Food delivery is a terrible business. M&A won’t make it better.
I worked at LivingSocial in 2012/2013. We used to joke that “we lose money on every transaction but make it up in scale.”
Takeout and Delivery was one of the last bets the company made. Basically food delivery. The customer service load is huge, the services aren’t really differentiated, and you have to both pay the driver enough for it to be worth it and keep prices low for the consumer to think it’s worth it.
Attracting customers on either side of the market means spending money to undercut your competition. As soon as you stop giving free delivery promotions or introductory no-fee periods for restaurants, they can instantly churn with little to no pain. Not to mention reaching small restaurants is incredibly time consuming. They’re not all just hanging out online. They’re running a business. They take a lot of expensive (human) outreach.
Margins are terrible, if they’re ever positive. It’s just a bad business.
And yet people keep trying. None of these companies have made a net dollar. But it’s a simple enough pitch and a common enough use-case that investors think, “yeah, that makes sense!”
I've said this in another thread, the business of all these "startups" seems not to be of making a sustainable business, but instead it's more of a pyramid scheme where one set of investors are trying to make money of the next round of investors (up to and after IPO). If we view it like that it makes sense, the merger/acquisition will increase stock prices because it seems like there is a holistic strategy. At some point the whole house of cards is going to fall down, but by that times all the early investors will have left and made a big buck.
Wealth is transferred from ordinary folk via the IPO-retirement-fund axis to the plethora of agents involved in the whole scheme, from the employees bashing out code and UX, right through to everyone involved the M&A and IPO and the whole tax / tax agent / government tax agency cadre.
Will it fall down? When? (The whole global macro climate right now is a wealth transfer scheme, i guess from ultimately third world countries to (eventually) investors)
Couldn't agree more. I've also made this point ad-nauseam. How is this not more the typical story. The tech industry we all work in is just so good at selling snake oil in terms of technology that isn't relevant at inflated prices, we seem to have branched out into entire companies that don't make sense.
I worked for five years at a grocery delivery company, and even there it was a nightmare trying to keep delivery routes profitable - that was with at least 5 hour's notice on what people had ordered, and pre-selected delivery slots, which meant we could peak at each driver doing 10-12 drops an hour if they were in an area with a high customer density. I have no idea how companies like Deliveroo expect to make a consistent profit when they get 25 minute's notice, no delivery slots, and therefore little to no ability to batch a driver's work. Everything I've read indicates a single Deliveroo driver would expect to do 1-3 drops an hour, which is just wildly inefficient.
Having said that, I do now wonder if you could make the model work by offering very cheap, or even free, delivery on the condition that you place the order a few hours in advance for a pre-selected delivery time. I'm not sure what the market is like for customers who want to order takeout food, but also know they'll want to do that in advance, but I think there's probably a niche there if anyone fancies taking a pass at it.
> Having said that, I do now wonder if you could make the model work by offering very cheap, or even free, delivery on the condition that you place the order a few hours in advance for a pre-selected delivery time.
You're right and you just described how that "Special Offers" section of über ears works. They give you a small selection of restaurants that another user near you has ordered from and a 5min countdown to place an order yourself, if you do you get free delivery and über benefits from the efficiency of a double or triple order for one of their drivers.
> Having said that, I do now wonder if you could make the model work by offering very cheap, or even free, delivery on the condition that you place the order a few hours in advance for a pre-selected delivery time.
While a nifty idea, I don't think it really works. I see two major obstacles:
Food ordering is instant (or almost instant) gratification. You want your food and you want it now. Or if not now then in 30 minutes, max. You may have the odd outlier, who plans accordingly and orders dinner at noon.
The other problem would be the customers at the end of the delivery route. While that doesn't matter much for groceries that sauce on the former tasty duck à l'orange may be mighty congealed and rather unappetizing once it arrives as one of the last deliveries of a route.
I just don't think that there's enough of a market for pre planned food deliveries and quality assurance would be impossible.
If you have a good math and data science team you should be able to predict demand pretty reliably. I think membership fee programs may be the future here with a premium for faster delivery vs normal delivery. The key is to set expectations.
I think a questions that’s going to pop up is, why does delivery work for a company like Dominos’s (vertical integration) but not Postmates (horizontal)?
I've worked as pizza delivery. The tipping and per-delivery payments to drivers is why it works.
Roughly speaking, a delivery driver in my area nearly a decade ago earned roughly $20/hr after gas and car expenses, half in hourly wages @ state minimum and the other half in tips + $1/delivery payment. They also took about 3 deliveries an hour when fully utilized, which wasn't for 100% of their shift. The wait time got used productively, combination of answering phones, making pizzas, or at worst folding boxes.
This combination means that you're employing people at a significnatly-above-minimum-wage level, but their excess time waiting for deliveries gets paid at minimum wage and used to do customer service. And in the worst case when things are so absolutely slammed that there is no downtime, well, that's when you have to let phones ring (or answer briefly with "thank you for calling, our wait time is currently two hours, would you like to place an order?"). Plus these drivers know the store and the area well and from that alone should be significantly more competent at resolving issues - often enough someone calling in about their order will end up talking to the person who just tried and failed to make the delivery.
With Postmates and the like, though, the time spent waiting for a delivery has no useful work to fill the time. It's also not paid, but the gig has to justify itself economically, which means that drivers have to make up for it through increased per-delivery payments.
Basically, the difference is that store-employed drivers can do useful work while waiting to engage in deliveries, while app drivers can't. This is a very significant efficiency gain.
You're assuming that domino's makes a profit on food delivery rather than breaking even on it.
But domino's also makes the food, so if they break even on the deliver, that's fine, they made money on the food. Scaling the delivery part of the business also scales the food part.
If you aren't making the food, you have to make money on the delivery alone because scaling your delivery service scales someone else's food business. You're essentially competing with your suppliers (restaurants with their own delivery), and they don't need to make money on the product. That's a hard position to be in.
Domino's is built to deliver pizzas. They have streamlined the process of an order being placed, prepped, and handed off to delivery to try to make each step of the process as efficient as possible.
Do "horizontal" delivery companies have similar integration and benefit from similar efficiency?
In an ideal delivery situation, you want two things to be true: first, delivery people should be constantly moving. Second, orders should be handed off to a delivery person as soon as they are finished.
Is this achievable when delivery people are routed to new pick-up locations for each delivery? You want your delivery person to arrive at the restaurant right as the meal is finished -- if they arrive early, your delivery person is idle and your costs go up; if they arrive late, the food is cold and your customers are dissatisfied.
Restaurants with successful delivery components can solve this by tweaking their number of delivery people and their service areas in response to their busy-ness, so that they always have delivery people returning to pick up more food with an appropriate frequency. Have horizontal delivery companies solved these problems, either through integration with the restaurants or through some sort of big data magic?
Part of it I think is that Dominos only does delivery, and their product holds up well in delivery. It comes out of the oven very hot, and with an insulated bag, it can sit for a little while and still be good. If you deliver something like Thai food, it doesn't come out as hot, and there are hotter and cooler parts of the food. This doesn't taste great if it takes 20 minutes to get from the kitchen to you.
That, plus the volume, allows Dominos to send out drivers with multiple pizzas. They can calculate an optimal traveling salesman route from the store to all of the customers in the run, and then the driver comes back to the store to do it again. Also, the whole organization is built around the drivers not waiting around. Restaurants will often not have the order when the driver arrives, and they have to mess around with payment, etc for every order.
All of that makes driver productivity much greater and so the delivery cost per order is much less.
Add costs to the other points mentioned in comments.
A pizza is made for £1-2 and sold for £10-20. The margin is incredible and more than enough to pay staff and deliverers.
I personally never order pizza delivery because it's a total ripoff. Don't want to pay £20 for a pizza (or two on promotion). This is a party delivery service as far as I am concerned, only used when there are friends over (big dollars for the company for a single delivery).
The business model of Uber and Just Eat by comparison is to attempt to deliver Noodles for £10 (one meal for a lazy millennial or a couple who doesn't want to cook). It doesn't work.
I can order Chinese From halfway across the city for the same price as delivery by Dominos. The closest Dominos is 5 minute walk away. The next is a 5 minute drive. The Chinese food is 25 minutes away.
@ThrustVectoring has an excellent answer, but to add one more bit:
When you have your own delivery staff, you are planning your costs and setting your prices with all that built in. When a third party is handling deliveries (in a very non-integrated manner), it's a lot harder to consider the delivery cost as a part of the business, because the cost is being borne by a third party who is charging you an arbitrary amount that may not actually reflect delivery costs.
Since the third-party delivery companies usually take a cut for their services, restaurant owners can't plan that way. They do have choices: they can raise prices overall or they can charge more per-item for delivery orders (if the delivery platform allows it). If they do this, the restaurant owners will be fine; they'll offset any loss to the delivery company with an increase in prices (as long as this doesn't hurt non-delivery business).
The problem lies with the third-party delivery companies. They have drivers who are sitting idle during their downtime, so they have to pay them more per-delivery, essentially paying them to sit around. They have a ton of cheap VC money behind them, and VC's seem to care more about market share than profits, so they are incentivized to do deliveries at a lower price than what it actually costs. So it's no surprise that we see things like revenue of $50M on expenses of $100M. It's a race to the bottom, fueled by someone else's money. All the delivery companies must charge well below cost in order to be competitive. At some point (hopefully) people will stop investing in these companies. At that point, we'll see the final consolidated state of things, and we'll see delivery fees go up dramatically, or service quality go down quite a bit, or both.
It worked as a vertical before technology allowed it to work as a horizontal.
Now it is just a value proposition. Dominos can still make it work because the delivery is bundled with incredibly cheap to produce food. Horizontals do work and aren't going away but right now there's many players making the bet that future market position is more important than current revenue so its not making great money today.
If I buy from Domino's I pay the fixed price for my pizza + delivery fee + tip for the driver.
If I buy food from $local_restaurant via $delivery_service I pay original cost of food + whatever the food deliver service adds to the cost of the food + the delivery services fee + tip to the restaurant + tip to the driver.
I think you could say something about optimization here. When I was in college, I briefly worked as a delivery boy, and I'd often make 2-3 deliveries per trip.
Perhaps we’ll look back and say “food delivery was the pet food of the 2020 startup boom/bust.”
I think these businesses are awful and probably unethical, but from the outside it would surprise me if a single winner could not make this business model work, once they had so much of the market that delivery schedules could reach high utilisation.
The issue is mostly limited by requirements to get food there quickly.
If we knew what we wanted ahead of time, scheduling delivery ahead of time would make it easy... since you could use a delivery route (to deliver 2-3 items nearby).
A single winner may be able to make it work since you can do 1-2 pickups and deliver to two nearby homes.
Imo Netflix is much worst in that regard. At least in this case, you can hope to won a capital attrition war and become the really big player. But for Netflix, it's literally a never ending spring in a hamster wheel. You have users that can almost instantly leave your platform if you don't have interesting content, so you need to perpetually use whatever money subscriptions generate to produce even more content, even more quickly as you get more users with varied tastes. If you slack on content, you get less subscription money.
Considering that a large part of the culture defining movies/franchises/series IP is also not owned by Netflix, they can't really hope to just end up outcompeting everyone else down the line. Think about it: food delivery is pretty generic, you don't really see the difference apart from cost. So if let's say Uber manages to bring down costs, outrun the current big competitors, and use that dominant position to keep prices lower than future newcomers, odds are customers will just keep using Uber.
But in Netflix's case, people will still want disney movies or HBO series. That means there's no real hope for a profitable market dominating position down the line, so they will need to perpetually produce a very expensive product just to pay off the cost of other expensive product. If Netflix starts to lose subscribers, it still has very fixed costs (content acquisition & debt service for already made content) whereas Uber or Doordash have most of their operational costs directly tied to demand. No orders only means loss of revenue, but no additional losses.
Netflix just seems like a very weird and very... risky investment and much more so than the already very shaky business of food delivery. But I always assume the markets see something I don't, so maybe I'm totally wrong!
I think you've got it backward. Uber is precisely like NetFlix and they don't have the Disney franchise (restaurants).
I started ordering on Uber Eats when they got the restaurant few blocks away that is good. Then they got another restaurant across the city, that's the only one to do some specialty food I love.
I only order from a couple places. All my friends only order from a couple places. Discussing what to order at parties goes like: this or this or that (each person's favorite or good enough restaurant).
Last month Uber added £5 delivery fee. Quit Uber and started the Deliveroo app. Everybody's got multiple apps on their phones. Couldn't care less about the app as long as it delivers the food.
i think this round of delivery startups were mostly driven by concentrated capital desperate for return (plus not enough diversity of thought to recognize unconventional but interesting bets), because anyone who remembers webvan knows that the economics of last-mile logistics hasn't changed substantially with faster/ubiquitous computing and mobile.
mobile does increase availability slightly and reduces friction a little, but those weren't the core problems that needed solving to make a successful business in the space. even uber's outsourcing of capital costs wasn't a major problem that needed solving to unlock the market.
you can't beat last-mile logistics by throwing more marketing at it.
I saw someone online saying how they didn't get their ranch with their pizza, so they called up customer service and eventually got a whole new pizza out of the deal.
I understand it sucks to not get your ranch, but come on...
I mentioned this in a comment above, but I worked at Domino's and this was 100% encouraged. My manager hammered it into my head that a mistake was just an opportunity to gain a more loyal customer. If someone called with a complaint, we would credit you for a whole new pizza. Drink and dessert too if we really F'd up.
The reason being people will actually stop ordering Domino's if they're upset at a mistake in an order. Even something as silly as not getting ranch dip you paid $0.50 for. Making it up to them with a free item way more valuable than the mistake almost made the customer feel guilty. After using their free pizza credit, a customer was almost guaranteed to order Domino's again within 2 weeks, and would generally order twice as often as they normally would for the rest of the year or longer.
My very first delivery ever, I opened up the heatbag and their whole order slid out and fell onto the floor outside their front door. Maybe still one of my most embarrassing moments ever, I was sure I was going to get fired. When I told my manager about it, he said "This is going to be more powerful than a hundred TV commercials"
Oh, and they have all your orders and previous free credits saved in the computer system that handles orders, tied to both address and phone number (or online account). So if you tried taking advantage of this thing they would just permanently ban you from ordering from our store. This only happened once or twice in my couple years there.
I had a few friends in customer support. This happened all the time.
If you spend too long going back and forth with a customer, the salary-based calculation of what it costs the company doesn’t make sense. So you give it to them free. But then it’s not like you have any margins that those come out of.
These delivery companies running at a loss are valued almost entirely based on growth in MAUs. Giving a customer a free pizza may be worth it if it keeps them on the platform, considering how much it costs to aquire a new customer.
Perhaps because of this Doordash has been aggressively cutting their refund policies. If an item is not delivered you don't get a full refund and often don't even get a refund for the item price + tax on said item.
well from the customer view (i think i have been this person a few times).. i dont exist to keep your company afloat. I trusted you to do what you said, and i gave you my money. and you didnt do what you said you would do.
Dear Company,
if you cant do your job you shouldnt exist
Kinda surprised this isn't higher up, I also assumed the path to a more sustainable model is to have a set of ghost kitchens making food of different types exclusively serving Deliveroo/Glovo/UberEats customers.
To be honest, this seems perfect. Your description of this business fits pretty well with the rest of Uber's business aka "burning investor money to never make a profit".
I have never worked in the food delivery industry (tech or otherwise), so I'm not in a position to make any assertions about it. From my limited vantage point, it seems that churn becomes less of a factor when you acquire and absorb/digest your competitors. Maybe that's the play here....buy the competition and then push the margins upward by (A) granting fewer introductory discounts, and (B) pushing on vendors to fork over more of their own margin.
Isn't it reasonable to think that once you have enough density, the business starts making a lot of sense (e.g., collecting (in the same car) multiple orders simultaneously from the same restaurant -- and delivering multiple orders on the same car to the same building/neighborhood)
I imagine you'd need a local hub/exchange for it to really work. I do question whether the model works outside urban settings though.
It is not impossible to achieve profitability. Seamless (what used to be every Wall Street Banker's go-to service) was profitable for a long while. Granted, they didn't have the same level of competition we see today.
I was looking for a comment mentioning Seamless. This is the best counter example. Note that these guys bootstrapped correctly from the start; as you mentioned, group buys was a great low cost/high margin way to get started.
When all you have is hammers, everything looks like a nail. Interesting to see this engineering folly in the financial space: M&A, no doubt, is a familiar tool among financiers.
- Create robots capable of handling pickup and delivery automatically - a very hard technical problem that were far from solving
- Manufacture these robots at scale
- Purchase and deploy these robots at scale
The timeline for all of these things together is years, even decades into the future. Even if you get the tech down, creating factories that can churn out hundreds of thousands of these robots will take years (see Tesla's example - and that's for tech we already understand, like cars). It will also require massive amounts of cash to buy and deploy all these robots.
Robot-led delivery isn't happening for a long time.
That is probably not so easy: you'd still have to pay for the car (if it retails for $100k, that is a lot of deliveries to make before eating that cost), and it will depreciate over time. And you still have to pay for gas (electricity?), insurance, maintenance, etc.
Not to mention solving the issue of the physical exchange with the customer.
I think it will make sense when cities will have a better infrastructure for targeted deliveries. I'm thinking routes for drones and clear delivery spots.
Would not be surprised 30y from now most homes won't have kitchen anymore. You'll have an access where a drone can come in an deliver whatever you ordered.
I do not look forward to that kind of future. As someone who has worked in food preparation, meals are usually quite unhealthy because they are designed to taste great. I can’t imagine eating delivered meals daily is good for your long term health. You would be surprised that seemingly healthy food, when made at a restaurant, is often anything but.
> Would not be surprised 30y from now most homes won't have kitchen anymore. You'll have an access where a drone can come in an deliver whatever you ordered.
I suspect you vastly underestimate how cheap and time effective cooking at home can be. My girlfriend and I just mealprepped 8 meals for $30. Took 15min of active work.
The whole week we both get a healthy balanced meal that takes 2min to prepare.
No delivery company can compete with that. Drones or no drones.
Edit to answer questions below:
We don’t mind eating 4 identical lunches. Saves you thinking about it. We use dinners and snacks for variety. This week it’s a pork roast with string beans and fingerling potatoes. Put potatoes in a baking pan, stick roast on a rack above the taters, stick in oven for 45min. Cook the beans in water.
About 15min of active prep time, another 5min to portion it out, 5min to stick dishes in dishwasher. Watch netflix or hangout while food cooks itself.
What's Postmates moat? Having never used it, I don't necessarily see the 2.6b$ value in a smaller delivery app that is only really used in some areas of the US. Though I'm sure there is something I'm missing and 2.6b$ is probably less expensive than the cost of pricing Postmates out of the market especially considering it's an all stocks deal. It's just that delivery seems to be easily scalable and easy to just dump money in to gain users (free delivery / delivery fees are much stronger factors than brand loyalty in my experience) so why acquire relatively minor players?
What's also interesting is that Postmates seems to have raised around 700m$, so chances are it's investors are probably the first to make an actual realized profit from food delivery ;).
I use Grubhub most of the time, and I’ve found the thing that keeps me on the platform is 1) The $10 monthly credit on American Express Gold cards and 2) The 2% cash back from the Rakuten portal, which stacks with the 4x points from the Amex card.
Of course, a lot of restaurants end up increasing their prices on Grubhub to make up for their fees, and rightly so (I phone in using the number listed on Apple Maps). I still don’t understand how anyone expects these food delivery apps to be profitable. I’m also 95-99% certain once we feel safe dining at a restaurant again we wouldn’t be using these apps anymore.
Exactly,those are amazing perks but they make for very expensive moat. As long as they need to bribe their users to stay with different financial incentives they will keep being glorified VC money redistribution schemes. My guess is that we will see a shift towards profitability when either cash dries out (which would mean Uber wins, they have deeper pockets and cashflow from ride sharing) or restaurants start to shift towards delivery optimized structures that would bring down delivery times and increase margins. I wouldn't bet on market domination from any player yet considering Just Eat's recent moves and deep pockets.
A little off topic, but wow it always amazes me how good credit card rewards are in the US.
> 1) The $10 monthly credit on American Express Gold cards
But the annual fee is $250, how is it worth it? At best if you use the $100 airline credit, which is now hard to "hack", and max out $10/mo on Grubhub, you're still paying $30 for the privilege...
> I’m also 95-99% certain once we feel safe dining at a restaurant again we wouldn’t be using these apps anymore.
at least here in NYC, we've been using delivery apps for over a decade. I wouldn't expect usage to drop below pre-COVID numbers once (and really, we should be saying if) things go back to normal.
Of all the services I've tried in this space, only Postmates lets you request items from businesses they aren't partnered with. This was a huge win once when I needed groceries delivered quickly.
They all do this now, to one degree or another. [1] [2]
The economics are even worse (because they don't get a cut from the restaurant), so these types of orders are either very high fee for the consumer, a loss leader, or both.
So they can go to the restaurant and order for you? That's interesting. I can't imagine it being very efficient or very fast though, how do they manage to not lose tens of minutes per order on non partnered restaurants/stores?
You can also order non-food items on Postmates (e.g. stuff from Home Depot).
Also anecdotally, the probability of an order actually arriving and being correct seems to be higher on Postmates. Perhaps the drivers there are more motivated to do a good job.
They don't have a moat. They are one of many similar players in the same space, which are interchangeable both to their workers and their customers, and they can only compete on price.
Drivers often work for several of these companies at the same time, and customers will use whichever one is cheapest at the time they feel like placing an order.
At the moment, with so many similar companies in the space, I don't see how any of them could become profitable, especially while being engaged in a race to the bottom on prices (because price is all that customers actually care about; the experience of a guy in a car bringing stuff to your door is pretty much the same with all of these companies).
> because price is all that customers actually care about
Customers actually care about service, too, but the two-sided-market-drivers-aa-contractors models doesn’t really leave the parts of service that would matter in the hands of the delivery matchmaker, so it's true that all they have is price, not because it's all customers care about but because it's all the firm has any kind of control over, by design.
Network effects are the moat here, much like for ride hailing apps. More drivers signed up on the app means that the service times for customers are improved, and more customers using the app means less waiting time and dead mileage for drivers.
There isn't much of a network effect at all once you hit a certain, relatively small, size which is why national ride-hailing businesses keep pushing the big ones out of their respective markets, and why there already are quite a lot of them competing profits away.
There's an illusion of network effects due to the investors willingness to burn their own money. Otherwise, like the actual transportation industry it's just a low margin business with tons of competition.
Meaningful network effects don't just make your company marginally better as you get bigger, that's true for virtually any business. It has to be shown that the size actually makes you run away with it instead of just leveling off.
The same is true in the fintech industry with all these much hyped neo-banks running on debt. Internationally they all tend to lose to local competitors because knowing your market and getting the details right is more important than scale.
A few things undermine the networking effect: drivers working for multiple delivery/ridesharing companies, and customers using multiple delivery companies.
If Postmates went of out business tomorrow the drivers would just shift to Doordash and Grubhub and Instacart and the others. There is zero moat.
I wouldn't call it network effects. All competitors are predominantly sharing the same network of customers and drivers. Sure, some are loyal to one service but I'm guessing a majority of people will try to get the best deal. If the network participants essentially select for lowest margin service with low switching costs, there is no moat. All services, in theory, should gain efficiency from network scale at same rate.
But that's the thing though, that's a very small advantage when it comes to a cutthroat sector like food delivery imo. I know I just use whatever app has free delivery or 25% off at that particular moment since it's almost frictionless to switch between apps. Even using different messaging apps is much harder.
That applies to all delivery apps and access to capital is really the only determining factor of success in that industry, but Postmates was also lacking in that regard.
I am bullish on this as a recent shareholder. We are now in the consolidation phase of delivery service where fewer companies mean less competition, more efficiency and better economics.
This is where Dara’s strength is. He has a history of great dealmaking and acquisitions. I expect Uber to thrive as the industry consolidates.
A more cynical take on this might be that it's hard to actually turn a sustainable profit in this market unless you have monopolistic pricing power, and hence, consolidation. Less of "the strong get stronger" and more of "the unprofitable become few enough to become profitable"
> A more cynical take on this might be that it's hard to actually turn a sustainable profit in this market unless you have monopolistic pricing power,
I'm not convinced even a sole provider would have pricing power in anything but a vastly smaller market than currently exists: food delivery doesn't compete with only other food delivery, but also with “drive there yourself takeout” and “cook (or at least heat up) food at home”, which limits the scope of pricing power.
I'd like to provide an personal take on this - this will be a bad deal until Uber can be a super app doing 100x more things than it's doing today. So maybe never.
Why? Because exactly in China there was consolidation of food delivery apps into like 3 or 4 of them from 100+. But all of them are still burning lots of money from investors, except one - Meituan-Dianpin which built on this super app (first think of it as uber+yelp+groupon+tripadvisor+more) handling all kinds of life needs from food to labor service. Yet this super app barely started making profits recently after grabbing so much aspects of daily life, while its food delivery unit is still burning money, though contributing to the profiting units like ads.
The American equivalent would be Google, as for myself and many others the Google maps reviews have long replaced yelp/groupon/tripadvisor, as it perhaps surprisingly tends to have the most accurate information about local businesses. But Google does not get into delivery because in America, the math doesn't work.
When I was in HK, I used foodpanda, it was super cheap, I think $10HK. Deliveryman shows up on a scooter, and has at least one other persons food with him. The density supports it. American cities are built somewhat differently where most middle-class people don't live very close to most of the restaurants they wish to order food from.
I think it has much more to do with the terrible math involved with doing delivery in such spread out regions. There being a super-app that does everything does not matter.
Also in America food takes much longer to be ready than in Asia. I don't know why but it does add up.
This is the same model that Uber at large is following with the taxi service. The underlying premise is that if Uber can just get a monopoly they’ll finally stop losing a billion dollars every month.
I doubt that Uber will be allowed to monopolize this industry. And if they did, I doubt that customers would be willing to pay the premium.
I doubt the validity of the food delivery model anywhere but the most dense urban areas. And in those areas competition is fierce and regulators are quick to pounce.
Just because Amazon lost money for a decade doesn’t mean every single company will follow that same trajectory.
This merger might trigger an antitrust case. Although people who order stuff might have lower fees through economies of scale, restaurants and drivers could be negatively impacted (more of a monosopy). At some point we need to start considering gig workers as part of antitrust considerations.
Anti trust seems weak. 3rd and distant 4th place merging. Even weaker right now than T-mobile Sprint. Where other things like spectrum and infrastructure were big. They are one company now.
I am awaiting a Steve Jobs-like re-entry of Travis Kalanick back into Uber when Uber purchases CloudKitchens to complete its kitchen-to-door vertical integration. It's all very hypothetical, but I give it a 1% chance of happening.
The future of Uber is clearly diversification. Drivers doing everything. I absolutely love that I can order food from distant restaurants because they have driver routes programmed to cover large distances and a business model that supports longer wait times for the customer in exchange for cheaper prices, wider restaurant selection, and of course more customers served. The local establishments can't compete with the 1 driver to 1/2/3 customer(s) model.
I'd say the future of Uber is perfecting their crown jewels first.
I'm a huge fan of the business model, but the app crashes, the customer service is non-existent, payments get rejected inexplicably and when you reach customer service they respond "I'm sorry you are having difficultly logging in."
I couldnt make it worse if I tried. Every rule of SWE-UX is violated. Got a problem? No code, no incident ID, you need to call a number with no context and re-contextualize. No follow-thru, nothing.
What I find interesting about the food delivery business is that there's clearly a market for this but nobody's happy.
- Restaurants (rightly) complain that the drivers provide a poor service. For example, pizza delivered cold because the drivers have no heat bags. I've even heard of a pizza box mounted vertically on a delivery bicycle.
- Customers are unhappy because food can be delivered cold through no fault of the restaurant. To save money, multiple deliveries can be scheduled at once. You can see this as your assigned driver drives passed the restaurant when your food is ready, clearly they're on another delivery. They come back 20 minutes later and turn what should be a 10-15 minute delivery (from the time the order is ready) to a 45 minute disaster;
- And drivers don't seem happy, complaining about low pay.
Yet... people want food delivered. Is this really just a case of people not willing to pay what the service truly costs? If so, no consolidation will help. I imagine fairly small delivery areas is really the only thing that can be economical.
I foresee a future where the entirety of listings on food delivery apps will be ghost restaurants - those whose menu and processes are optimized for delivery.
Many high street brick-and-mortar restaurants will shut, but those that remain will likely make being "not available on any food delivery app" a unique selling proposition.
Kalanick's next startup is basically this concept: CloudKitchens. At this point, it might be more of a risky real estate play than anything (to get these ghost kitchens set up in major cities with many hungry would-be customers).
Centralizing the restaurants seems key to profitability. The current format is too costly.
You're suggesting that the act of eating out, or walking for takeout is going to stop for a sufficient percentage of the population that regular restaurants are going to disappear?
That people are going to pay a premium to have their food always delivered and that people actually want to be in their homes / offices all the time, rather than get out of their current place to go and do something?
That's not a good example to bring up, especially if you take into account the recent layoffs and their current operations.
In Estonia they still seem to be doing a sort of a limited trial where they only deliver to a small area of one part of the town. The robots are too slow and get ignored by traffic all the time since their programming is very conservative. They try to avoid accidents but at the cost of delivery times.
> Is this really just a case of people not willing to pay what the service truly costs?
I think so. If a driver spends an hour on delivery, they have to make $15 in NYC or ~$8 elsewhere (USA) to be worth their time. For a single person, that can be the price of the whole meal again.
I've run into this when seeing the fees reflected on a final checkout page, and decided to cook for myself instead.
A single person isn’t really an efficient use for delivery. When I’m ordering for four people it’s $80+ so paying $20 for delivery is totally fine. And most places I order from are <10min drive.
Still surprising that they have managed a ~3x exit. They were raising money at a 1.3b$ valuation as recently as 2018 and to me it seems like Postmates is further behind it's competition in terms of growth and market share than it was 2 years ago.
This is one of those cases where the pandemic saved a company. A few companies like post area and this “uncooked food by mail” companies got saved big time.
What do you mean by execution? As a user, I've used them all, and like Uber Eats overall UX the best. But I suspect you were talking more about business operations?
If I was an investor, I would be worried that the CEO with no operations or technology experience is also the COO and CTO, is the one leading the operations and technology integration.
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I worked at LivingSocial in 2012/2013. We used to joke that “we lose money on every transaction but make it up in scale.”
Takeout and Delivery was one of the last bets the company made. Basically food delivery. The customer service load is huge, the services aren’t really differentiated, and you have to both pay the driver enough for it to be worth it and keep prices low for the consumer to think it’s worth it.
Attracting customers on either side of the market means spending money to undercut your competition. As soon as you stop giving free delivery promotions or introductory no-fee periods for restaurants, they can instantly churn with little to no pain. Not to mention reaching small restaurants is incredibly time consuming. They’re not all just hanging out online. They’re running a business. They take a lot of expensive (human) outreach.
Margins are terrible, if they’re ever positive. It’s just a bad business.
And yet people keep trying. None of these companies have made a net dollar. But it’s a simple enough pitch and a common enough use-case that investors think, “yeah, that makes sense!”
But it doesn’t. It just doesn’t.
Wealth is transferred from ordinary folk via the IPO-retirement-fund axis to the plethora of agents involved in the whole scheme, from the employees bashing out code and UX, right through to everyone involved the M&A and IPO and the whole tax / tax agent / government tax agency cadre.
It's not trickledown.
It's deluge-up economics.
Having said that, I do now wonder if you could make the model work by offering very cheap, or even free, delivery on the condition that you place the order a few hours in advance for a pre-selected delivery time. I'm not sure what the market is like for customers who want to order takeout food, but also know they'll want to do that in advance, but I think there's probably a niche there if anyone fancies taking a pass at it.
You're right and you just described how that "Special Offers" section of über ears works. They give you a small selection of restaurants that another user near you has ordered from and a 5min countdown to place an order yourself, if you do you get free delivery and über benefits from the efficiency of a double or triple order for one of their drivers.
While a nifty idea, I don't think it really works. I see two major obstacles:
Food ordering is instant (or almost instant) gratification. You want your food and you want it now. Or if not now then in 30 minutes, max. You may have the odd outlier, who plans accordingly and orders dinner at noon.
The other problem would be the customers at the end of the delivery route. While that doesn't matter much for groceries that sauce on the former tasty duck à l'orange may be mighty congealed and rather unappetizing once it arrives as one of the last deliveries of a route.
I just don't think that there's enough of a market for pre planned food deliveries and quality assurance would be impossible.
Roughly speaking, a delivery driver in my area nearly a decade ago earned roughly $20/hr after gas and car expenses, half in hourly wages @ state minimum and the other half in tips + $1/delivery payment. They also took about 3 deliveries an hour when fully utilized, which wasn't for 100% of their shift. The wait time got used productively, combination of answering phones, making pizzas, or at worst folding boxes.
This combination means that you're employing people at a significnatly-above-minimum-wage level, but their excess time waiting for deliveries gets paid at minimum wage and used to do customer service. And in the worst case when things are so absolutely slammed that there is no downtime, well, that's when you have to let phones ring (or answer briefly with "thank you for calling, our wait time is currently two hours, would you like to place an order?"). Plus these drivers know the store and the area well and from that alone should be significantly more competent at resolving issues - often enough someone calling in about their order will end up talking to the person who just tried and failed to make the delivery.
With Postmates and the like, though, the time spent waiting for a delivery has no useful work to fill the time. It's also not paid, but the gig has to justify itself economically, which means that drivers have to make up for it through increased per-delivery payments.
Basically, the difference is that store-employed drivers can do useful work while waiting to engage in deliveries, while app drivers can't. This is a very significant efficiency gain.
But domino's also makes the food, so if they break even on the deliver, that's fine, they made money on the food. Scaling the delivery part of the business also scales the food part.
If you aren't making the food, you have to make money on the delivery alone because scaling your delivery service scales someone else's food business. You're essentially competing with your suppliers (restaurants with their own delivery), and they don't need to make money on the product. That's a hard position to be in.
Domino's is built to deliver pizzas. They have streamlined the process of an order being placed, prepped, and handed off to delivery to try to make each step of the process as efficient as possible.
Do "horizontal" delivery companies have similar integration and benefit from similar efficiency?
In an ideal delivery situation, you want two things to be true: first, delivery people should be constantly moving. Second, orders should be handed off to a delivery person as soon as they are finished.
Is this achievable when delivery people are routed to new pick-up locations for each delivery? You want your delivery person to arrive at the restaurant right as the meal is finished -- if they arrive early, your delivery person is idle and your costs go up; if they arrive late, the food is cold and your customers are dissatisfied.
Restaurants with successful delivery components can solve this by tweaking their number of delivery people and their service areas in response to their busy-ness, so that they always have delivery people returning to pick up more food with an appropriate frequency. Have horizontal delivery companies solved these problems, either through integration with the restaurants or through some sort of big data magic?
That, plus the volume, allows Dominos to send out drivers with multiple pizzas. They can calculate an optimal traveling salesman route from the store to all of the customers in the run, and then the driver comes back to the store to do it again. Also, the whole organization is built around the drivers not waiting around. Restaurants will often not have the order when the driver arrives, and they have to mess around with payment, etc for every order.
All of that makes driver productivity much greater and so the delivery cost per order is much less.
A pizza is made for £1-2 and sold for £10-20. The margin is incredible and more than enough to pay staff and deliverers.
I personally never order pizza delivery because it's a total ripoff. Don't want to pay £20 for a pizza (or two on promotion). This is a party delivery service as far as I am concerned, only used when there are friends over (big dollars for the company for a single delivery).
The business model of Uber and Just Eat by comparison is to attempt to deliver Noodles for £10 (one meal for a lazy millennial or a couple who doesn't want to cook). It doesn't work.
I can order Chinese From halfway across the city for the same price as delivery by Dominos. The closest Dominos is 5 minute walk away. The next is a 5 minute drive. The Chinese food is 25 minutes away.
When you have your own delivery staff, you are planning your costs and setting your prices with all that built in. When a third party is handling deliveries (in a very non-integrated manner), it's a lot harder to consider the delivery cost as a part of the business, because the cost is being borne by a third party who is charging you an arbitrary amount that may not actually reflect delivery costs.
Since the third-party delivery companies usually take a cut for their services, restaurant owners can't plan that way. They do have choices: they can raise prices overall or they can charge more per-item for delivery orders (if the delivery platform allows it). If they do this, the restaurant owners will be fine; they'll offset any loss to the delivery company with an increase in prices (as long as this doesn't hurt non-delivery business).
The problem lies with the third-party delivery companies. They have drivers who are sitting idle during their downtime, so they have to pay them more per-delivery, essentially paying them to sit around. They have a ton of cheap VC money behind them, and VC's seem to care more about market share than profits, so they are incentivized to do deliveries at a lower price than what it actually costs. So it's no surprise that we see things like revenue of $50M on expenses of $100M. It's a race to the bottom, fueled by someone else's money. All the delivery companies must charge well below cost in order to be competitive. At some point (hopefully) people will stop investing in these companies. At that point, we'll see the final consolidated state of things, and we'll see delivery fees go up dramatically, or service quality go down quite a bit, or both.
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Now it is just a value proposition. Dominos can still make it work because the delivery is bundled with incredibly cheap to produce food. Horizontals do work and aren't going away but right now there's many players making the bet that future market position is more important than current revenue so its not making great money today.
If I buy food from $local_restaurant via $delivery_service I pay original cost of food + whatever the food deliver service adds to the cost of the food + the delivery services fee + tip to the restaurant + tip to the driver.
I think these businesses are awful and probably unethical, but from the outside it would surprise me if a single winner could not make this business model work, once they had so much of the market that delivery schedules could reach high utilisation.
If we knew what we wanted ahead of time, scheduling delivery ahead of time would make it easy... since you could use a delivery route (to deliver 2-3 items nearby).
A single winner may be able to make it work since you can do 1-2 pickups and deliver to two nearby homes.
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Considering that a large part of the culture defining movies/franchises/series IP is also not owned by Netflix, they can't really hope to just end up outcompeting everyone else down the line. Think about it: food delivery is pretty generic, you don't really see the difference apart from cost. So if let's say Uber manages to bring down costs, outrun the current big competitors, and use that dominant position to keep prices lower than future newcomers, odds are customers will just keep using Uber.
But in Netflix's case, people will still want disney movies or HBO series. That means there's no real hope for a profitable market dominating position down the line, so they will need to perpetually produce a very expensive product just to pay off the cost of other expensive product. If Netflix starts to lose subscribers, it still has very fixed costs (content acquisition & debt service for already made content) whereas Uber or Doordash have most of their operational costs directly tied to demand. No orders only means loss of revenue, but no additional losses.
Netflix just seems like a very weird and very... risky investment and much more so than the already very shaky business of food delivery. But I always assume the markets see something I don't, so maybe I'm totally wrong!
I started ordering on Uber Eats when they got the restaurant few blocks away that is good. Then they got another restaurant across the city, that's the only one to do some specialty food I love.
I only order from a couple places. All my friends only order from a couple places. Discussing what to order at parties goes like: this or this or that (each person's favorite or good enough restaurant).
Last month Uber added £5 delivery fee. Quit Uber and started the Deliveroo app. Everybody's got multiple apps on their phones. Couldn't care less about the app as long as it delivers the food.
Like you said teaching small businesses is hard, and you need to undercut competition to grow.
Well you don't need to teach someone who has been using grubhub and postmates already.
mobile does increase availability slightly and reduces friction a little, but those weren't the core problems that needed solving to make a successful business in the space. even uber's outsourcing of capital costs wasn't a major problem that needed solving to unlock the market.
you can't beat last-mile logistics by throwing more marketing at it.
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I understand it sucks to not get your ranch, but come on...
The reason being people will actually stop ordering Domino's if they're upset at a mistake in an order. Even something as silly as not getting ranch dip you paid $0.50 for. Making it up to them with a free item way more valuable than the mistake almost made the customer feel guilty. After using their free pizza credit, a customer was almost guaranteed to order Domino's again within 2 weeks, and would generally order twice as often as they normally would for the rest of the year or longer.
My very first delivery ever, I opened up the heatbag and their whole order slid out and fell onto the floor outside their front door. Maybe still one of my most embarrassing moments ever, I was sure I was going to get fired. When I told my manager about it, he said "This is going to be more powerful than a hundred TV commercials"
Oh, and they have all your orders and previous free credits saved in the computer system that handles orders, tied to both address and phone number (or online account). So if you tried taking advantage of this thing they would just permanently ban you from ordering from our store. This only happened once or twice in my couple years there.
If you spend too long going back and forth with a customer, the salary-based calculation of what it costs the company doesn’t make sense. So you give it to them free. But then it’s not like you have any margins that those come out of.
Dear Company, if you cant do your job you shouldnt exist
Self promoting tip: hire people who feel this
Ooof, I remember that from 2000. Does anyone look at unit economics?
PT Barnum made a book called "the art of money getting" - which could help many, worth the read.
I imagine you'd need a local hub/exchange for it to really work. I do question whether the model works outside urban settings though.
- Create robots capable of handling pickup and delivery automatically - a very hard technical problem that were far from solving
- Manufacture these robots at scale
- Purchase and deploy these robots at scale
The timeline for all of these things together is years, even decades into the future. Even if you get the tech down, creating factories that can churn out hundreds of thousands of these robots will take years (see Tesla's example - and that's for tech we already understand, like cars). It will also require massive amounts of cash to buy and deploy all these robots.
Robot-led delivery isn't happening for a long time.
It's like relying on a miracle. It's not a valid business plan.
Not to mention solving the issue of the physical exchange with the customer.
That's simply false. A lot of profit is made in the space and as soon as you have some significant market share it becomes a cash cow.
Yes, it might not always work to start up in a already saturated market, but that shouldn't be a surprise.
I hadn't gotten that impression.
Would not be surprised 30y from now most homes won't have kitchen anymore. You'll have an access where a drone can come in an deliver whatever you ordered.
I suspect you vastly underestimate how cheap and time effective cooking at home can be. My girlfriend and I just mealprepped 8 meals for $30. Took 15min of active work.
The whole week we both get a healthy balanced meal that takes 2min to prepare.
No delivery company can compete with that. Drones or no drones.
Edit to answer questions below:
We don’t mind eating 4 identical lunches. Saves you thinking about it. We use dinners and snacks for variety. This week it’s a pork roast with string beans and fingerling potatoes. Put potatoes in a baking pan, stick roast on a rack above the taters, stick in oven for 45min. Cook the beans in water.
About 15min of active prep time, another 5min to portion it out, 5min to stick dishes in dishwasher. Watch netflix or hangout while food cooks itself.
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What's also interesting is that Postmates seems to have raised around 700m$, so chances are it's investors are probably the first to make an actual realized profit from food delivery ;).
Of course, a lot of restaurants end up increasing their prices on Grubhub to make up for their fees, and rightly so (I phone in using the number listed on Apple Maps). I still don’t understand how anyone expects these food delivery apps to be profitable. I’m also 95-99% certain once we feel safe dining at a restaurant again we wouldn’t be using these apps anymore.
A little off topic, but wow it always amazes me how good credit card rewards are in the US.
https://www.eater.com/2019/8/6/20756799/yelp-grubhub-phone-n...
Not sure if this applies to numbers in Apple Maps, but something to bear in mind.
But the annual fee is $250, how is it worth it? At best if you use the $100 airline credit, which is now hard to "hack", and max out $10/mo on Grubhub, you're still paying $30 for the privilege...
at least here in NYC, we've been using delivery apps for over a decade. I wouldn't expect usage to drop below pre-COVID numbers once (and really, we should be saying if) things go back to normal.
The economics are even worse (because they don't get a cut from the restaurant), so these types of orders are either very high fee for the consumer, a loss leader, or both.
[1] https://gizmodo.com/doordash-pizza-arbitrage-shows-the-fubar...
[2] https://www.eater.com/2019/10/30/20940107/grubhub-to-add-res...
Also anecdotally, the probability of an order actually arriving and being correct seems to be higher on Postmates. Perhaps the drivers there are more motivated to do a good job.
https://www.crunchbase.com/organization/postmates
Drivers often work for several of these companies at the same time, and customers will use whichever one is cheapest at the time they feel like placing an order.
At the moment, with so many similar companies in the space, I don't see how any of them could become profitable, especially while being engaged in a race to the bottom on prices (because price is all that customers actually care about; the experience of a guy in a car bringing stuff to your door is pretty much the same with all of these companies).
Customers actually care about service, too, but the two-sided-market-drivers-aa-contractors models doesn’t really leave the parts of service that would matter in the hands of the delivery matchmaker, so it's true that all they have is price, not because it's all customers care about but because it's all the firm has any kind of control over, by design.
There's an illusion of network effects due to the investors willingness to burn their own money. Otherwise, like the actual transportation industry it's just a low margin business with tons of competition.
Meaningful network effects don't just make your company marginally better as you get bigger, that's true for virtually any business. It has to be shown that the size actually makes you run away with it instead of just leveling off.
The same is true in the fintech industry with all these much hyped neo-banks running on debt. Internationally they all tend to lose to local competitors because knowing your market and getting the details right is more important than scale.
If Postmates went of out business tomorrow the drivers would just shift to Doordash and Grubhub and Instacart and the others. There is zero moat.
Grubhub has been profitable for years now, pulling in $23m in income in 2018, see: https://www.cnbc.com/2019/12/13/grubhub-uber-eats-and-doorda...
Why? I don't know. They were early to the game and I stuck with it I guess
That applies to all delivery apps and access to capital is really the only determining factor of success in that industry, but Postmates was also lacking in that regard.
This is where Dara’s strength is. He has a history of great dealmaking and acquisitions. I expect Uber to thrive as the industry consolidates.
I'm not convinced even a sole provider would have pricing power in anything but a vastly smaller market than currently exists: food delivery doesn't compete with only other food delivery, but also with “drive there yourself takeout” and “cook (or at least heat up) food at home”, which limits the scope of pricing power.
Why? Because exactly in China there was consolidation of food delivery apps into like 3 or 4 of them from 100+. But all of them are still burning lots of money from investors, except one - Meituan-Dianpin which built on this super app (first think of it as uber+yelp+groupon+tripadvisor+more) handling all kinds of life needs from food to labor service. Yet this super app barely started making profits recently after grabbing so much aspects of daily life, while its food delivery unit is still burning money, though contributing to the profiting units like ads.
When I was in HK, I used foodpanda, it was super cheap, I think $10HK. Deliveryman shows up on a scooter, and has at least one other persons food with him. The density supports it. American cities are built somewhat differently where most middle-class people don't live very close to most of the restaurants they wish to order food from.
I think it has much more to do with the terrible math involved with doing delivery in such spread out regions. There being a super-app that does everything does not matter.
Also in America food takes much longer to be ready than in Asia. I don't know why but it does add up.
I doubt that Uber will be allowed to monopolize this industry. And if they did, I doubt that customers would be willing to pay the premium.
I doubt the validity of the food delivery model anywhere but the most dense urban areas. And in those areas competition is fierce and regulators are quick to pounce.
Just because Amazon lost money for a decade doesn’t mean every single company will follow that same trajectory.
Can you explain this sentence? I always thought more companies, implies more innovation, and thus more efficiency.
a) at a restaurant, rather than having ten different delivery people pickup, One person can pickup ten orders.
b) 10x more consumers means that the average distance between deliveries shortens.
It’s not going to be quite this efficient but directionally more scale means more efficiency.
In addition, less competition means that Uber can charge more for their services.
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I'm a huge fan of the business model, but the app crashes, the customer service is non-existent, payments get rejected inexplicably and when you reach customer service they respond "I'm sorry you are having difficultly logging in."
I couldnt make it worse if I tried. Every rule of SWE-UX is violated. Got a problem? No code, no incident ID, you need to call a number with no context and re-contextualize. No follow-thru, nothing.
- Restaurants (rightly) complain that the drivers provide a poor service. For example, pizza delivered cold because the drivers have no heat bags. I've even heard of a pizza box mounted vertically on a delivery bicycle.
- Customers are unhappy because food can be delivered cold through no fault of the restaurant. To save money, multiple deliveries can be scheduled at once. You can see this as your assigned driver drives passed the restaurant when your food is ready, clearly they're on another delivery. They come back 20 minutes later and turn what should be a 10-15 minute delivery (from the time the order is ready) to a 45 minute disaster;
- And drivers don't seem happy, complaining about low pay.
Yet... people want food delivered. Is this really just a case of people not willing to pay what the service truly costs? If so, no consolidation will help. I imagine fairly small delivery areas is really the only thing that can be economical.
Many high street brick-and-mortar restaurants will shut, but those that remain will likely make being "not available on any food delivery app" a unique selling proposition.
Centralizing the restaurants seems key to profitability. The current format is too costly.
That people are going to pay a premium to have their food always delivered and that people actually want to be in their homes / offices all the time, rather than get out of their current place to go and do something?
In Estonia they still seem to be doing a sort of a limited trial where they only deliver to a small area of one part of the town. The robots are too slow and get ignored by traffic all the time since their programming is very conservative. They try to avoid accidents but at the cost of delivery times.
I think so. If a driver spends an hour on delivery, they have to make $15 in NYC or ~$8 elsewhere (USA) to be worth their time. For a single person, that can be the price of the whole meal again.
I've run into this when seeing the fees reflected on a final checkout page, and decided to cook for myself instead.
Not a 10x exit.
I suspect that many of the investors are just happy to record a profitable exit.
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Hard business.
UberEats and Postmates have the worst execution in the space compared to Caviar (owned by DoorDash), DoorDash and Grubhub.
Dara is a banker, he doesn't know anything about operations. This will end bad.