In this episode of Industry Focus: Consumer Goods, Emily Flippen and Motley Fool contributor Dan Kline discuss the important role played by the delivery industry and how it is managing the crisis. They chat about the different delivery platforms available out there and how they compare with each other, the economics of operating a delivery service, worker safety in a health crisis, and much more.

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This video was recorded on March 31, 2020.

Emily Flippen: It's Tuesday, March 31st, and I'm your host Emily Flippen. Joining me today to break down how the delivery industry has been handling the COVID-19 crisis is Motley Fool contributor Dan Kline. Dan, how are you doing?

Dan Kline: Hey, there, Emily. I'm as good as can be expected, I guess, is how you'd say it.

Flippen: Yeah, it feels pointless to be asking that right now.

Kline: Yeah, look, I don't want to underplay it, I'm blessed compared to most people. We're working, my wife is working, my son went back to, sort of, school today, digitally. I mean, it's ridiculous, like, his teacher posted the first lesson and at the bottom of the lesson, my son was all excited, was the answer key. [laughs] So it's definitely a work-in-progress in getting these things done. But, you know, compared to most people, we have it easy. So, me complaining that I can't be on a trip is probably not particularly fair.

Flippen: Well, that's fair enough. I am in Maryland, where we are now at a stay-at-home-indefinitely order myself, so I am losing it in my own way.

Kline: Yeah, you have one of the stricter orders of any place I've seen here. Not even, like, supposed to take a bike ride or a walk, which are being encouraged in other places.

Flippen: They did clarify that after the fact, that going out, as long as you were not within six feet of another person was OK. There was a period there, after the initial announcement, where I thought I was just stuck inside.

Kline: Okay. So, it's a little bit better, it's still not great. I mean, I go to drive-through once a day, and as I mentioned to you before, I want to hug all the Starbucks workers, but of course, you can't do that. So, you know, it's really just tip if you can, especially ordering delivery. I'm literally having delivery drivers drop things six feet away, and tip as much as you can is all I can say before we get into things here.

Flippen: Yeah, and that's a great segue to what we're going to be talking about today, which is the delivery industry and how the companies that are both historically delivery-only companies and companies that are maybe just now building out a delivery presence have been handling this crisis. So what companies do you see that have their investments in this delivery service starting to pay off?

Kline: Yeah. So, clearly, Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), Target (NYSE:TGT), those are the big winners on the retail and grocery side. With Walmart and Target, they've also invested in pickup operations. Grubhub (NYSE:GRUB), clearly from the delivery side, because more people are adopting it, you're not necessarily going to see these companies making a lot of money on what they're doing right now. The problem there is a lot of people are waiving fees, it's costing them way more money in terms of the logistics in getting this stuff out there, paying workers more in most cases, at least in the case of Amazon and Walmart. But this wasn't a quick ramp-up. These are companies, you know, Amazon specifically has been working on this for a very long time. And first they went to two-day delivery, then they went to one-day, then they went to limited same-day and grocery in some markets, then they took over Whole Foods delivery from Instacart, which is a private company, but another winner here.

And the same thing has been happening at Walmart. There was a lot of pushback from some of their executives on some of these investments and how much they've put into -- it's a +100,000 people picking grocery orders, though, obviously, that will be automated at some point or at least a lot of it will be automated. But you're in a situation where they look really smart because this is going to carry over past COVID-19.

Flippen: Are there any companies that maybe have tried to get into this space where their investments aren't paying off or maybe they're just not in it at all when they should have been by this point?

Kline: There's definitely companies that should have been farther along. Grocery chains have generally elected to use Instacart, which is fine, but it's a middleman, it pushes the prices higher. Speaking from experience here, if you order from Publix, which is the grocery chain here, it's a little hard to tell on groceries where the prices are, because I know, I don't know if my box of cereal is $2.79 or $3.40, I'm not that aware.

Where I will tell you I see the difference is their liquor store. I order Publix liquors through Instacart, sometimes because I'm lazy at the moment, because I'm not really going to go into a liquor store, and the prices are significantly higher. So, that's a case where had Publix build up this capacity on its own -- and that's a regional non-Publix grocery chain -- they might be in a better position, but as long as you can deliver, you can take advantage right now. When we move to the post coronavirus world, I think people are going to be hyperconscious of the fact that some of these charge delivery fees, some don't, some markup prices on the actual items, some don't.

So, again, the people that have their own infrastructure, even like a Domino's, which has long been a delivery pickup company, has the ability to sort of flex more delivery and just get more pizzas out there, and that is going to be a hangover, you know, a good type of -- I get there is no such thing as a good hangover, [laughs] but it's going to last past this, in that, a lot of people who never thought of Domino's will have the Domino's app in their computer and then they will sort of just use it when there's no other option. And when I say "no other option," like, ten o'clock at night when the local pizza place is closed or they don't feel like going out. So, you're going to see a big carry on the winners from this.

Flippen: You mentioned grocery stores and looking at a post in a coronavirus world. One grocery store that has started an initiative, it's been long in the making, kind of outside of this crisis right now, is Kroger and their pilot pickup-only store. How do you feel about that?

Kline: Yeah, so this happened not intentionally. [laughs] They went to a pickup-only store because that particular store, that particular community, they weren't allowed to have people in, but I think there's going to be a big change here. And we're seeing it with what's called ghost kitchens in restaurant delivery, when you look at Grubhub and you're like, there's a chicken place that I've never heard of that I can order from. And then, you're like, maybe I'll go pick it up, maybe I'll go eat there. And you realize it isn't a physical location, it's a commercial kitchen in a warehouse somewhere that's producing solely for delivery.

And I think you might see retailers, grocery store specifically, taking space that's maybe not desirable for a traditional store and opening up locations that serve a wide area for delivery and maybe some spot pickup, like, maybe you have a small storefront in an expensive Manhattan neighborhood where you can pick up your order that was produced in Queens and gets shipped over. You know, just speaking of cheap real estate to expensive real estate relatively. Queens is still expensive, but much cheaper than Manhattan.

I think you're going to see more and more of this where Starbucks in New York has a few pickup- and delivery-only locations. And the sort of glut of available retail might facilitate that. I'm in a co-work right now in a warehouse district and it doesn't really lend itself toward traditional retail, but it's really well located compared to where a lot of people live. So, if you put a restaurant in here that only did delivery and pickup, your cost would be much lower and that's, obviously, very important in the restaurant game.

Flippen: So, that makes me feel very positive about the future for delivery, but a lot of these delivery companies, especially food delivery, like, Uber Eats and Grubhub have been really just sucking wind in terms of the amount of money that they burn. So, is it safe to assume that, both, this crisis and the tailwinds that you mentioned, that they're doing better now?

Kline: So, they're probably doing a little better at the moment, though, in a lot of cases, they're waiving fees and have higher expenses to keep people on the job. The problem going forward is, you have Grubhub charging a fee, and I assume there's some restaurant backend fees as well, for something that Domino's offers for free, that Amazon, other places are offering for free.

And there's also a ton of competition. West Palm Beach, where I live, has like, seven or eight different delivery services, some that you've heard of, like DoorDash and Postmates and Grubhub, some that you haven't that are more local, we have the Delivery Dudes, we have Cravy. And none of them offer a particularly differentiated service, with the exception that they might have, like, one or two restaurants. So, I know for a while, we had to go into one app, it wasn't even an app, it was a website that was particularly difficult to use to order from one chain that we like to order from, and they charged us a 15% premium.

That's going to go away. There's going to be a lot of shake-out in this space, we've already seen a little bit of shake-out in the space. And the margins are very bad, it costs a fair amount of money for someone to drive to a restaurant and pick up my order. Now, you might see some technology coordination from this where, like, you see with Amazon, they're not delivering just my order to my building, they're ordering like a bunch of things to the building. So, you might see more of that where the Uber drivers dropping someone off and dropping off my takeout, but that doesn't really work all the time either, because does the Uber rider want to smell like Chinese food when he gets dropped off.

So, yeah, this is an industry that isn't financially sound, so we might see a lot of shake-out.

Flippen: And you mentioned economically you're not really sure if this has changed, but there are definitely a lot of people ordering delivery, whether that be from Amazon, whether that be food, whether it would just be shopping online. I talked a little bit about Ulta and their potential e-commerce opportunity previously. But do you think that this is actually going to cause any permanent shift in the consumption habits of those customers that they gain or does everybody go back to consuming like they were once this crisis is over?

Kline: No this is going to accelerate a shift. So, as we started talking this year, last year online was about 13% of overall retail. Obviously, it's going to be higher this quarter because we were forced to order things online. But once you set up an account with, whether it be Ulta Beauty or Amazon or CVS or whoever else you might be ordering from, using that account, when convenient or for replenishment of things you always buy, just makes sense.

An example I'll give is, I get razors from Dollar Shave Club. So, I don't ever have to think about razors, which was something that if you run out of, that's not great, you can't shave that day, you have to shave using an old razor that hurts. You know a silly example, but I use quip for my toothbrush, they send me a new toothbrush head every three months and a new battery, it's all very, very convenient. So, people who never use this, and I mention my mother a lot, but my mother is 70 and doesn't necessarily use all this technology, but she's being forced to do things she's never had to do before and her whole generation is. And that's going to be good for them, because as you get older and older and maybe become less mobile, you might want to have things delivered or even logical things, like, we get water delivered. We get water delivered because water is heavy and I live in a building and my parking space is really far away from where I live, so having someone roll up the water to my door is super-convenient, and more people are going to be in the apps that once an app has your credit card information, it's easier for you to order again, they're going to have your email, they can market to you.

Do I think people are going to be ordering things at home that they might be ordering right now, like, Starbucks? No, it's not super-great to pay $4.99 to get, like, three lattes and spend $22 for your three coffees. Right now, that's a luxury, it's a convenience, it's great, that's not going to continue, but the sort of, like, regular replenishment cycle and increased ordering of take-out and other things.

I mean, my habit has always been to just buy things from Amazon. If I need something, just place an order, because Amazon makes that so easy with Prime, and now, I think more people are going to do that.

Flippen: I love that you put that in the context of not just food. Because I feel like, right now we're all talking about these food delivery workers, these people who are driving around delivering just edibles, but in reality I think it's probably going to, yeah, to your point, accelerator shift that's much bigger.

Speaking anecdotally, I have parents who have been really reluctant to set up any sort of online delivery. I think my mom knows how to work Uber Eats before this, [laughs] but that's about it. And now talking to them during this crisis, it seems like everything that they can get done online or over an app, they're taking the time to figure out how to do that and then doing it. And yeah, I don't see that going away.

Kline: And let's be clear that the biggest winners are going to be the chains that were already winners. [laughs] Amazon, Walmart, Target are going to come out ahead. Just to be a little silly, what is the most ridiculous thing you've ordered from Amazon during this crisis?

Flippen: I'm not sure this is silly, I had to order speakers for my computer, [laughs] because I'm working from home and I didn't have them.

Kline: Yeah, a good example. I had to order a pad for my desk chair at my co-work because we're doing these two-hour video chats, or sometimes it's just one-hour, but long periods of time where I'm sitting in a chair that I used to think was comfortable, but isn't all that comfortable when you're sitting in it for hours and hours. I've ordered gym equipment online, I ordered rice the other day because I couldn't find medium grain rice at any of the local delivery services and it took a week to show up, but it showed up. I think most of us have ordered toilet paper from Amazon. Well, you can order toilet paper from Amazon the rest of the year and you don't have to settle for brands you've never heard of. So, once this is over, all those big players are going to have just more people.

And I know I do this, I like to shop, I like to look at what I'm buying before I cook dinner, but there's some days where at three o'clock, I look at my work load and go, like, "I'm not making it to Whole Foods today, let me just jump online and buy some salmon and some mushrooms and some rice or whatever I'm going to cook together, and all the ingredients I need and have it come over. Oh, and that doesn't hit the minimum, so I'll buy two things, the coffee that I'll drink the next day," or whatever it is. More people are going to do that because it's not going to seem daunting. And if it performs well now, which it largely has, imagine how it will perform when demand goes back to closer to normal.

Flippen: But there's kind of a, I'm going to say, dark side -- that sounds like such an overstatement, but there really is kind of a dark side to this delivery-only business, especially as we're in the midst of a health crisis. Because ultimately there are people who are exposing themselves so we don't have to. Like, Amazon and Instacart, they're hiring people. And those people are striking because they're saying that they're exposed to poor health conditions and they should be compensated for that risk. So, how do you think about this totally growing and important delivery industry with long tailwinds versus the safety of the workers, both, today and in the future.

Kline: Yeah. So, it's important to recognize that these strikes that are being threatened are in limited locations, it's not widespread, I don't want anyone to panic. If you're not reading about it in your local news, look really carefully at where -- I've seen a lot of irresponsible headlines about strikes that are happening in one market as if it was happening everywhere.

But I think what Walmart is starting to do or planning to do is really a blueprint. Walmart is going to use an infrared thermometer to take the temperature of every worker. If the worker's temperature is over 100 degrees, they're going to send them home and they have to be normal for at least three days before they can come back and they're going to be paid for their hours during that. That type of procedure needs to be in place.

Now, the problem is, it's going to take Walmart a few weeks to get thermometers to all its stores. It's also sending gloves and masks, not the medical grade mask that we need to reserve for healthcare, but a mask that will somewhat protect you, but it's going to take a while to get those out.

I'd like to see Amazon and Instacart making those same promises. Amazon is paying more. I think Instacart is paying more, but I'm not 100% sure of that. But this is going to be a bigger debate about retail workers and minimum wages and are we really paying the people who are feeding us enough?

And I think we've already all had the thought of, if the guy behind the counter at the fast food chain has to come to work when he's sick, that can't be good for any of us, whether it's coronavirus or not, so we may address things like paid leave and paid sick leave nationally. And other issues that were previously thought of as liberal causes, now seem to be more just like, "Oh, I'll be selfish, I don't want you to come to work sick," that's not political, that just makes sense.

Flippen: Yeah. And on that note, I kind of want to bring it back to how you started this podcast, which was to say, tip people well. I know the details haven't really been worked out for compensation for these workers and there's little that the average Joe can do about it, but when you do order delivery, if you have the opportunity to tip then, I mean, that's a good way of at least acknowledging that these people are, in a sense, risking their lives and risking their own health to provide a service so you don't have to expose yourself.

Kline: Yeah, and obviously, everyone's situation is different. If you're out of work and really tight for money and can just barely get that pizza you're ordering, tell the guy, thank you, tell him, you appreciate it. I think people do understand that these are hard times. But if you're like you and I, and you're lucky that you're working and you're very busy during this time-period, I know that I'm tipping 25%.

You know, when I go through the drive-thru at Starbucks on a $4 coffee, I'm hitting the $5 tip, which is the most they allow. That number may go up, if you're ordering more, I'm not entirely sure. So, I'm really within reason doing whatever I can, making sure -- like, I have friends playing free concerts from their basements online, making sure I hit the tip jar, because those of us that are still moving forward here have to remember that there's a lot of people that are scared, there's a lot of people that are putting themselves at risk for us, and do everything you can.

And also, keep them safe. If they want to put the delivery down and then wait to walk back to their vehicle so you can get it, follow their lead, do whatever is necessary, because they're on the frontlines. And obviously, they're not in as much danger as the healthcare workers, but they're in danger based on their job, and their job is serving you. So, be thankful and do what you can.

Flippen: Dan, thank you so much for joining me today and breaking down this very tumultuous time in industry.

Kline: I have a feeling we'll be doing this again soon, so thank you, Emily.

Flippen: [laughs] I definitely think so. Listeners, that does it for this episode of Industry Focus. If you have any questions, feel free to shoot us an email at IndustryFocus@Fool.com or to tweet us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for his work behind the screen today. For Dan Kline, I'm Emily Flippen, thanks for listening and Fool on!