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The Millennial Urban Lifestyle Is About to Get More Expensive

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The Millennial Urban Lifestyle Is About to Get More Expensive

 

As WeWork crashes and Uber bleeds cash, the consumer-tech gold rush may be coming to an end.

 

Oct 15, 2019

 

Several weeks ago, I met up with a friend in New York who suggested we grab a bite at a Scottish bar in the West Village. He had booked the table through something called Seated, a restaurant app that pays users who make reservations on the platform. We ordered two cocktails each, along with some food. And in exchange for the hard labor of drinking whiskey, the app awarded us $30 in credits redeemable at a variety of retailers.

I am never offended by freebies. But this arrangement seemed almost obscenely generous. To throw cash at people every time they walk into a restaurant does not sound like a business. It sounds like a plot to lose money as fast as possible—or to provide New Yorkers, who are constantly dining out, with a kind of minimum basic income.

“How does this thing make any sense?” I asked my friend.

“I don’t know if it makes sense, and I don’t know how long it’s going to last,” he said, pausing to scroll through redemption options. “So, do you want your half in Amazon credits or Starbucks?”

I don’t know if it makes sense, and I don’t know how long it’s going to last. Is there a better epitaph for this age of consumer technology?

Starting about a decade ago, a fleet of well-known start-ups promised to change the way we work, work out, eat, shop, cook, commute, and sleep. These lifestyle-adjustment companies were so influential that wannabe entrepreneurs saw them as a template, flooding Silicon Valley with “Uber for X” pitches.

But as their promises soared, their profits didn’t. It’s easy to spend all day riding unicorns whose most magical property is their ability to combine high valuations with persistently negative earnings—something I’ve pointed out before. If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings, or have seen their valuations fall by more than 50 percent.

These companies don’t give away cold hard cash as blatantly as Seated. But they’re not so different from the restaurant app. To maximize customer growth they have strategically—or at least “strategically”—throttled their prices, in effect providing a massive consumer subsidy. You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base. With each Uber ride, WeWork membership, and hand-delivered dinner, the typical consumer has been getting a sweetheart deal.

For consumers—if not for many beleaguered contract workers—the MLS is a magnificent deal, a capital-to-labor transfer of wealth in pursuit of long-term profit; the sort of thing that might simultaneously please Bernie Sanders and the ghost of Milton Friedman.

But this was never going to last forever. WeWork’s disastrous IPO attempt has triggered reverberations across the industry. The theme of consumer tech has shifted from magic to margins. Venture capitalists and start-up founders alike have re-embraced an old mantra: Profits matter.

And higher profits can only mean one thing: Urban lifestyles are about to get more expensive.image.gif.f6fc0ec9ab9c6aae220a68eeef57a99b.gifimage.gif.c967b348dcd4f8f51e75272179529358.gif

The idea that companies like Uber and WeWork and DoorDash don’t make a profit might come as a shock to the many people who spend a fair amount of their take-home pay each month on ride-hailing, shared office space, or meal delivery.

There is a simple explanation for why they’re not making money. The answer, for finance people, has to do with something called “unit economics.” Normal people should think of it like this: Am I getting ripped off by these companies, or am I kinda-sorta ripping them off? In many cases, the answer is the latter.

Let’s say you buy a subscription to a meal-kit company, which sends you fresh ingredients and recipes to cook at home. You pay $100 a month. The ingredients are tasty, so you renew for the second month. And the third. But by the fourth month, you’ve decided that you’ve learned enough basic tricks around the kitchen to handle roasted chicken or sautéed cod by yourself. You cancel the subscription.

Your lifetime value to this company is $400—or $100 for four months. Since you quit, the meal-kit company has to find the next “you” to keep growing. So they advertise on podcasts. Let’s say that, on average, this company can expect to add 100 new users if it spends $50,000 on podcast advertising—or $500 per new user.

If the company spends millions on podcast ads, its user base and revenue base will grow and grow. Outside analysts will gasp and marvel: This meal-kit thing is on fire! But look closer: If it costs $500 to add a new user, and the typical marginal user—like you—only spends $400 on meal kits, there is no path to profitability. The road leads to the red.

This example is not a hypothetical. The meal-kit company Blue Apron revealed before its public offering that the company was spending about $460 to recruit each new member, despite making less than $400 per customer. From afar, the company looked like a powerhouse. But from a unit-economics standpoint—that is, by looking at the difference between customer value and customer cost—Blue Apron wasn’t a “company” so much as a dual-subsidy stream: first, sponsoring cooks by refusing to raise prices on ingredients to a break-even level; and second, by enriching podcast producers. Little surprise, then, that since Blue Apron went public, the firm’s valuation has crashed by more than 95 percent.

Blue Apron is an extreme example. But its problems are not unique. WeWork’s valuation crumbled when investors saw the company was losing more than $1 billion a year. Peloton’s stock got crushed when investors balked at its growing sales and marketing costs. Lyft and Uber may collectively lose $8 billion this year, in large part because the companies spend so much money trying to acquire new customers through discounts, promotions, and credits. Unit economics will have its revenge—just as it did after the last dot-com boom.

For years, corporate promises rose as profits fell. What’s coming next is the promise-profit convergence. Talk of global conquest will abate. Prices will rise—for scooters, for Uber, for Lyft, for food delivery, and more. And the great consumer subsidy will get squeezed. Eating out and eating in, ride-hailing and office-sharing, all of it will get a little more expensive. It was a good deal while it lasted.

 

https://www.theatlantic.com/ideas/archive/2019/10/say-goodbye-millennial-urban-lifestyle/599839/

 

Personal Comment: I wonder what this means for Tesla? They haven't been turning a profit either.

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5 hours ago, Spankfurt said:

If my food boxes get more expensive I'm out 

 

That's just it though, I think this could go well beyond the food boxes, and those businesses which people don't find attractive at the higher price points could die out entirely.

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The sooner consumer tech crashes, the better. I think it's an incredibly wasteful use of so much of our capital. It's not really making the world "better", just more "convenient" if you get what I mean. It's capital that's going into optimizing on-demand human servants instead of capital going into improving products, infrastructure, etc. So many companies are just "X - on the internet!" and trying to capture that market, since the internet allows for economy of scale much more easily, hollowing out competition (e.g. all the newspapers that went bust with only a few juggernauts like the NYT surviving).

 

They aren't changing the fundamentals behind the business. With Uber you are still basically just paying a guy in a car to drive you somewhere, same as anyone did decades ago, it's just improved service and convenience with venture capital subsidizing the fare some. Some of the companies do have moonshot plans on the side that constitute actual technological advancement, like Uber's investments in self-driving cars, but we'll see if they get outplayed by their competitors and how viable the technology really is for covering all the situations the average driver is in. We could see mass scale deployment in a decade - or decades. Basically my criticism of consumer tech companies is that a lot of them aren't about improving technology at their core but about being a digital service platform. It is fine for these companies to exist but I think they're receiving an inordinate amount of our capital. It seems like most societal change occurs through our phones now rather than real world change. Teslas and smartphones are perhaps among the most visible changes to our real world technological landscape, but it feels like if you look at the physical world and not the digital one, not much has been changing over time, at least in America.

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2 hours ago, EagleMan said:

The sooner consumer tech crashes, the better. I think it's an incredibly wasteful use of so much of our capital. It's not really making the world "better", just more "convenient" if you get what I mean. It's capital that's going into optimizing on-demand human servants instead of capital going into improving products, infrastructure, etc. So many companies are just "X - on the internet!" and trying to capture that market, since the internet allows for economy of scale much more easily, hollowing out competition (e.g. all the newspapers that went bust with only a few juggernauts like the NYT surviving).

 

They aren't changing the fundamentals behind the business. With Uber you are still basically just paying a guy in a car to drive you somewhere, same as anyone did decades ago, it's just improved service and convenience with venture capital subsidizing the fare some. Some of the companies do have moonshot plans on the side that constitute actual technological advancement, like Uber's investments in self-driving cars, but we'll see if they get outplayed by their competitors and how viable the technology really is for covering all the situations the average driver is in. We could see mass scale deployment in a decade - or decades. Basically my criticism of consumer tech companies is that a lot of them aren't about improving technology at their core but about being a digital service platform. It is fine for these companies to exist but I think they're receiving an inordinate amount of our capital. It seems like most societal change occurs through our phones now rather than real world change. Teslas and smartphones are perhaps among the most visible changes to our real world technological landscape, but it feels like if you look at the physical world and not the digital one, not much has been changing over time, at least in America.

 

Quite a lot is changing actually in the physical world. Well paid stable jobs are harder to come by. Home ownership rates are plummeting. Student debt is rising and fast. National debt is rising. You know. The good things.

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