Tuesday, July 23

Ordering in: The rapid evolution of food delivery

The way people eat is drastically altering worldwide. Delivery of restaurant-quality meals was still mostly restricted to Chinese and pizza little under 20 years ago. Having more than quadrupled since 2017, meal delivery has grown to be a $150 billion worldwide industry today. The COVID-19 epidemic in the United States has caused the market to more than quadruple, from a solid historical increase of 8%.

Read More: deliver anything

The emergence of enticing, easy-to-use applications and technologically advanced driver networks, in conjunction with evolving customer demands, has made ready-to-eat meal delivery a significant market. Early in the pandemic, lockdowns and physical separation regulations greatly boosted the sector, with delivery turning becoming a lifeline for the struggling restaurant business. It is expected to be a long-term staple in the dining scene going ahead.

The food delivery ecosystem’s economic structure is constantly changing as it grows. As the sector grows, factors including real estate, brand, operating efficiency, range of products, and shifting customer behavior will decide who wins and loses. Possible regulatory restrictions, such as modifications to driver compensation, will play a role in the reorganization. And despite the industry’s phenomenal expansion throughout the worldwide epidemic, most delivery systems have continued to be unprofitable. Christopher Payne, the Chief Operating Officer of DoorDash, recently stated to the Wall Street Journal, “This is a low-margin, scale-driven, and cost-intensive business.”

Despite these obstacles, significant investments are still being made in the field. Notable fundraises include Wolt, which raised $530 million in January 2021; REEF Technology, which raised $700 million in November 2020; and Rebel Foods, which raised $26.5 million in July 2020. Other consolidations include Uber’s acquisition of Postmates, which was completed in December 2020 for $2.65 billion; and Just Eat Takeaway’s acquisition of Grubhub, which was completed in June 2021 for $7.3 billion. Deliveroo in March 2021 and DoorDash in December 2020, two recent IPOs, show the industry’s continued enthusiasm and unpredictability. Further changes to the landscape following the worldwide epidemic are posing new possibilities, difficulties, and decision points for a complex network of participants, including delivery services, eateries, drivers, customers, and other digital enablers. Parallel to this, a new class of rivals is joining the battle for “share of stomach” with the rise of quick-commerce/rapid delivery platforms. These platforms, such Getir ($550 million in June 2021) and JOKR ($170 million in July 2021), have attracted substantial amounts of capital.

Developing fronts in delivery

Not that long ago, restaurants took care of the little meal delivery services that were available directly. These days, there is a whole ecosystem of participants.

The meal delivery industry in the United States is rather complicated, with four major firms dominating certain large metropolitan markets: DoorDash, Grubhub, Postmates, and Uber Eats. In San Jose (77 percent of the market), Houston (56 percent), Philadelphia (51 percent), and San Antonio (51 percent) as of May 2021, DoorDash was leading. The market was somewhat balanced when Uber acquired Postmates in 2020. As of May 2021, Uber Eats and Postmates together accounted over 50% of the market in Los Angeles and 41% in New York City (Exhibit 2). These numbers fluctuate every month as platforms fight for local users.

Restaurants

In the past, restaurant profits have been calculated using three fundamental expenses: food (which typically accounts for 28–32 percent of total expenditures), labor (which accounts for another 28–32 percent), and occupancy or real estate-related costs (which account for 22–29 percent). From the perspective of unit economics, a restaurant should operate at a rate of 78 to 93 percent, which would yield a profit margin of 7 to 22 percent (franchise restaurants pay additional franchise fees to corporate).

In the past, delivery orders were treated by drivers rather than wait staff and were considered an additional table for the business. The restaurant paid minimum pay to drivers, who usually delivered many orders at once within a certain radius in exchange for gratuities from patrons. In general, delivery was meant to raise a restaurant’s income by using its kitchen more frequently and profitably.

When the COVID-19 epidemic started to threaten eateries’ survival, delivery turned out to be a lifesaver. In 2020, a lot of eateries that used online delivery services saw an increase in their revenue from deliveries. Nevertheless, their total earnings frequently decreased, with sporadic negative margins (Exhibit 3). The pandemic-imposed eating limitations may have contributed to this tendency, but the fundamental problem was always the disparity between delivery-driven revenue surges and profit losses.

platforms for delivery

The platforms are under a lot of strain. They are having trouble turning a profit in spite of their rapid expansion. Furthermore, these businesses aren’t anticipated to turn a profit for a number of years, according to reports from the Wall Street Journal. However, there exists a potential benefit if platforms explore novel income streams and reduce certain expenses.

The existing economics of platforms are mostly driven by transportation costs and restaurant and customer fees and commissions (Exhibit 5). According to our data, the average contribution margin is around 3 percent, or $1.20 on average orders.