just acquire the technology and fold it into their offerings; it’s why investors aren’t exactly lining up to invest in retail tech (Amazon) or marketing tech (Google, Facebook).

Technically 3PDs can’t be called black swans because black swans are supposed to be unknowable events. But damn if the entire brick and mortar ecosystem – from merchants to the very suppliers that support them – isn’t actually competing against 3PDs… they’re just too dumb to realize it.

But hey, payments bros gotta focus on payments, right? Ain’t got time to keep this POS thing relevant. Oh, except 3PD are their own payfacs too.

LOLz for days in POS.

Always.