Pizza Arbitrage
Emailed on May 22nd 2020 in The Friday Forward
If you've read the recent headlines on food delivery services vs restaurants you'll quickly find out that no one wins: restaurants get hit with large fees and delivery companies hemorrhage money in providing the service.
As an actual business, food deliver services don't make sense, but we're not going to talk about that. We're going to talk about pizza arbitrage. First, let's get this out of the way:
Arbitrage: noun - the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset.
Ranjan Roy, who writes an excellent newsletter called Margins, published a gem this week about how he made $75 in riskless profit for his friend's pizza kitchen by leveraging the nonsense economics of SoftBank-backed DoorDash.
You can read the full piece here, but here's the skinny:
Doordash creates delivery options for many restaurants (without the restaurants consent) by scraping their google pages. This includes prices, and they included delivery for this friends restaurant. This creates huge problems for restaurants but we won't get into all that. For starters, imagine getting bad reviews for poor delivery quality on delivery you never approved...
Doordash had mistakenly taken the price for a plain cheese pizza and applied it to a 'specialty' pizza with a bunch of toppings. What does this mean? Doordash was charging customers $16 for a pizza that actually costs customers $24.
Enter: arbitrage opportunity. Ranjan encourages his friend to place orders for his own pizza through Doordash.
The result of Trade 1: He called in and placed an order for 10 pizzas to a friend's house and charged $160 to his personal credit card. A Doordash call center then called into his restaurant and put in the order for those 10 pizzas. A Doordash driver showed up with a credit card and paid $240 for the pizzas.
But after food costs this only equates to $10 in profit, so they increased the margins.
The result of Trade 2: if you removed the food costs this could get more interesting. The order was put in for another 10 pizzas. But this time, he just put in the dough with no toppings. Now suddenly each trade would net $75 in riskless profit ⇒ $240 from Doordash minus ($160 in costs + $5 in boxes).
Still not a lot of money, but they found out they could do this many times. After all, Doordash reportedly lost an insane $450 million off $900 million in revenue in 2019, so these multi-thousand dollar arbitrage bets are something far less than a rounding error.
There's not really a scale you could do this at to make a real, exciting business, but the exercise was at least entertaining, and at best a perfect illustration of how much of a bubble food delivery is.