Who will be the Amazon or Shopify of food delivery ?
Food delivery business is tough but to crack. Like E commerce, the only way to succeed is dominating the market and optimize with scale.
Food delivery is probably the hottest space in tech right now. With Covid 19, food delivery has accelerated more than ever. More and more people are willing to order online since physical stores have closed. This certainly is a good opportunity to change consumer behavior and achieve significant marketshare for all the food delivery companies out there. But challenges remain galore for the companies. It is a unique space, which although is improved by technology, remains heavily challenged by common real world and logistically hard problems.
Broken unit economics
The single biggest reason, food delivery in and itself is a tough business to be in is because the unit economics doesn't make sense as it currently exists. A single food delivery involves a person going to a restaurant, waiting for your food, driving from to your home and delivering the food at your doorstep. The driver has to be paid for this work in addition to the food cost you are already paying. If you simply compare it with the usual ride sharing businesses, it seems a little uneconomical. Simply because picking & dropping a person and charging them $5 for it seems justified. But when you charge the same person $5 for $20 food order, people get a little uneasy. The behavior exists and I believe it’s the primary cause of why it’s so difficult to make food delivery a sustainable business. The $5 delivery cost may look ok when you are ordering $75-100 worth of food but for $20-30, 25% delivery fees may look a little steep. Plus cost of delivery in USA vs a country like China or India is 10-15 times more. For e.g the statement below compares delivery cost between a Chinese food ordering company vs the one in USA.
The sheer impact of population density has on this business is jaw-dropping. Meituan Dianping’s cost per order is 6 cents (0.47 RMB), comparing to Grubhub’s 2.8 dollars. (Source)
But low price in China or India doesn’t mean that the overall economics of it is any better. Since the delivery fees is low, the cut for companies goes down too. It just means that because it’s cheaper for people to order in China, more people end up ordering compared to USA.
The average price of majority of food orders is still low
The problem also is that, majority of people (over 60%) are ordering in the price range of $10-50. The $5 cost I have mentioned above is completely hypothetical. Usually most of the delivery companies don’t have a fixed cost, but have a complicated price markup on top of the usual menu price which includes meal price markup, service fees and the delivery fees. This varies between different delivery companies and ranges from 15 to 40% [1]. Just wonder if you have to pay $8 on top of $20 order; you might just decide to get the order by yourself from the restaurant.
Food delivery is more complicated
Pizza is easier to deliver. But other things like for instance Ramen which taste best when hot is more difficult to deliver and so a lot depends on the packaging. It takes a lot to keep the experience of the end product being delivered similar to what customers expect when they are dining in. Then there is the challenge of a user wanting food from multiple restaurants. I might want a burrito from Chipotle, a burger from Wendy and a desert from some cake shop. How do you take care of that ?
Does that mean food delivery can never be a profitable businesses ? If you go by history, food delivery in a way falls into the bucket as online retail as far as unit economics is considered. No one wants to pay for the delivery fees but everyone wants the best possible product (in this case food). Unless you have market dominance, it’s very difficult to be profitable at low margins. The holy grail in food delivery I believe is to crack this virtuous cycle (image below). Note that “optimization” in the image refers to the opportunity for optimizing delivery network (more deliveries per delivery person, applying data analysis to prioritize time of the day, restaurants etc).
Although, substantial improvement in any of the components above can trigger the cycle, but the most obvious starting point is getting more users. More users means more orders, which leads to more scope for optimization, lowering the delivery cost and attracting more users.
But to keep getting more users over an extended period of time, companies should be more than just food delivery. Some of the ways companies might do that.
Expanding food delivery into different sectors to optimize the delivery network. Delivering food ? Maybe also deliver grocery, medicine, clothes or almost anything. This can bring the scale in terms of delivery orders enabling the company to optimize. The delivery cost will go down which will attract more customers creating a vicious cycle. This is what Amazon has been able to do with the retail business (besides books, sell almost anything in the world).
Diversifying the businesses horizontally for cash flow. The food delivery platform can also expanded into selling different services. For e.g maybe food delivery companies can engage the user to sell concert tickets, or create an enterprise business to sell raw materials to its restaurant partners. This again will have different margins and can lead to significant revenue for the company. The company can then use that revenue to keep the delivery cost low which then can attract more users. A network effect taking place. Amazon has been doing this too (aws, kindle, prime etc).
Let’s look at some companies which are already doing this.
Uber - Diversifying ride hailing
The good thing with Uber is that it already has its core business different from delivery businesses. This gives Uber the power to leverage and optimize its driver for both of its businesses. Uber drivers have options to chose from delivery or ride hailing thereby hedging risk and increasing scope for optimization. This can definitely enable Uber to keep delivery prices low. Maybe in future, they’ll allow drivers to do both at the same time; pick and drop food order and rider from nearby source and destination. This will optimize for lower cost for both the ride & the food delivery. Apart from this, Uber has other services too; Uber for businesses, freight business, healthcare. There is no reason all can be optimized in future in various forms.
Meituan - Food delivery super app
Probably the best example of food delivery turned into something else is Meituan which is a Chinese firm launched in 2010 as an online coupon company similar to Groupon. But over time it started offering services like movie tickets, hotel booking, food delivery, ride hailing, restaurants review and more. The reason I mention Meituan as an example of food delivery pivoted into different sectors is because the majority of users coming to the app are looking for food options.
According to an earning call in 2018, 85% of Meituan users first came to the app for scouting restaurants or food delivery. More than half of the users who had been on the platform for more than 3 years have bought all 5 top-selling services on the platform. (Source)
Meituan has leveraged the size of the userbase coming to the app to increase it’s sources of revenue further enabling it to keep low cost of delivery (even maybe taking a loss). The low delivery cost attracts more people which means more revenue and food orders increasing scope for optimization and further reduction of cost. This statements sums it up.
Food delivery to Meituan is what eCommerce to Amazon. It is a long and costly way to profitability. Once it does, it can propel the company to enter what Bloomberg called the virtuous circle. (Source)
Doordash - The on demand local fedex
Doordash has been a food delivery first company and has acquired a significant marketshare on that front. It has been able to do by being solely focused on being the best possible delivery provider and differentiating from the competitors in various ways. But Doordash has always been more than a food delivery company, at least that’s how the founders thought about it.
DoorDash began with a simple mission: to enable every merchant to deliver. Ultimately, our vision is to build the local, on-demand Fedex. We are a logistics company more so than a food company. We help small businesses grow, we give underemployed people meaningful work, and we offer affordable convenience to consumers. (Source)
Doordash has been trying to be the default delivery provider for any and everyone. Are you a businesses looking to sell online ? Just partner with Doordash and outsource delivery to them. A short term advantage Doordash has here is that they can use their same network of delivery providers as they do for their own food delivery which in turn optimizes the whole thing similar to Uber. Also, they can provide value add services to retailers like sharing the data around customer behavior. Doordash has also released a new feature for local restaurants; Storefront. With this, Doordash aims to enable restaurants to create an online website of their own. This enables the restaurants to take control of the orders and also the data around user behavior. But if they choose to use Doordash as the delivery provider, they would have to pay commissions. (The commissions along with storefront are waived off for some restaurants for a limited time). This means that the company’s long term vision is analagous to a company like Shopify. Be the delivery enabler for small businesses instead of being the food delivery app. This mission to be the default on demand fedex like provider for local delivery can give Doordash a lot of competitive advantage. The more they are able to fulfill expectations of businesses in terms of quality, in time delivery, data insights etc.; more businesses will come to Doordash. This is unlike Uber which does not have an offering like this and mostly deals with different types of ride hailing business. The only exception is Uber freight which is different from on demand local delivery.
Dominoes - The true “fast food” provider
Domino was and always has been a pizza delivery company. See this image for the first ever advertisement they did (The name was later changed to Dominoes).
Not everything is readable but one thing is crystal clear. “Fast free delivery”. And of course the very popular “30 minutes or free” delivery made Dominoes the household name. Delivery had always been at the forefront in Dominoes growth. Seems like over time, Dominoes was able to perfect the art of logistics, franchising and delivery. It was also the first company to introduce mobile ordering plus they made the whole “ordering a pizza” a seamless experience. Quote from this article -
They gamified the ordering process with new features like a virtual Pizza Builder that brought pizza toppings to life on users’ screens. They also added another layer of convenience with their Pizza Tracker. Now, for the first time ever, users could follow the progress of their food from when they pressed the order button to when the food arrived at their door. This made the process of ordering food so much more transparent and convenient that companies like Seamless, Postmates, and since caught on and copied it.
But what Dominoes has done is not easy to replicate. They have been able to perfect the art of making and delivering at pizzas at scale. Not all restaurants can do that and not every dish you order is a Pizza in terms of preparation or delivery. But, we may see a trend of (or maybe it’s already happening) restaurants starting with a third party service like Doordash to jumpstart their delivery operations and maybe at some point go the Dominoes route. But that is a big maybe. The economics of using an external service provider might prove to be more beneficial in future. An analogy can be made to cloud computing which because of its many benefits has motivated large companies to move to cloud.
Overall, the food delivery sector is changing rapidly with new ideas being experimented, mergers & acquisitions, IPOs etc. All being accelerated by the Covid 19 situation. We are seeing many companies pursuing market dominance by trying out different strategies and we may see different models come out of it.