Anyone following the food delivery space can pick up on the signs of upheavals in the industry. Uber Eats sold its India business to Zomato, and Glovo – a Spanish unicorn operating in over 20 countries – closed down operations in four countries to achieve profitability by 2021. Delivery Hero, on the other hand, merged its two brands, Talabat and Carriage, in the Middle East and North Africa region.
Growth at any cost is no longer an option for these platforms at this stage. The Wall Street Journal recently reported conversations between multiple food delivery companies in the US to explore options of collaboration or consolidation. The reason is clear: venture capitalists are not interested in funding subsidies anymore.
The industry has very few profitable companies. Meituan-Dianping in China is one of the exceptions: The food delivery giant is operating in a competitive market and has a strong opponent in the form of Alibaba-owned Ele.me, which has turned profitable. Massive scale, focus on alternative revenue streams like ads and deliveries to other verticals, and effective fleet management has led to Meituan’s success. Another food delivery company, US-based Grubhub, is profitable, but its revenue is declining.
Other than these two firms and a few others here and there, no notable food delivery services are profitable.
Food delivery is an industry that has not yet weaned off of VC money. Uber Eats’ losses in 2019 were US$461 million on revenue of US$734 million. In 2018, Zomato lost approximately US$300 million and Deliveroo lost more than US$500 million.
The space, which has been built on subsidies, is now left stranded with little support from investors. Thin margins, low brand loyalty, and little differentiation are some of the things that make this business difficult.
But there are also signs that securing more funds will be a challenge. Swiggy raising a US$115 million round from its existing investors is a sign that its next big round is either late or is non-existent. Glovo rolling back from four markets right after its fundraising round is a sign that it has either been unsuccessful in raising the entire round or it does not expect the next one to be easy.
How will the industry evolve?
In this environment, the most natural option left for these platforms is to consolidate. By the end of 2020, it is expected that most markets will be left with a maximum of two major players, and some will become a single-player market.
During and after the consolidation, there will be corrections in the market. The natural goal of these platforms post-consolidation would be to finally return profits to their investors. Some visible and expected strategies for these platforms would be as follows.
Increase in commissions
This is already visible in markets where there is a monopoly or one large player with over 70% market share. The commission percentages have already gone as high as 40%, making a direct impact on restaurants. In price-sensitive markets, where establishments also get sizable volume from direct/phone orders, restaurants would be reluctant to increase the prices.
This problem has been addressed by the establishments in different markets by increasing the overall menu prices and then running offers/discounts on in-store and direct delivery channels. Building and growing their own delivery channel has become more important than ever.
Alternative revenue streams
Several food delivery companies have flirted with the idea of venturing into deliveries of other items including groceries and medicine. Meituan is already doing this successfully, and Glovo has always pitched itself as a multicategory app. On the other hand, Foodpanda has launched Pandamart in Singapore, Taiwan, and some other markets, where it onboards neighborhood convenience stores and supermarkets for grocery delivery.
These efforts allow the delivery platforms to improve their utilization, as food delivery has two peaks of two to four hours during lunch and dinner time. For better retention of couriers, they need to deliver more in the remaining hours. A natural choice for this is to venture into other deliveries
Second, grocery and medicine are both verticals that have higher average order values.
Cloud kitchens – also known as dark or ghost kitchens – have been around now for at least a couple of years. While there have been several models of ghost kitchens operating globally, one of the most standard models is the way platforms have built them. Food delivery platforms are at an advantage to identify locations of such kitchens as well as the right cuisines and brands for those places, based on the data that they have acquired over the years.
They’re also better positioned to finally lease some physical assets and provide a low-risk expansion path for restaurants, thanks to the money they’ve raised. Deliveroo and Talabat in Dubai and Swiggy and Zomato in India have allowed brands to expand very quickly through their network of cloud kitchens. And as delivery time ends up becoming the most important key performance indicator for any delivery company, a network of cloud kitchens can allow these platforms to deliver from nearby kitchens rather than from a distant branch.
Cloud kitchens have ranged from only leasing a location to managing the entire operations. The more services cloud kitchens are providing, the higher the share of revenue they keep. So far, these food delivery platforms have not ventured into sourcing/supply chain and kitchen operations services, yet their unit economics have improved for those orders which are being delivered from their cloud kitchens.
To achieve profitability for these food delivery companies, the final step is to own the brands and run them through cloud kitchens to get 100% of the available margins. From all the data that these firms have acquired over the years, they can identify in each area the kind of brands that will pick up.
One of the pioneers in this space has been Rebel Foods, which raised US$125 million in series D money in August 2019. Following its footsteps, Swiggy and Foodpanda, have established their own brands in the Indian market.
Restaurant associations can sense this predatory move where establishments are becoming less important for platforms. Now that these food delivery services have a user base and are contributing a meaningful part in the revenue of a restaurant, they are becoming disproportionately more powerful.
As such, establishments are not shying away from openly expressing their concern over their strategic disadvantage. Most of them, especially those who have their own couriers, have stopped sharing customer data.
The restaurant industry has to move fast to maintain its relevance. With consolidation around the corner, the “winners” of the food delivery battle will be merciless in killing small- and medium-sized businesses to finally return profits to their shareholders.
With more last-mile delivery networks available, owning the logistics footprint is becoming less of a strategic advantage. This should push restaurants to build and engage with their own customers before it is too late. Who can deliver? Who will lose steam in the race? This year is going to define who the winners are, and the next couple of years are going to define the return on the billions of venture capital money that has been spent in this industry.