Delivery - who wins?
I think it’s fair to say that delivery is here to stay. It’s what consumers want and expect – and it’s not going to go away. But as I look at the marketplace, it seems to me that the fundamental point of profit is, at best, somewhat cloudy. With so many contributing parties to the process of delivery, it’s difficult to see who is making the money. Is anyone?
Firstly, there’s the consumer, who can pay as much as 400% more for an in-home eating experience that arguably, could be replicated with food bought from the supermarket. Yes, with supermarket food, you have to cook it, but the quality and variety of food has improved enormously over the last few years, so for many people, it can just be a case of putting some food in the oven. Yet, it seems, in today’s world when most things are available on demand, people are prepared to pay for even greater convenience.
As delivery grows, so does the demand for drivers. That’s great for the labour market as a whole, but being in delivery is certainly not an easy ride. Most riders are on, or near the minimum wage, it’s physically demanding, involves adverse weather conditions and there are minimal, if any, tips to supplement the low wage.
Operators need to stay in the running by providing delivery as an integral part of their offer. If they don’t, they know (or believe) that they will lose business to their competitors. But, they’re paying as much as 30% of their total delivery sales to the aggregators. So, operators may make sales from delivery but they make significantly less profit from it than from customers walking through the door.
For the operator to make significant profit from delivery it’s a question of scale. However, the more delivery they do, the more they dilute the eating ‘out’ experience of their core business, which makes them the most profit. And it is by no means the case that operators only gain incremental sales from delivery. There is plenty of evidence that delivery, with its lower profit, also cannibalises higher profit walk-in sales. Ultimately, delivery equates to higher turnover but less overall profit or at least a lower percentage EBITDA.
The delivery company
For the delivery aggregators to make money, they need of volume. Unless they’re operating in large, mature and mobile markets like London or New York, they are losing money. And, the challenge is that there are not many mature markets. Some towns and cities are not profitable and never will be.
So, if no-one’s making significant money, where does it go from here? I suspect one of the things we’ll see is further M&A activity - especially from the larger players backed by serious funding - to enable scale. This will provide more resources for developing the core technology – a key to success in delivery – and a bigger marketing spend to enable greater consumer awareness. It will be interesting to see how things develop over the next two years. One thing is for sure, consumers will continue to want to have food delivered.
Later this week, I’m heading to India to visit operators, aggregators, dark kitchens and investors in Delhi, Mumbai and Bangalore, to see just what is going on in that innovative market, which has tremendous growth potential. I’m looking forward to sharing my observations …