Disrupting the Hospitality and Food Industry Through Crowd-Sourcing Economic Activities

Growing up in the province of New Brunswick, Canada I was keenly aware that one family, the Irving family, owned and operated most industry. Whether it be oil/gasoline/ forestry/paper products/transportation of people and goods/media, whatever industry the Irving’s chose they generally weren’t satisfied until vertical integration was complete.

In the case of transportation, for example, the Irving’s owned the buses, as well as the service stations where the buses filled up, and the gas that went into the buses, and the trucks that hauled the oil, and the refinery where the oil was converted into fuel, and the ship that brought the crude to the refinery. The only point on the chain where Irving didn’t exercise full control was when the oil was extracted from the ground.

When, back in day, K.C. Irving decided to sue commuters for carpooling (reference in this book) and for hence threatening his monopoly on collective transportation. K.C. would have it that his right to make money triumphs over the right of individuals to organize themselves.  In other words the trade of goods and services, according to this world view, must be limited to the realm of commerce: value cannot be exchanged through any other means.

Fortunately for consumers his lawsuit was unsuccessful, but that didn’t put the issue to rest.

Fast forward to the present day New York where the municipal government has passed a law aimed squarely at companies like AirBnB.com. AirBnB, for those who don’t know it, allows you to rent your room, apartment or house for short-periods and thus make some extra cash while out of town. Using a review-based system to hold buyers and sellers accountable, AirBnB is thought to represent a massive threat to the hotel industry as home owners are able to undercut hotel prices by offering accommodations at far more reasonable prices.

With the internet decreasing the cost of communication and collaboration these types of disruptive economic activities will arise. Established industries will then turn to government to help regulate innovation and competition out of existence, and government will have to choose between the clear will of the people, as expressed through our willingness to engage in such exchanges, and the financial muscle of big business. The question we have to ask then is whether or not these crowd-sourced types of commerce are a threat or a benefit.

The assumption that first needs to be squashed when tackling questions such as these is the idea that demand is fixed. This assumption usually expresses itself thusly: there is only so much money in the economy dedicated to non-fixed accommodation: if we re-allocate and re-distribute that portion of wealth from hotel chains to average citizens (i.e. individuals not specialized in the hospitality industry) then jobs will be lost and the economy will suffer.

The problem with this argument is that demand is very rarely fixed. For example, when email began to achieve ubiquity many saw the new technology as an efficiency booster because of how easy people could communicate: the cost of communicating to one is the same as the cost of communicating to many. By spending less time on communication, some figured, workers would have more time to focus on more productive tasks. The problem is that with the new ease of communication people communicated more, not less. Though many assumed a decrease in demand, demand actually grew exponentially to the point where many of us spend most of our labour sending and receiving emails. There is no doubt that we are more productive, but it’s not because we spend less time communicating.

Similarly, though the increased competition in the hotel space created by those with fewer fixed costs may push some hotels out of business, it will also open the door for many more people to travel and hence spend more money in New York City. If in the past finding a hotel for under $300 a night in Manhattan was prohibitive, the removal of such an obstacle will mean that more people travel. In addition, rather than strengthening the Hilton Empire’s bottom line we citizens will distribute our earnings more fairly throughout the economy,  something that is impossible in a capitalist system dominated by conglomerates.

As a former died-in-the-wool socialist who still believes in achieving a more equitable distribution of wealth, I actually invite more of this type of disruptive economic activity for the very reason that it spreads wealth more evenly and creates new economic opportunities.

For example, imagine your grandmother is a very good cook, but that she doesn’t have the capital or know-how to start up a restuarant. Now imagine there is an AirBnB for food where normal people can offer to cook a meal in their house. You scan the listings for food your interested in, read the reviews to see what others have said, and then finally make the booking online. The transaction is completed entirely through the website and no money need exchange hands between grandma and her client.

Because grandma is only serving one table an evening in her own home she can offer a meal at half the cost of the restaurant. After the meal the customer reviews grandma and grandma reviews the customer (maybe it’s a requirement that you at minimum one gives a 1-5 star review before making one’s next booking). Each builds his or her profile and thus enables both the buyers and the sellers of the service to make better educated decisions about their next transaction.

Now imagine Grandma gets so many good reviews that she can start increasing the price and the margin she makes. Or, let’s say her meals are a huge hit and she cannot keep up with the demand. Riding her wave of popularity, grandma starts a Kickstarter campaign to raise enough money to open her own restaurant. Her loyal clients, fueled by their appetite, donate money and encourage their friends to do so. Soon Grandma has raised enough capital to start her own restaurant, hire a staff, and please the good people of New York on a greater scale.

If you’re a New York restauranter and you’re reading my blog the past passages may have caused you to shit your pants, and for this I apologize. After all, allowing Grandma to compete in the food industry is unfair since she has limited costs and can undercut your every meal like a seasoned deli server. Secondly, grandma doesn’t have a staff, and if enough grandmas join her she’s likely to put your people out of work.

In response to this I would argue the following: first, a decrease in cost in the food service industry is likely going to lead to an increase in consumption, since more people will be enabled to eat out. The question for society  though shouldn’t be how many jobs are immediately lost, but how much economic activity is created: when the printing press came along a lot of scribes were put out of work. The amount of labour dedicated to literacy intensive activities however grew exponentially to the point that, as mentioned earlier, many of us spend all day reading and writing and we now call that “work.”

It’s like what a food truck vendor told NPR’s Planet Money when they asked him about the explosion of food trucks. Food trucks, he argued, used to be considered dirty and unsafe. With so many on the streets, he added, each one validates the legitimacy of the other. Sure the market is more competitive and margins are decreasing, but if you’re product is good then you will survive because net volume of customers is going up. Enabling people to get the word out about the quality of your product can only help the food truck driver: if people seek him out (as tends to be the case in the SF Bay Area), than his success is no longer limited to his luck at scoring the right location.

Finally, one’s ability to open a restaurant is not entirely dependent on one’s ability to cook (though you’re success often is): instead, one’s ability to open a restaurant depends on one’s access to start-up capital. If, however, you have a proven track record as a chef before you begin the process of opening a restaurant then we have a much better allocation of capital matched to talent. The economy becomes more efficient, supply can more easily find demand, and the increase in people to people transactions (as opposed to people to corporation transactions) makes for a much more equitable distribution of income and hence, in my opinion, a much healthier version of capitalism. The conditions under which businesses compete become more even.

There are a number of questions I haven’t addressed here, including how due you ensure that Granny’s kitchen is actually safe: after all, restaurants need permits to operate and must be subject to random inspections in order to prevent them from becoming public health risks. In a distributed model such as the one proposed here we could risk an outbreak of any number of food-born diseases by not exercising tight enough control on cleanliness.

To give an example of how such a system might work, allow me to refer to how Switzerland manages pet ownership. In Switzerland if you own a dog you must register your dog with the local authorities and pay a small tax (in the Geneva canton it’s about 80 CHF). To complete the registration of your pet (unregistered pets at subject to a fine. Well, the owner is. Not the pet) and receive the medallion that signifies this registration. You must attend classes over two weekends, one theoretical, the other practical (the practical test includes the pet).

As a result of this regulation everyone who owns a pet in Switzerland has the same baseline knowledge of pet management. Leashed dogs are thus permitted in most restaurants, cafes, public transport, etc. Occasionally bad things happen (usually minor skirmishes between dogs in which the owner of the restaurant may ask them to tie their dog outside if the owner doesn’t immediately volunteer) , but 99.9% of the time nothing happens: dogs are happy, owners are happy, and with the exception of those miserable individuals who hate the sight of an animal whose primary purpose is to infuse the world with love, everyone else is unperturbed.

Having myself worked in a restaurant for two years and a meat and cheese deli for four years, I can personally attest that the knowledge required to serve non-life threatening food is easily acquired and applied. Though accidents can and will happen (just as a handful of AirBnB proprietors out of millions have found their apartments trashed), the benefit brought about by millions of new transactions far outweighs the potential risks. Therefore, similar to the Swiss dog model, having people undertake a minimum amount of schooling and subjecting them to occasional inspections, combined with the immediate feedback mechanism created by clients and patrons reviewing each other, is enough to safeguard the public interest.

Capital is sticky: when left to its own devices it tends to fuse, bond, and congregate. In more equal societies, however, bonded capital is regularly broken up and forced to dedicate itself to more productive activities. Though the playing field needs to be even for businesses as well (i.e. additional taxes charged to hotels should also apply to AirBnB patrons), we will achieve a much healthier and fairer distribution of wealth when we allow for the distinction between buyers and sellers to become more blurred in a way that is more effective than any centralized socialist model could ever be. Whether it be AirBnB or Granma’s restaurant, empowering individuals to take control of the means of production opens us to a new world of economic opportunities that, if properly managed, can transform our world for the better.

About Matthew Carpenter-Arevalo

A former Google and Twitter manager, Matthew Carpenter-Arévalo is the founder and CEO of Céntrico Digital, a managed marketing services company.

2 Responses to “Disrupting the Hospitality and Food Industry Through Crowd-Sourcing Economic Activities”

  1. Darlene winchester Reply September 1, 2012 at 2:56 am

    You knew the Irving’s well at a young age. People that live here surely do not always see the whole picture… Even to this day. Great article!

  2. awesome article! Check out housebites.com – airbnb for takeout.

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