a16z Podcast - a16zPodcast: People Marketplaces Take On One of the Last Great E-Commerce Opportunities -- Groceries

Episode Date: June 16, 2014

People Marketplaces are a lot like eBay -- connecting buyer and seller -- but for services, says a16z General Partner Jeff Jordan. These two-sided marketplaces are cropping up across the economy, from finding a ride to house cleaning and pet sitting. Now Instacart is bringing the People Marketplace model to the grocery business -- a massive market that has seen very little change even as the internet and mobile have upended most retail categories. Joined by a16z's Sam Gerstenzang, this segment outlines the elements of a People Marketplace; why the model is gathering momentum now; and if we all remember what happened with Webvan, why is this time is different?

Welcome to the A16Z podcast. I'm Michael Copeland. And we're here today with general partner Jeff Jordan. Jeff, welcome. Thank you, Michael. Good to be here. We're also joined today by Sam Gerstein-Zang, who's part of our investing team. Sam, welcome. Thanks, Michael. So, Jeff, you have written a fair bit and talked about what you define or call people marketplaces. Tell us what those are, and then let's get into kind of the marketplaces that you're seeing out there. I mean, it's almost eBay meets services. So eBay, when I worked there, was economically empowering literally hundreds of thousands or even a million people to earn part of all of their living selling on eBay. With the advent of mobile phones, it's now possible for those same armies of people to earn a living doing services. And, you know, that's what I refer to as a people marketplace.

Their service marketplaces build up around independent contractors. So give us an example of some. of those marketplaces operating out there in the world today. You know, Lyft is a great example of a marketplace. Homejoy, Instacart, any place that, you know, people are performing a service that can be done, can be rented essentially with labor. So in Lyft's case, it's my car. In Homejoy's case, that's a cleaning service, right?

Home cleaning. Why or what enables these kind of marketplaces, you know, today as opposed to five years ago or even three years ago. You know, the mobile phones, the smartphone in your pocket, which is a little computer, is essentially the enabler here. Before, if everything would have had to been done, you know, in an analog way or just, you know, scheduling would be hard. A geographic location is hard.

Logistics are hard. The mobile phone and the processing power and the GPS capability is a real enabler to empower a distributed workforce to be really smart and really efficient. I mean, I get that in the case of Lyft, right? So it's transportation, it's people and, you know, automobiles moving around. How does that work in the case and how does it sort of get more sort of nuanced in the case of whether it's home cleaning as an example or, you know, there's these services that will deliver food from a restaurant? And I want to get to groceries because that's, you know, been our latest investment in Instacarp.

Yeah, so let's talk, delivery from restaurants. There's two that are growing very strongly, DoorDash and Caviar. And so they get an order in. So a consumer can order in a number of fashions, but they have to, one, get the order to the restaurant, which often involves some form of mobile technology. A lot of them have tablets sitting there to have the restaurant receive the order. Then they have to efficiently get drivers to that restaurant, ideally as the order is being completed, and efficiently get to the house as fast as they can. So they're tracking the drivers through GPS. They're doing algorithms to say which driver is optimal to do this order.

And then, by the way, once they drop off that order, what's the optimal next order? So the efficiency and profitability, these marketplaces are typically around capacity utilization. How many deliveries can they fit into, say, an hour? Right. And the mobile phone and the computational power and the GPS enables them to pack more efficiency into the hour, which creates better economics for consumers and better economics for the company. Interesting. So in some ways in Sam, I want you to chime in here.

you could be caviar or door-dash. Door-dash. And essentially you're operating like FedEx, but without the jet planes, it sounds like. Yeah, without the jet planes in the cars. I mean, the level of logistics behind restaurant delivery, behind the Ubers and lifts, it is astonishing how these are large-scale logistical systems. And one of the advantages, Sam, that I think we talked about earlier, was that we've all bring these supercomputers to the party. It's not like FedEx or UPS that had to sort of install this infrastructure of technology. Yeah, absolutely. I think there's sort of this red herring in that we think of it. These service are enabled because we have smartphones. But the interesting part is that each of these drivers on DoorDash or Instacar or elsewhere,

they bought a smartphone for themselves, play games or do other things. And now suddenly this becomes this tool that allows them to tap in to this network. And it allows them, you know, it's bring your own device and that it creates this marketplace. Right. Well, you mentioned Instacart. We've mentioned it, you know, now several times. Jeff, let's jump into that. That's one of the most recent investments here at A16Z.

How is it a people marketplace and describe for us how it works? No, it is interesting. Grocery is one of the last categories standing for the analog brick-and-mortar business. Grocery has been almost completely untapped by the digital revolution in commerce. And do I want to dig into that. Why do you think that is? You know, historically the approach people were taking was to build, a parallel supply chain for the grocery business. So take Webvan back in the day. They would

build their own warehouse with their own materials handling technology. They would fill, they would buy the goods to go into that warehouse, and then they'd fill their trucks on a delivery route and send it out. It's incredibly capital intensive. I believe Webvan, you know, $1.2 billion of investor capital disappeared with the disappearance of Webvan in the day. So it gives you a sense for the asset intensity. Fast forward to today, now you've got this mobile army of under-employed people, you know, because if there was some full employment, this might not be quite as interesting, but the whole employment relationship between the U.S. worker and employers has changed, and there are a lot of people looking for decent paying jobs. You've got a bunch of potential

people who want to earn money, all with mobile phones. And so instead of building the parallel supply chain, they're figuring, Instacart's figuring out how to leverage the existing supply chain, the brick and mortar store. So brick and mortar has a lot of disadvantages, but one advantage, a couple advantages it has. They have strong local brands. I mean, my local supermarket is being Keenies. And they have distributed inventory of the goods that are of interest to the people in that area. So Instacart gets into the grocery business without like Webvan and even like Amazon Fresh and I want to get to this without building warehouses, stocking them, you know, Some other grocery store does all that.

It's basically a virtual approach. The Instacart CapEx, instead of building distribution centers, buying trucks, you know, inventorying them, they literally are buying servers. I mean, that's their CAPEX because the employees bring their own mini computers, the smartphones, they bring their own cars, and the supermarkets are where the warehouses are, quote unquote, as well as the inventory. It's a virtual approach relative to a very expensive, centralized physical approach. And why then do the bricks and mortar supermarket chains and or supermarkets individual ones?

Why do they want to play along with Instacart? You know, one is they really lack the technology capabilities to build something this sophisticated and this efficient themselves. So we had the same thing at Open Table. Why doesn't a restaurant build their own reservation system? Well, we, you know, we had a man-century of development into our reservation system. It was pretty good. So one is a lot of the groceries are, you know, lack this ability. But the big thing is they want incremental orders.

So if you're the, you know, in Portola Valley, there's two grocery stores. It's Beankinis and it's Roberts. And so if neither is delivering and one offers efficient delivery at this point, they're going to take share. And the Instacart tracking, the survey work they've done, is. is the grocery store who is providing affordable delivery in a very timely way. Instacart, you can get groceries as quickly as within an hour, take share. And so the grocery store on the same physical CAP-X is getting more business. And as a result, you get more business, it's more profitable.

Sam, so we've tried this before with WebVen back in the day, and I think WebVen finally shut down in 2001. But what's changed in those years to make this, you know, from maybe a behavioral aspect, something that could work today? I mean, we've always gone to the grocery store and we've always need food for dinner. But why now? Well, I think the first thing is just the size of the Internet has grown tremendously. And so there are more people who know how to and can log on to a website. And just the expectations of what can be ordered online have changed.

People expect now that they can order anything else and why not groceries, right? Right. There you have, you know, you can order toothpaste to be delivered next week from Amazon, but why can't you have the groceries in your home today? And I think so there's just sort of that awareness that has completely changed. And I think so today, less than 1% of the U.S. market have their groceries delivered online. And we think, why not, why can't that be 100%? Right. Jeff, you know, you obviously looked hard at this and other models. And one of the other models is what Amazon is doing with Amazon Fresh. And it's that sort of like, let's build our own.

I mean, they have warehouses, right? Parallel supply chain. Yeah. So in the Instacart model, and I guess more broadly, you know, this sort of virtual model, what efficiencies does it bring specifically that you see? So I'm violating one of my hard and fast rules in this Instacart investment, which is don't compete with Amazon. But this is kind of a hopefully a not core Amazon.

business at this point. So from the consumers, there's business differences in consumer differences. The business difference is it's capital efficient. I mean, Amazon will have to spend billions of dollars to roll out fresh. That means it will be rolled out slowly. You know, just you can't drop distribution centers and full of inventory with lots of trucks immediately in a market. Oh, Amazon can be fast. So one is it's a lot cheaper. Second is the virtual model will be a lot, we'll provide better service. You know, it will be able to get you groceries as an hour. Amazon right now has a subscription to fresh

and often you need to schedule grocery deliveries a day in advance into a broad delivery window. Right. Third is operational efficiency. You know, in a centralized model, that food that's being going to be delivered at 5 o'clock is possibly being picked at 10 in the morning stuffed on a truck that is,

that in order to make the service efficient needs to make 10 stops along the way. I see. If you're number 10, You know, they're there. Instacart, the person picks it from the store and drives it to your house, just like you would. So there are a set of different benefits, both for the consumer and from the business perspective that we think creates an interesting opportunity for Instacart. I think also for Instacart, you can have groceries delivered from the Rainbow Co-op in the mission. You can have groceries delivered from Whole Foods.

And so there's really, you can shop from merchants and brands you care about rather than sort of Amazon's generic brand, which is also really exciting for consumers. My favorite local supermarket now uses Instacart Berkeley Bowl. They have a complete unique selection of food. I actually, I swing, I mean, I love to cook, but I swing by Berkeley Bowl when I'm in the East Bay just because I love their selection. So these people marketplaces, you know, we've got groceries, we've got transportation, we've got delivery. How far does this model extend, do you think, Jeff? Well, we're hopeful it extends quite well. I mean, right now the company's focused on groceries.

One of the interesting things we've talked about in people, marketplace internally, is, you know, everyone wants. once a horizontal platform, you know, horizontal platforms, you know, just generically are more valuable, they're just incredibly hard to start. So early in people in marketplaces, you had the horizontals of Task Rabbit or Zarly where you could ask people to do anything. And the paradox of choice and the lack of optimization against specific verticals, no one knew what to do with it. So they really didn't do much of anything with it. But the ones that seem to be getting the traction, you know, lifting cars, you know, home joy in, home cleaning. Instacart and grocery delivery, DoorDash and Caviar and food deliveries are picking a vertical and optimizing for it.

Now, you know, so, you know, possibly down the road, there's a possibility to extend it to do verticals. But I got to tell you, there's a lot of groceries bought in the U.S. And so, you know, not a bad-sized market for the tax. It's actually the single largest category of retail in, according to the Department of Commerce in, in the United States. And it has not been at all disrupted by digital at this point. Interesting. Well, my refrigerator awaits online grocery delivery. I'll tell you that. And Jeff, I want to thank you for your time and Sam, you as well. It's a pleasure.