Free Pizza

Some of it is generational.

Some of it, I maintain, is common sense. Others, may characterize it, perhaps correctly, as cheapness.

When I worked in downtown Chicago, I sometimes ordered lunch online. No matter how busy I was or what the weather was like, I always walked to pick it up. I could never justify the cost of delivery.

If pressed, or even if not, I felt pretty good about myself – maybe even a touch smug – when I would observe delivery people taking lunches to office buildings throughout the city. 

Of course, if I really wanted to save money, I could have made my lunch at home or limited my 7-Eleven runs. But the point of this post is not my financial inconsistencies, it’s food delivery people!

Which brings us to one of my favorite articles of 2020. It involves food delivery, arbitrage, the peculiar incentives of startup economy, zero interest-rate policy (ZIRP) and demonstrates that there may, indeed, be a free lunch after all.

Or at least free pizza.

Ranjan Roy, one of the co-authors of the Margins Newsletter, wrote a fun, creative and brilliant article. He opened it this way. “If capitalism is driven by a search for profit, the food delivery business confuses the hell out of me. Every platform loses money. Restaurants feel like they’re getting screwed. Delivery drivers are poster children for gig economy problems. Customers get annoyed about delivery fees. Isn’t business supposed to solve problems?”

Roy proceeds to tell a story about a friend of his who owns pizza restaurants. The friend, by choice, did not offer delivery. So why did he receive complaints from customers who said their pizza was delivered cold?

It turned out, without his permission, DoorDash had created a delivery option on his Google Listing. The friend asked Roy what he knew about DoorDash and he replied with this classic line about the business model of many 21^st century aspiring tech disrupters. “Raise a ton of money, lose a ton of money, and just obliterate the basic economics of an industry.”

It gets better.

DoorDash charged $16 for the same pizza the owner listed as $24. Roy writes that based on the way the restaurant’s website was set up, it appeared DoorDash mistakenly used the price for a cheese pizza and applied it to pizza with multiple toppings.

Roy said it was time for his friend to start making pizzas, selling them to DoorDash and start booking $8 of profit per pizza.

He convinced the owner to place an order for 10 pizzas with instructions to deliver them to a friend. The owner charged $160 to his credit card and a DoorDash driver arrived at the restaurant and paid $240 for the pizzas. Roy joked with his friend that he should, “run this arbitrage over and over. You could massively even grow your top-line revenue while netting riskless profit, and maybe even get acquired at an inflated valuation.”

For the next experiment/arbitrage/pizza order, they prepared pizzas with just dough. This would increase the profit even more, provided DoorDash did not catch on.

Surely, DoorDash would, right?

Tear up your trusty econmics texbook and read the whole thing to find the answer. Roy walks us off with what may well be, "the greatest ZIRP story ever told."