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This is part three of a Re/code Special Series about the new instant gratification economy. In five days of stories, photos and videos, we are exploring the explosion of tech startups that cater to our every need and desire, on demand.


The streets of San Francisco are bottlenecked by double-parkers: Sedans with bright Google Shopping Express stickers on the side carrying bags of online purchases inside, hulking UPS and FedEx trucks, and as of last December, AmazonFresh trucks for the company’s online grocery service.

UPS paid $1.27 million for 14,552 parking tickets to the city of San Francisco in 2013, according to the city’s municipal transportation agency. That’s up from $673,000 for 11,788 tickets in 2006.

It’s just part of the cost of doing business.

parking_ticket_final1

The ubiquity of Amazon trucks in the streets is part of a big shift for the e-commerce giant. The influx of trucks comes only after years of Amazon bending over backward to avoid having local operations in California, so it wouldn’t have to pay sales tax.

Now that it’s paying to be here, it’s everywhere.

I’ve noticed that the backs of many AmazonFresh trucks sport ads for “Betas,” the company’s online video show. “Conquering the world one byte at a time,” says the promo, with a group photo of the show’s nerdy characters and their gadgets.

“Betas” was canceled in March, but the Amazon trucks haven’t been repainted.

The perils of physical infrastructure.

Some AmazonFresh trucks still sport ads for "Betas," Amazon's online video show.

SFCitizen.com Some AmazonFresh trucks still sport ads for “Betas,” Amazon’s online video show.

As startups square up to take on the giants of delivery to bring customers their packages, groceries, food and services on the same day they’re ordered, they don’t necessarily need traditional infrastructure — warehouses, vehicle fleets, even employees.

Unless they want to burn through hundreds of millions of dollars, like online grocer Webvan and on-demand deliverer Kozmo did in the dot-com era, they’ve got to think smarter.

Redefining delivery for a new era of customers who want everything right away requires rethinking operations. By focusing attention on creating a powerful logistical system, and tying into the “sharing economy,” many of the new crop of startups in the on-demand space are trying to offer faster service at a much lower operational cost.

And so the young players in the instant gratification economy are ferrying cargo across town via crowdsourced workers.

Usually, these are independent contractors, who decide when they want to work, drive their own vehicles, receive directions about where they need to be via smartphone — and cover the cost of their own parking tickets. The new buzzword for this is “fractional employment.”

And at least judging by early examples in the handful of towns where these services are available, people may even be willing to — gasp — pay for same-day delivery. A Harris poll in June found that 14 percent of respondents — and 25 percent of millennials — said they would be okay with an added fee for same-day delivery for online purchases. The mean amount that people were willing to pay was $13.90.

Making money off these services is possible, these companies say, because of the far lower cost structure required to operate them. But established package-delivery companies like FedEx are skeptical. FedEx CEO Fred Smith told CNBC in June that he doesn’t feel any heat from trial efforts at same-day delivery by Amazon and Uber.

“The demand for same-day service is a relatively small, discrete segment of demand,” Smith said. “We have FedEx SameDay City in 22 markets. We don’t see that as a big threat, or quite frankly, a huge opportunity, either.”

Deliv CEO Daphne Carmeli

Vjeran Pavic for Re/code Deliv CEO Daphne Carmeli

Asked about Smith’s flat dismissal of the on-demand world, Deliv CEO Daphne Carmeli replies, “I don’t think that’s the product we’re talking about.”

Menlo Park-based Deliv provides same-day delivery services for malls and retailers to offer to their customers. Carmeli wants to build “the PayPal button for delivery,” so people can opt to get whatever they buy later that day delivered from a local store, rather than from Amazon Prime.

Carmeli, who is a longtime Silicon Valley executive — she was head of e-commerce at Netscape — points out that a FedEx same-day shipment can cost $50. Deliv is trying to do deliveries of almost anything and everything later that day, for as little as $5.

“He can’t get it at a low price, because he’s an asset-based company,” Carmeli says of FedEx’s Smith.

Because in this upside-down world, assets are a liability.

“Jeff Bezos is my pre-sales organization,” says Carmeli. “He’s got every retailer going, ‘Shit, what am I going to do?’”

Amazon might be shaking up the world of retail, but Amazon only has something like 100 warehouses.

“The reason we can do what we do is we don’t own capital assets,” says Carmeli, who aims to have 1,000 times more distribution centers than Amazon by using malls and retailers that already exist. (At least, that’s the dream. Today, Deliv operates in three U.S. markets and at 10 malls.) Crowdsourced drivers pick up batches of orders, and then take them out to people’s homes.

“I don’t own trucks, I don’t pay for drivers I don’t use, I don’t pay for hubs,” Carmeli says. “The malls are my hubs.”

gsx_courier_3

Google

But there’s a middle ground, one that’s being pursued by companies that can afford it — particularly Amazon and Google.

What comes after Amazon Prime? Let’s call it Amazon Prime Prime.

Amazon said last year that more than 20 million members signed up for its two-day delivery service, Prime, which now costs $99 per year. While that’s a small number in the grand scheme of things, the high-spending habits of the group — estimated to be more than twice as much as regular Amazon customers — are having a magnetic effect on the rest of the industry.

A skunkworks team at Google developed what became Google Shopping Express last year, by putting the Amazon Prime model under a microscope. According to a source familiar with the project, the biggest lesson was that it’s worth investing ahead of where the market might be today.

Which is to say, many people still don’t know they want same-day delivery, because today they think same-day delivery means fuss, friction and expense. But if you make something fast and easy, consumers will come to appreciate it — and maybe even pay for it. So the upfront investment is worth it.

“It’s better to build volume first, than to launch with a ‘gotcha,’” the source says.

That’s the hypothesis, anyway.

And Google isn’t testing the last part of that hypothesis — charging people money — yet.

It is currently subsidizing six-month trials of unlimited free delivery. In fact, the company is throwing something like $500 million at Google Shopping Express.

Competing with that kind of budget is a scary prospect for startups.

But here’s the problem with Amazon and Google’s master plans — at least according to the little guys. Because both companies have established brands and large audiences, they’re under more pressure to provide a controlled and professional experience. If big fancy Google sent some dude in a beat-up Honda Accord to bring your Target purchase to your door, you might short the stock. So, at least for now, the big guys are not making use of crowdsourcing and fractional employment.

That means all those millions of dollars are not being used particularly efficiently. Google Shopping Express pays top dollar for a system that includes outsourced couriers from companies like 1-800-Courier, in-store pickers, consolidation centers and free membership renewals.

Uber gets in the delivery game on the streets of New York.

PureWow.com With UberRush, Uber gets in the delivery game on the streets of New York.

Four years ago, a service that helped people use their smartphones to hail black sedans for expensive rides across town launched in San Francisco.

Today, Uber is valued at more than $18 billion, and is having real effects on the global business of transportation. Especially in early markets like San Francisco, the taxi industry is suffering, taxi medallion lease rates are falling, car ownership is losing some of its appeal, and drunk driving may even be decreasing.

And in Uber, a new crop of entrepreneurs find inspiration. Its model is studied and applied across more types of services every day. Uber doesn’t have assets, but it does have revenue — well over a billion dollars of revenue globally, according to multiple sources. The company paid for a study that said Uber was directly and indirectly generating $2.8 billion per year in the U.S. alone.

What worked for Uber — raising lots of money, rolling out aggressively in tens of cities, busting up local incumbents and regulators, making swagger its brand — many startups and investors hope to emulate. Some people call these companies “Uber for X” startups, where “X” is the existing industry they are trying to make more efficient. A list of “Uber for X” startups on the site Quora has close to 100 entrants.

The scrum now includes two Ubers for home cleaning, a few Ubers for handypeople, at least three Ubers for massages, five Ubers for valet parking, a couple of Ubers for laundries, an emerging group of Ubers for hair and makeup, and so very many Ubers for food.

According to data pulled by CB Insights, “Uber for X” companies get 46 percent larger Series A than other technology startups.

Uber itself wants to be the “Uber for X” — though it has its hands full with the whole people-moving thing. The company has pulled various stunts, like delivering ice cream and kittens.

More seriously, it rolled out an experiment called UberRush in New York City that helps people send items across town via bike messenger.

According to multiple sources familiar with major retailers, the next iteration of UberRush will be an “Uber it home” option at checkout counters at stores. For a fee of about $10, shoppers will be able to send their purchases to their door later that day via Uber. This expansion is also being planned for trials in New York.

At least one retailer contacted by Uber did not take the company up on the offer, because it did not view Uber’s insurance as sufficient, according to a source.

Uber has not yet responded for a request for comment about the trial.

Bike messenger Sean Lyons works for four app-enabled bike-courier services, including WunWun.

Anthony Quintano for Re/code Bike messenger Sean Lyons works for four app-enabled bike-courier services, including WunWun.

So here’s a crazy idea. Could you actually make a business out of offering same-day delivery — for free? Permanently, not as a promotion.

One guy believes it can be done.

That’s Lee Hnetinka. He’s one of those born-hustler types who figures out how the world works, and then looks for an opportunity to change things up.

His startup, WunWun, promises to buy anything from any store or any food from any restaurant in Manhattan, parts of Brooklyn and the Hamptons, and deliver it to any place in that same zone. It’s free.

The turning point in the 26-year-old’s life came when he read an investment bank research study, Hnetinka tells me as we sit in the sweltering heat on his New York City office’s rooftop deck, where he orders eight tennis balls (to protect the deck from scratches when chairs are dragged around) and I order ChapStick with sunscreen. Both orders show up within 20 minutes, from separate bike messengers.

Hnetinka was inspired by an April 2013 investment memo from Jefferies called “Same-Day: The Next Killer App,” which made two big points: 1) Free shipping has become a “must-have” in e-commerce. Half of consumers abandon online shopping carts without it; and 2) there’s the opportunity to improve on that service by making it same-day.

WunWun was actually included in the report; at that time, it offered deliveries for $15.

Hnetinka’s brainstorm: How about combining the two? How about giving away free shipping, and making it same-day, too? “We’re tying free and fast, that’s what we stand for,” he says. “If we do that, no one can undercut us.”

Sounds great, but how does WunWun stay in business?

“Free is just not a business model, it’s just not,” says Bastian Lehmann, co-founder and CEO of Postmates, WunWun’s larger competitor. Postmates charges $5 per delivery plus distance and demand, and a nine percent surcharge. “Once you offer something for free, how do you ever go back?”

Hnetinka’s answer is that everyone else is thinking too small. For today, WunWun is making money by taking a slice of tips, and by getting discounts from retailers it spends a lot of money with that it doesn’t pass along to customers.

Tomorrow, WunWun will try to create the offline equivalent of search advertising, Hnetinka says.

Stores will be able to bid to be the supplier for WunWun orders, whether tennis balls, ChapStick or Yankees hats.

“That’s when WunWun really starts to make a lot of money,” Hnetinka says. “We have created the largest demand funnel. We’ve brought together convenience of ordering online with immediacy of offline. So we’re not talking about profitability margins, we’re talking about marketing budgets.”

WunWun currently operates in New York with about 300 couriers.

For Hnetinka, it’s a redemption story. He was briefly held by authorities two years ago, when a small town in the Hamptons busted him for violations related to renting out mansions to underage partying kids. At the time, the Long Island son of a limo driver was on track to do $5 million in revenue managing 10 summer rentals at the age of 24.

Hnetinka is no longer in the party-rental business. His firm paid a fine to have the charges dismissed. And after his mom saw WunWun featured on Bloomberg, he says she has forgiven his youthful mistakes.

“I powered through when everyone was looking at me as a villain. I was like, that wasn’t my fault — well, maybe it was. But being an entrepreneur is who I choose to be. I’m trying to change something I believe in, in this offline world.”

Free delivery at your door within an hour? It may be crazy. It may not actually be a business. But it’s probably only slightly more farfetched than five years ago when Travis Kalanick was dreaming up Uber taking on the world’s transportation empires. For now, enjoy it while it lasts — for an era, or for an instant.


Liz Gannes

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