If you were under the impression that the food delivery market (not to be confused with the groceries delivery market) has matured and is now entering a period of consolidation, you’re about to be surprised. It’s not that the market, dominated by the likes of Deliveroo, JustEat, Takeaway.com (who have recently agreed a merger) and Food Panda in the UK and Europe and DoorDash, Uber Eats, Postmates and Grubhub in the USA, plus other brands in different geographies, is not seeing a level of consolidation. It is – as evidenced by the JustEat-Takeaway.com merger.
Smaller takeaway and restaurant meal delivery apps are being gobbled up by larger competitors – Square’s Caviar app recently being acquired by DoorDash for $410 million is one prominent example. But it’s not a wave of consolidation that marks the market entering a calmer, more mature level of stability. It’s one that looks more like a Game of Thrones-style choosing of sides before a coming period of carnage that will leave just a few standing.
Venture capital is still pouring into the biggest food delivery brands. DoorDash, the U.S. market leader has raised around $2 billion since early 2018. India’s Swiggy and Brazil’s iFood have taken in $1 billion and $500 million respectively. Rappi, which operates across much of Latin America has attracted a $1 billion investment from Softbank’s Vision Fund – the world’s biggest tech investor. Amazon is awaiting regulatory approval to conclude a major investment in Deliveroo that would see it lead a $575 million round.
Despite that fresh injection of cash into its war chests, Deliveroo has just announced that it is pulling out of Germany. Presumably cutting its losses after haemorrhaging cash trying to take market share from Takeaway.com. The latter bought German market rival Delivery Hero last year to end an expensive skirmish for market share in Europe’s biggest economy.
Is The Food Delivery Market Being Fought On Tech Or Depth Of Pockets?
The food delivery apps battle is one between tech start-ups. But superiority of tech doesn’t look like it will be a major factor. The tech-based online business model is the disruptor but there is little particularly ground breaking in the technology food delivery apps are built on. Different users may have their usability preferences between apps but essentially, they are all much of a muchness.
Management, efficiency of logistics systems speeding up delivery times, marketing and branding of course all have an influence. But the deciding factor is proving to be cost, the availability of couriers, breadth and depth of choice from restaurant and takeaway partners and delivery times. Competing on those variables is boiling down to who can throw the most money at building their courier network, taking smaller commissions from partners and subsidising deliveries.
Even a company as cash rich and historically happy to sustain a huge burn rate as Uber is feeling the heat. With growth rates dropping off for its core ride hailing app business, Uber had been putting a lot of focus on, and money into, Uber Eats – the food delivery service that relies on the same network of drivers. But now Uber is a public company and stock market investors are less tolerant of losses than private equity and venture capital is. The company’s share price struggles following its May IPO come as scepticism grows as to when, or even if, it will achieve profitability.
That has changed the equation in the company’s pursuit of the food deliveries market. It’s still a major player but will struggle to justify burning the cash that might be required to compete with still private competitors like DoorDash.
Source: Second Measure
Why Are Private Investors Ready To Pour So Much Money Into The Food Deliveries Hole?
The major food delivery apps in the USA saw their revenues increase by 55% in 2019. Which sounds good. But no major food delivery app company has ever made a profit. Not only are they not profitable but are burning through investors’ cash like there is no tomorrow. Restaurant and fast food partners paying 15% to 30% in commission also question the profitability of the model on their side of the fence. Some are taking the bold stance of refusing to work with the food delivery apps and even many of those who do grumble that the increased sales bring little benefit because the margins the commission leaves them with are so thin.
Dominos, which recently saw its market capitalisation drop 12% as a result of like-for-like shop orders dropping in the face of the new competition, has warned there are major question marks over the sustainability of the economics of the food delivery apps. But they continue to attract fresh investment.
The reason is that private equity sees a market that offers huge potential returns for the eventual winners of bloody war being waged for it. Some even argue it could match or even surpass the size of the ride-hailing market. The Financial Times quotes an anonymous big investor in the sector who believes that eventually, once the market has matured, the margins could also be better.
The wider trend in the food market offers some support for that optimism. Food has become even more central to modern culture than it has been. Eating has always been important to social dynamics but the media age has elevated its status even more. TV cookery shows, celebrity chefs, bestselling cookbooks, YouTube channels, Facebook posts of tantalising meals ordered on holiday, or just someone’s lunch and Instagram accounts have all played their part.
It’s no longer enough to just eat with family and friends. Where, what and how a meal is eaten now says almost as much about a person as their fashion choices or taste in music and film. “You are what you eat”, has never been truer than it is in the digital age.
That development has been reflected in the food industry. We spend more than ever before at the supermarket, splashing out on a huge range of products that would have blown the minds anyone doing the household shopping list 20 years ago. But we are also spending more and more on restaurants. In 2015 the amount the average family in the U.S. spends on ready food prepared for them for the first time surpassed the amount spent on groceries for home.
Stats on the UK market are harder to come by as the ONS breaks spending categories down differently. But the percentage of income spent on ‘eating out’ also saw an increase between 2013 and 2017, though a slight decrease since. What is notable is an increase in spending on takeaway food orders. That’s particularly prevalent in households where the head is aged 30 or younger.
Source: Office for National Statistics
In the USA, it is projected that by next year more than half of restaurant spending will be on food eaten ‘off-premise’. That means the value of meals ordered through delivery apps, online or over the phone direct from restaurants or from drive-throughs will for the first time exceed that of those eaten on-site.
In different ways the trends are a result of internet-caused disruption. Many of the bricks-and-mortar premises on high streets previously filled by shops have been replaced by casual dining chains and independents as their former tenants were defeated by e-commerce and moved out. The rise of the delivery apps also transformed a takeaway market that was once dominated by pizza, Chinese food. Pizza is still the most ordered meal but its market share is falling quickly. The new restaurants that replaced shops on high streets offer a huge range of types of cuisine and most of them are available for takeaway through the various apps.
Changes in the way we spend our time is the other trend fuelling the rise of delivered ready-meals. Those who have benefitted most from the digital economy are also often spending longer hours commuting, at work or see their work encroaching into their out-of-office hours through mobile devices. 60% of millennials also say they are spending more time on content streaming services and social media. With lives that are increasingly becoming a ‘pendulum swing’ between work time and screen time, the time once spent preparing an evening meal is seeing its time slot increasingly squeezed.
The result is a new breed of consumer seeking the kind of ‘convenience maximisation’ service for their need to eat as they do in other areas. Combined with the trend towards greater requirements around what we eat, and its growing role as part of our personal identity, and it’s not difficult to see why investors have so much faith in the future of the food delivery market.
But the super low-margin business model, intense competition, rising wages, social backlash against questionable employment policies and restaurants pushing back against the cost of working with delivery apps are all intense pressures delivery app companies are coming under. Which is why many experts are convinced an industry shake-out will leave just a few dominant players standing. The road to that point will see a lot of money spent by those who hope to outlast the competition. And much of it will be lost backing the runners that finally succumb to fall by the wayside.
The big money backing the current and runners and riders in the food delivery market are not stupid and are aware the game they are playing is likely to be a zero-sum one with the semi-safety net of possible acquisition. But the size of the end prize appears to be enough to encourage a continuing flow of millions.