A thought crossed my mind the other day as I was contemplating investing in a software-leveraged trash hauling company.  Pardon me, waste disposal company.

Okay, you can stop laughing now!

I’m an active broad-spectrum angel investor and invest in a lot of areas, most of which are technology leveraged, so tech-leveraged waste hauling isn’t that far afield for me.

Back to the topic at hand.  Trash hauling in the US has consolidated into several major players – Waste Management and Republic Services being the biggies – but plenty of small companies remaining as well.  Similar consolidation occurred with funeral homes, Service Corp. International and Stewart Enterprises being the biggies but with plenty of mom-and-pops (mostly pops) remaining.

Will food delivery services like Uber Eats, DoorDash, Grubhub, and Deliveroo and grocery delivery services like Instacart, eventually consolidate into two or three major players serving the larger markets and a bunch of smaller firms in smaller markets?

It seems to me like they might, and I see a lot of similarities between them.  All three industries – trash hauling, funeral homes, and delivery services – are essentially local market businesses.  Once you have sufficient scale in a local market, you’re golden, but scale in one market doesn’t translate into scale in another, so dominating in New York doesn’t mean you dominate New Orleans.

Cable companies went down the same path, consolidating into regional dominants, but unlike trash hauling and funeral homes, there is economy of scale in negotiating for content which forced that industry to further consolidate.

Your thoughts?

Funeral Homes

Out here in my part of the Midwest, there seems to be only mom and pop businesses: it’s such a “My grandparents had their funerals through them so I just naturally went there to arrange mom’s funeral.”

I think that there are always going to be economies of scale if you’re purchasing coffins and other supplies for 500 funeral homes instead of just one. However, I suspect a corporation would either keep the original names of each acquired business or transition with a “McMurray Funeral Home, part of the Ajax Mortuary Corporation” sign.

I remember several years back, the mom and pops were fighting back against corporate challengers who were undercutting them on price. There were radio advertisements that made it sound like your loved one was going to end up in a shoebox with the Big Corporate funeral homes.

So keeping the “family name” of the acquired may make sense for the near term.

I wonder if areas of the country with significant transplants would be good consolidation markets: I’m thinking of places like North Carolina that has had a continual invasion of new residents from up North over the past 15 years. I suspect they would be more amenable to purchasing funeral services from a corporate-owned mortuary.

One challenge is that funeral homes out here are generational businesses. You became a mortician because your father and his father were morticians. Without a stake in the business, would you see a sharp drop off of new morticians in a corporate run funeral home world?

Huh. Now you have me interested in what a software-leveraged waste disposal company is.

I would have thought that waste disposal and and food delivery would be like the difference between enterprise and consumer software. Waste disposal sounds so capital intensive and based on long-term contracts with municipalities + owning highly regulated waste disposal sites. Do consumers even know or interact with the companies that haul their waste?

Whereas with Uber Eats and Instacart, the brand means a ton to consumers and a huge part of the transaction is the experience they have with the software. It doesn't matter that much if Uber Eats is in New Orleans when you are Deliveroo and want to expand, I wouldn't think, because Uber Eats doesn't have the municipal contract, the landfill, or the infrastructure of complex and expensive trucks.

It seems to me the battle between food delivery companies is more a competition between app and brand builders, whereas waste management is more a battle of infrastructure and efficiency. Am I wrong?

Waste Hauling app

I occasionally listen to the podcast, The Pitch, and I’ve heard a few pitches from food waste hauler startups. The target customer is B2B, specifically restaurants. If the hauler can repurpose the food waste into commercial grade compost, they can

• undercut Waste Management in what they charge the restaurants (first revenue stream)

• sell the compost to commercial growers and retailers (second revenue stream)

• negotiate for a payment from municipalities since it reduces their need for more landfill sites (third revenue stream)

• obtain Federal tax subsidies, like the Solar Power industry received under Obama, if a Green New Deal is passed (fourth revenue stream)

The US, compared to the rest of the world, has one of the lowest food waste repurposing rates in the world:

“But recycling of organics—food waste, yard waste, pretty much anything that rots—remains voluntary, even though such material makes up about a third of New York’s trash. All but five per cent of the city’s organic waste goes to landfills.”

What could food recycling look like under meaningful Climate Crisis legislation?

Take South Korea as an example of a country that passed such legislation 15 years ago:

“In 1995, South Korea replaced its flat tax for waste disposal with a new system. Recycling materials were picked up free of charge, but for all other trash the city imposed a fee, which was calculated by measuring the size and number of bags.

“By 2006, it was illegal to send food waste to landfills and dumps; citizens were required to separate it out. The new waste policies were supported with grants to the then nascent recycling industry. These measures have led to a decrease in food waste, per person, of about three-quarters of a pound a day—the weight of a Big Mac and fries, or a couple of grapefruits. The country estimates the economic benefit of these policies to be, over the years, in the billions of dollars.“

So there is the possibility of a unicorn-sized market if @afisher invests in the app startup.

Unfortunately, as you’ve pointed out, the capital costs of building the infrastructure is enormous (trucks, separate dumpsters for food waste, composters, sales team for in-person selling).

Plus, if multiple startups in this space have been on The Pitch, I would imagine that the competition will be enormous.

And what’s to stop Waste Management from building their own app and infrastructure and obliterating the startups?

My two cents, FWIW.

Further Reading

June 2017

Industrial Organic (#3) | The PitchAmanda Weeks started a food waste company designed to reduce harmful greenhouse gases. Now she just needs investors to get behind her plan to save the planet.gimletmedia.com

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How South Korea Is Composting Its Way to SustainabilityAutomated bins, rooftop farms, and underground mushroom-growing help clean up the mess.www.newyorker.com

The waste disposal company is RTS and they focus on commercial customers such as technology companies that want certification their waste is recycled appropriately.

RTS | A Commercial Waste & Garbage Disposal CompanyInnovative commercial waste management that helps you reduce your environmental impact. Our custom solutions are tailor-made to fit your waste management needs. Call 1-833-787-4630 for a free assessment.www.rts.com

They contract out the actual waste pickup to existing smaller trash haulers, but whenever possible, RTS tries to own their own transfer stations where waste is aggregated before being sent to recyclers, landfills and such.

They have a custom app that directs the trucks from location to location -- I presume using a travelling salesman algorithm, a capability that smaller trash haulers don't have.

Funeral home consolidation

I grew up in the funeral business, literally in family funeral homes. My dad was a funeral director, the first and last in our family in that occupation. As you say, it's a father to son business and neither my brother nor I had any interest - we both became software engineers.

He owned three small town funeral homes in Northeast Illinois which did a few dozen funerals per year. Buying those funeral homes fresh out of mortuary college was a definite financial risk for any young man starting out. He also ran an appliance store to make ends meet. When I was 8, he sold those and bought a half-interest in a funeral home in Missouri that does about 200 funerals a year. Again, another big financial risk for anyone in their mid-thirties, buying into a business with a business partner you just met.

When you retire, who do you sell to when you don't have a son or daughter in the business? In my dad's case, he sold to his business partner's son who did enter the business and a long-time employee (and great embalmer). But those were 15-year earn outs and you need a lot of self-confidence to take on an obligation like that.

I think that's why SCI and Stewart have been able to consolidate so many funeral homes. There's a limited pool of younger funeral directors who can undertake those purchases; they'd rather be employees. You see the same with medical practices which, in part, has driven consolidation from small practices to larger practice groups.

It looks like the home delivery service consolidation continues with Uber announcing they are buying Postmates for $2.6B.

Uber Closes On $2.6B Deal To Buy PostmatesUber Technologies has purchased Postmates Inc., the food-delivery app, in an all-stock deal worth $2.6 billion.www.pymnts.com

Uber previously tried to buy Grubhub, a deal that fell through with Grubhub selling out to Netherlands-based Just Eat Takeaway instead.

Uber-Grubhub Deal Falls ApartThe merger between Uber Technologies Inc. and Grubhub will likely be off the table over antitrust concerns raised with the potential deal.www.pymnts.com

This is almost like the Sweet 16 tournament. Are we approaching the Final Four?