Photos: Gopuff, DoorDash, Instacart
Is the food delivery bubble ready to burst?
E-grocery and restaurant delivery experienced an unprecedented spike in adoption with the start of the novel coronavirus pandemic and startups sprung up and partnered with retailers to facilitate getting food to consumers stuck at home. As the economy reopens, however, some are beginning to ask if all the investment in food delivery fulfillment has created a bubble just waiting to burst.
With venture capital investors throwing money at delivery startups during the pandemic, James Boley of The American Reporter likens the situation to a gold rush, with many speculators anticipating riches and few destined for appreciable returns on their investment. With VC investors failing to look at the stability of the given business models and startups needing to spend money quickly, Mr. Boley sees overhyped investor unicorn delivery startups soon undercut by a drop in food delivery as in-restaurant dining picks up.
Venture capital firms were investing tens and hundreds of millions into delivery startups as recently as late April, according to a CNBC report. London-based Taster received $37 million, Finnish startup Wolt raised $530 million and a project begun by ex-Deliveroo staff called Dija raised $20 million.
As startups jostle to outdo each other and differentiate themselves in the market by providing half-hour and even 10-minute delivery, observers question if new players in the space will eventually outpace demand for the services.
Consolidation already appears to be hitting food delivery, with Uber gobbling up medium-sized delivery players via acquisition and rolling them into its Uber Eats app offering.
Other developments, however, point to the demand for food delivery continuing to remain strong even in regions where lockdown measures to prevent the spread of the novel coronavirus have eased.
In the quick-serve restaurant space, major players like McDonald’s have been slow to reopen even as restrictions have been lifted on in-store dining with some franchisees finding drive-through, curbside and delivery-only to be cost effective ways to do business.
The model has grown so popular that municipalities have begun jumping in to protect restaurants that may be losing out from over-dependence on third-party delivery startups. San Francisco recently placed a ceiling on how much delivery apps can charge restaurants per order, according to Eater.
- Grocery Delivery: A Modern-Day Gold Rush? – The American Reporter
- Lockdowns are lifting, but VCs remain bullish on food delivery start-ups – CNBC
- Walgreens inks a deal with Uber Eats to expand same-day deliveries – RetailWire
- Is fast food going too slow in reopening for dine-in business? – RetailWire
- Will Permanent Fee Caps Actually Rein in Delivery Apps? – Eater
Discussion Questions
DISCUSSION QUESTIONS: Do you think the potential growth and investment opportunities for grocery and restaurant delivery companies has been over-hyped due to the pandemic? How do you see the long-term demand for food delivery shaking out?
Poll
Loading …BrainTrust
Suresh Chaganti
Consulting Partner, TCS
Doug Garnett
President, Protonik
Delivery grew strongly during the pandemic and the number of deliveries and the number of people using delivery services will remain higher even as we emerge from it. However the stellar growth rates won’t continue forever and some people will revert back to previous behaviors. The imbalance lies in the fact that capital has been thrown at delivery services and the segment is now very crowded with a lot of players vying for a slice of the action. At the same time, very few of these players are profitable or have clear pathways to profitability. There is certainly a need for delivery services and there is growth to be had, but there is also a need for consolidation and a shakeout over the longer term. In the meantime, the crowding is not necessarily a bad thing as it drives innovation and experimentation.
The days of explosive growth are over, mostly because of renewed demand for in-person dining as consumers crave “normal” experiences. And I expect that the big competitors in this space (GrubHub, DoorDash, Uber Eats and others) will need to renegotiate their rates especially with some bigger national clients. Fees up to 30 percent of volume are tough to swallow in a low-margin business.
But the business model itself is sustainable, for a few reasons:
At least here in Atlanta, you can easily double the cost of your meal by having it delivered. I don’t know how that is sustainable. My guess is that most of these services will fall by the wayside.
This is not overhyped and still getting started. The industry is turning out to be a huge battle between folks like Kroger, Walmart, Albertsons, Instacart, and upstarts like Gopuff (which are still new/limited).
Walmart has the upper hand right now due to its volume (as always) and likely they will figure it out. Kroger is investing a lot, but I don’t love their Ocado separate facility approach. Amazon is important but doesn’t have enough scale in the few Whole Foods stores it has relative to the competition.
So we are in the first inning here, folks. Expect hundreds of millions of dollars in VC investment in this space over the next five years. Grocery has not even penetrated 10 percent online yet. If this even moves to 30 percent in the next 10 years, you can see why this is so important.
Delivery is a capital intensive business. Customer acquisition expenses, driver fees, promotions for returning customers, high churn, low lifetime value, low value add as an intermediary – there is probably no other business that is so structurally unattractive.
Naturally, three companies are expanding beyond food delivery to grocery and other retail. But there is no getting away from the structural challenges.
There will be even more M&A before the dust settles and two or three top players – Uber included – will emerge, after consolidation.
On the higher-end side, I think delivery has been over-hyped due to the pandemic. No one will ever want to pick up an expensive steak dinner for in-home consumption, nor would one want to order premium cheeses without having the tasting experience in a specialty grocery store. However for the QSR and grocery staple items spaces, the convenience consumers have discovered in delivery is behavior-shifting. Plus, the fact that McDonald’s has observed cost cuts with these convenience-driven plays means there’s sustainability to these consumption behaviors for brands as well. Over time, the food industry will be more predictably split into brands that do the majority of their business via delivery/drive-thru and brands that do the majority of their business via on-premise consumption/in-store shopping.
While pandemic conditions were ideal for food delivery, our hunger for convenience will endure. Time savings, quality options and variety have made food delivery a desirable habit over the past year. It also kept us connected to our favorite local businesses. Many of us will continue to seek these benefits over the long term.
Stripping delivery down to its core benefits is a great way to look at it over the long haul, Lisa. I view this in a similar vein with a slight twist (appropriate since I view economics as the most “twisted” of disciplines in general!) The utility of a product or service — in this case it is not having to go to the store yourself — is determined by its perceived value to a given consumer. The perceived value of not dying is quite high and difficult to measure. The perceived value of not expending time and gas money is relatively low and completely quantifiable. I think delivery will ultimately grow. We will have a pullback in the near term as consumers focus on the core benefits of time and money compared to current costs. But technology will enable increasingly viable models that will meet more consumers’ threshold for utility long term.
My guess is that the VCs are investing because the TAM (Total Attainable Market) of delivery extends well beyond food and restaurants. My thesis is that food delivery is the gateway for hyper-local delivery. And so, while food delivery may fade, I predict that the speedy delivery format will substantially migrate to other non-experiential categories. Yes, dining is expected to go back to mostly in-person; however getting your booze, diapers, paper towels, milk and such is most definitely not a glorious in-person experience and having items brought to the door as quickly as food delivery is the future. There are many companies doing it now.
What you have been seeing is food delivery services expanding into delivering things other than food (prescriptions, hardware, groceries, etc.) I would guess they have to because of the need to continue to build revenue.
People were used to getting their Amazon products delivered to them. But then, the most popular product category purchased by Amazon shoppers in the United States was electronics (low-frequency purchase). With the pandemic, frequently bought items (consumer non-durables) went up by 20 percent to 25 percent in terms of online sales, which means there is not just higher demand but also a manifold increase in purchase frequency. The delivery industry is still in the experimentation phase – they haven’t figured out the most cost-effective, efficient, and sustainable model of delivery and I believe that experimentation will continue to go on for a few years. That means there will continue to be more investments and consolidation in the space.
I completely understand the demand here. Customers want it. Grocers and restaurants want to provide the service. Entrepreneurs want a slice of the emerging market. But — is there an existing or emerging model that works for all three parties? Customers are happy with the service and fees. Retailers are comfortable with the service and fees. And the entrepreneurs are making money or have a clear path to profitability. This equation needs to go three for three to work. And it seems like a delivery service that handled a wider range of products would ultimately make more sense. A season or two through non-pandemic living will give us a better baseline to understand what the business model needs to look like during “normal” circumstances, understanding that normal is a moving target right now.
People have discovered the convenience of food delivery and are unlikely to fully return to pre-pandemic dining behavior. The pandemic forced new creativity in the food and dining segment and fueled investments in meal deliveries. The rate of food delivery growth will come down, causing an operational shakeout in the current players. However the upshot is that the rise of home deliveries transcends foods, and the delivery assets in play can also deliver retail products. Bottom line, consumers have validated the delivery model, and competitors will aggressively add to the home delivery categories to capture market share and create operational efficiencies.
Let’s be honest, crab cakes via delivery don’t taste like crab cakes at a restaurant. Yes one can settle but most people like their food hot and not wrapped in a series of bags. Yes flying cars, drones, and deliveries can have profits at some point but for all that money chasing potential it doesn’t seem like profits are on the way any time soon.
This is not be the first VC-fueled bubble and I’m sure it will not be the last. The trouble is that these bubbles do not help confidence and tend to support weaker, inefficient players that only survive while the market is at its peak. It was obvious that during the pandemic these delivery companies would be in demand and it was just as obvious that once the pandemic started to decline, and retail and restaurants reopened, the speed of growth for these businesses would slow. Running a business in a boom market is one thing, but running one in a flat or declining market is another entirely and the least efficient ones will lose out and wither. It will have created a number of lucky wealthy winners and the rest may just have to wait for the next boom time.
Whenever you offer people a service that is widely accepted as a solution to what is seen as a temporary problem a fair number of consumers will continue using it after the perceived problem has passed. In the case of delivery companies – retail or foodservice – a large percentage of consumers like delivery and will continue to be willing to pay for the convenience or perceived safety. That said, there are lots of firms chasing the same opportunity, so there is clearly going to be a shakeout in the market. Hard to tell who wins but it is reasonable to assume surviving firms will fit into two categories: high-profile branded service, perhaps a DoorDash or Uber or companies like that; and high quality, consumer-focused companies providing turnkey, white-label services to companies who want to reinforce and grow their own brands.
We’ve seen 20 years of attempts to scale food delivery to unicorn levels. But it isn’t a business that warrants the hype or investment.
From here, some premium food delivery options (like our weekly delivery by Alpenrose dairy) will continue strong. Otherwise, it’s a business operating at the margins of society. There is need. There is not scale.
No doubt the pandemic created some Fool’s Gold in terms of the grocery and restaurant delivery market. Many of these new startups balanced supply and demand via their pricing paradigm. However the overall delivery market will see contraction as consumers reject the price of home delivery and venture out to their favorite restaurants. The native developers should have enough traction to survive such changes. However the recent startups do not appear to have the same foundation and market penetration to necessarily make it through.
To be clear, meal delivery and grocery delivery are two different things. I am certain that grocery delivery will continue to gain ground, with steady investment from the grocers themselves.
The present business model for third-party meal delivery is unsustainably flawed, in my opinion, with fees much higher than the profit margins earned by the restaurants themselves. So I am generally in agreement with Mr. Boley’s article. This is a trend inflated by slack investor due diligence and hype.
Here in Tucson, AZ the concern over high delivery fees has raised enough concern that the mayor and city council capped fees at 15 percent last October. Interesting to see how other municipalities have taken similar steps.
The fees offend me enough that I personally have opted to support my favorite restaurateurs by opting for contactless pick-up.
Convenience has always been a motivation factor for a segment of the consumer population, a segment which grew during the pandemic. As we begin to enter a post-COVID world, consumers will move back to some more traditional patterns. The question is — how many consumers will retain some of the patterns of the pandemic.
One of the benefits of increased delivery penetration during the pandemic is the connection with more consumers than ever before. If the delivery services can capitalize on that relationship, they will continue to reap the rewards. If they fail, then the investments in delivery may fail to pay out. Approaches can be increased personalization and cross-sell of other products and services. As always, delivery services must quickly adapt to the new-new reality.
Demand for food delivery services will decrease as more consumers resume their traditional shopping patterns; that is, shopping in the grocery stores where they can select their own produce and meats. Only two and maybe three service providers will remain after a shake-out. This coming scenario should not surprise anyone.