On-Demand Food is Hungry for Marketshare
Where are on-demand food companies like JustEat, GrubHub and DoorDash headed?
Just today, I saw an advertisement for 5 different food delivery mobile apps — 3 on social media, 1 in my email inbox and 1 on a billboard next to the bus terminal. There’s a veritable war going on amongst food delivery startups for consumer attention and wallets.
I was curious — what’s actually happening in the on-demand food space and what does the future look like for these startups?
How It All Started
In 1995, World Wide Waiter (now Waiter.com) was founded and considered to be one of the first online food ordering services available. Throughout the dot com bubble, other web based food delivery startups were founded and also, collapsed.
Fast forward to the present, more than $1 billion is invested in the food delivery industry on an annual basis. JustEat has successfully gone public. UberEats does more trips than Uber some days. Not too long ago, Facebook made a bold move into the space with their Order Food feature.
However, despite tough competition, it’s worth noting that after all this time, only 1% of the total food and groceries market is online.
Aggregators (Software Only)
The first on-demand food startups focused on creating a software marketplace, akin to a virtual food court. Restaurants are still responsible for organizing their own delivery logistics but aggregators provide them with more exposure and business. Being largely software companies, aggregators are able to scale very quickly but they are disadvantaged by having little control over the quality of food or timeliness of delivery.
Examples of aggregators: Just Eat, GrubHub, and Delivery Hero.
Full Package (Software and Logistics)
The next wave of food delivery companies offered the full package: the software platform and the in-house delivery fleets. Although these full package providers are able to give customers and restaurants a more cohesive experience, their heavy operations and labor requirements made them difficult to scale. To compensate for more expenses, they typically also charge higher commissions.
Examples: Postmates, Deliveroo, and DoorDash.
Fast Food 2.0 (Enjoy at Home Cuisine)
The third wave, or Fast Food 2.0 delivery startups, believe that the future of the restaurant experience is in the home. These restaurants often avoid having a physical space and deliver a select menu to customers that would place orders through an app. They are able to save on time and expenses, thanks to pre-prepped meals.
One example is Ando, by David Chang, the founder of Momofuku. Ando has $7 million in venture funding, a celebrity chef known for rethinking food, and no physical restaurant location for walk-in customers. (Comprehensive review, here.)
What is the Future of this Industry?
There are two ways of looking at competition in the on-demand food industry.
One, will there be a winner amongst the three categories? Eventually, will all the surviving food delivery startups be full package solutions that offer both the software and the logistics? Or will the aggregators, that can scale quickly, outpace them first? Is there even space in the market for Fast Food 2.0 restaurants like Ando?
Two, will there be an ultimate winner amongst all the startups? Will it be one winner takes all or will there always be multiple players that may cater to different regions or different demographics?
Evolution from Aggregators to Full Package Solutions
First generation on-demand food startups were aggregators but they’re feeling the pressure to evolve. Public companies especially, are feeling the pressure from shareholders to keep growing in an increasingly competitive market. Investor pressure played a large part in UK-based GrubHub’s $90 million acquisition of three regional delivery companies and their additional $5.5 million investment into building their own network of independent driver contractors. As you can see, converting from a software to a logistics solution is expensive.
“I’m running my delivery-based business with the explicit goal to break even. That’s not fun for me, and normally I’d say that’s the dumbest business you could ever be in. Why run a break-even business? That’s a pain in the butt.”
— Maloney
High Operating Costs and Consumer Demands Compress Margins
Ride-share businesses connect drivers and customers; on-demand food startups have more to worry about with the added step of connecting drivers, customers and restaurants. In addition, consumers are typically willing to pay more to transport themselves, than to transport their food. The combined effect of customer expectations and challenging logistics, ultimately compresses margins in the on-demand food delivery industry.
Another challenge of the industry is the high delivery driver turnover rate. To incentivize drivers to stay and to encourage them to represent the company in the best possible light, these drivers are typically more costly to recruit and also paid more than the industry standard. For example, DoorDash spends almost $200 recruiting each new driver, most of which only drive for the company for 3–6 months.
One potential game-changer for the on-demand food industry is the adoption of technology such as drones or autonomous vehicles. Although probably not practical in the immediate future, the costs associated with delivery drivers are reason enough for companies to look into developing alternative delivery methods. These include self-sufficient pizza makers, burrito bombers, and meal delivery drones.
Market Share First, Profitability Later
Despite the attention and investment money poured into on-demand food startups, profitability is rare. Instead, the race is to gain marketshare, establish a monopoly and willingly (or unknowingly) sacrificing margins in the process. There’s a common saying in Silicon Valley that food delivery consumers are enjoying “VC-subsidized meals”.
One example of a startup that burned out is Bento. There was a clear demand for the bento box delivery service they offered — the company was growing at 15% every week. But this became a nightmare as aggressive growth only fuelled further losses as the company burned through its cash. It turned out that Bento was paying $32 to make and deliver one meal that cost the customer, $12.
The overall result is that the companies with the biggest war chests will end up winning the race.
A large war chest can also fuel acquisitions of competitors — for their assets, their market share, their regional expertise, and more. JustEat, for example, has been on an acquisition spree with:
- SkipTheDishes, in December of 2016, for $110 million — Just Eat CEO, David Buttress, said the acquisition will “materially strengthen” Just Eat’s “number one” position in Canada.
- Hungryhouse, in December of 2016, for £200 million
- Takeaway.com, in August of 2016, who sold its assets to JustEat
- Spain’s La Nevera Roja, Italy’s PizzaBo/hellofood Italy, Brazil’s hellofood Brazil, and Mexico’s hellofoodMexico, in February of 2016, for £94.7 million
On-Demand Food from a Global Perspective
Unsurprisingly, food delivery is a huge market from a global perspective. In particular, China and India drive a lot of the current and expected growth in the food delivery industry of the Asia Pacific region.
In China, on-demand food delivery used to be dominated by fast food chains such as McDonald’s and KFC, but since then, local food delivery services have been able to offer cheaper services and more diverse food options. Now, the market is dominated by the likes of Ele.me, which employs 10,000 drivers, delivers food from over 30,000 restaurants, in over 260 cities.
On the other hand, in India, the transition has not yet taken place. When both domestic and global food delivery startups first started in India, many made the mistake of not providing deliverers with enough training, leading to poor customer service experiences.
Established food chains in India therefore, enjoy a better reputation than new startups, and are able to take advantage of a younger population’s growing interest in food delivery. India is actually Domino’s Pizza’s biggest international market, largely due to how popular Domino’s in-house delivery service is. Domino’s guarantees delivery of its pizzas within 30 minutes and has so far been able to achieve a 99% success rate.
Another interesting competitor in India is the dabba walas, a century-old food delivery institution that delivers boxed lunches to the work lunch crowd, on a subscription basis. They have a very loyal and well established customer base, and significantly lower turnover rate amongst deliverers.
Re-examining the Future
Will there be a winner amongst the three categories?
It looks inevitable that surviving food delivery companies will be full package solutions. Being a software-only aggregator can only get companies so far, because of limited control over important factors of the end customer experience such as delivery times, food quality and customer service.
By shifting the focus from profitability to marketshare, scaling also doesn’t have to be cost-effective, reducing the competitive advantage of aggregators. In fact, scaling doesn’t even have to be organic. What appears to matter more , is how much investment money startups are able to raise and whether or not they can manage their cash flow.
Finally, I think it will be difficult for Fast Food 2.0 restaurants, like Ando, to gain a large presence in the market. Consumers have made it clear that they look for variety and short of being an already established fast food brand, single menu delivery solutions don’t seem to meet a market need.
Two, will there be a ultimate winner amongst all the startups?
Aggressive expansion and acquisition activity seem to indicate that when the dust has settled, there will likely be a few, large players left. However, looking at the global market, it is pretty clear that regional expertise is still a defendable advantage.
One example is Ele.me’s stronghold on the Chinese market. A deep understanding of Chinese consumers and technology aside, Ele.me also has deep pockets, having received US$1.25 billion in funding from Alibaba. Alibaba also backed Didi Kuaidi, the taxi-hailing service that successfully defended its market against Uber. If a global on-demand food company were to imitate Uber and attempt at similar expansion into China, it would likely also be met with failure.
What’s for sure however, is the tremendous opportunity that is yet un-captured in the food delivery space. Over the next few years, it will be interesting to watch companies compete to figure out the logistical challenges, design the best customer experience, and work around high industry turnover rates — even as venture capital interest in the space declines.
I, for one, would love to see my fried chicken delivered this way, one day.
I’d love to hear your thoughts on the future of food delivery; let’s have a conversation below! If you enjoyed this piece, please recommend by tapping on the applause button.
