The Food Delivery Business is booming. But there is a catch … a fairly dramatic one; they don’t actually make money. The question is why then are investors pouring $Billions into these companies. That’s what this edition of the Business Model Canvas is about.
How do Delivery Apps make money?
There are many big, publicly-traded Delivery Apps in the food delivery business, worldwide, but let’s list the top 3:
- Just Eat Takeaway.com in Amsterdam (Market Cap: ~€13 Billion)
- Doordash in the USA (Market Cap: ~$65 Billion)
- Uber (Uber Eats) in the USA (Market Cap: ~$108 Billion > Uber Eats accounted for about ~43% of revenue in Q4 2020)
These companies above have also acquired several competitors themselves (ie. Grubhub, Skip The Dishes, Postmates, +). Yet with all of these companies in the market, they all have effectively the same business model:
As you can see in the diagram above, it is a 3-sided marketplace between the customer, the restaurant/merchant, and the delivery driver. On any given order between the customer and the restaurant, the Delivery App will charge the customer a Flat Fee, and then will charge the restaurant a commission on the Order Value that typically ranges from 20-40% (30% standard, except in jurisdictions where the fee is capped). The Delivery Driver then gets a fee that includes factors such as distance drive (ie. Mileage) and other factors (depending on the app, restaurant partner, etc). It is a messy business model to analyze collectively, but in the end the Unit Economics look something like this:
These businesses all lose money on the margin; however, as illustrated in the example above that Net Revenue (ie ‘Net Revenue for Uber Eats’) is exclusive of all the costs associated with Uber’s Delivery business (ie. Cost of Revenue). You can see from their recent Q4 2020 Earnings that they lose money (EBITDA – essentially, the profitability of the business line).
ALL of the companies, public or acquired, lost BIG money in the first 9 months of 2020, and yet we have seen investors push stocks like DASH (IPO in Q4 2020) to record highs. For example, Uber Eats was losing ~$3.36 per order in mid 2020.
The question in all of this is WHY?
There are no absolute answers, but here are a few plausible ideas:
- the category’s TAM (Total Addressable Market) is huge, and the shift in consumer behavior towards delivery will one day make this category profitable (ie. Uber Eats currently losing money, but CEO expects profitability on the horizon)
- Business Model Innovation such as offering Subscriptions to frequent users ($9.99 per month + applicable discounts) will help create a recurring revenue business model that can be optimized into a profitable stream over time
- the big prize is not, in fact, restaurant Food Delivery but rather Grocery Delivery. We see DaaS (Delivery as a Service) emerging in parts of Europe and the US to meet on-demand expectations with select grocery deliveries
Uber Eats emergent Grocery delivery business “… had gross bookings exceed $1 billion on an annualized run rate in September.” In addition to that, their acquisition of Postmates helped them increase their brand presence and add “DaaS” partners to their Grocery delivery line (~18% of December orders).
Whichever explanation (or combination of explanations) you believe is most likely – cost optimization for future profitability, business model innovation (subscription), or adjacent market entry (ie. Grocery) – one thing is for sure: the 1st version of the Food Delivery business model is broken.
Community-Centric or Commercial Partner Strategy?
These businesses work with Commercial Partners to help scale their offerings. Given that this market is itself an ecosystem (consumers, restaurants, grocery strores, drivers, etc), several partnerships by Uber Eats, DoorDash and others were created in order to increase the breadth, depth, and convenience of their respective offerings. In 2020, as a result of the pandemic, growth in the market exploded.
Competition up to this point in the history of the market has mainly been focused on increasing market share; going forward it is likely to focus on profitability and innovation.
There are a few different layers to potential partnerships, but almost unlimited options of firms (big and small) that Delivery Apps can form partnerships within those layers.
- Uber offers a bundled package between its ridesharing (ie. Mobility) and grocery delivery (ie. Delivery) businesses called UberPass. While it’s technically a ‘partnership’ between two of Uber’s businesses, it does create a new Subscription product in the market that is hard to match (users can choose from Uber Pass (includes ridesharing offers) or Eats Pass (delivery only)). For context, Lyft has partnered with GrubHub to create essentially the same program via their LyftPink offering
- Further building on the Subscription model, Uber Eats has partnered with American Express to offer a 12 month free trial for customers who are enrolled with their Green, Gold, or Platinum cards, an example of a partnership between a Delivery App and Financial Services company
- There has always been competition to partner with leading restaurant chains. Each Food Delivery App has their own set of partners. DoorDash, for example, has partnered with Chipotle in the US. It was estimated that ~12% of Chipotle’s orders come via the Delivery channel (Jan. estimate). These partnerships often are premised around lower delivery fees; they don’t always increase revenues, but they do work for some chains that have scale of operations
- The emergence of Ghost Kitchens (or Cloud Kitchens) – effectively restaurants that lease small kitchen spaces with no front of house – have created opportunities for Delivery Apps to create new partnerships and ‘experiences.’ Not without controversy, naturally, but nonetheless the Ghost Kitchen business model has created a niche for Delivery Apps to innovate with smaller restaurants and experiment with new types of delivery models
- During the pandemic, these cash-rich Delivery companies attempted to take some of the sting off their commissions for smaller restaurants by creating programs, incentives, and even small grants that mirror a partnership strategy
All three apps say they have spent millions of dollars to support small restaurants through grants and free promotions. DoorDash said it waived commissions for eateries with five or fewer outlets in the early months of the health crisis. Grubhub said it suspended commissions for independent restaurants for the first few weeks of the pandemic. Uber Eats said it has halved commissions for restaurants doing their own deliveries through mid-this year.WSJ
- Finally, with their foray into the Grocery business, companies like Uber Eats are launching partnerships with large grocers like Carrefour in Paris, France
We can see that there are really no limits to the types of commercial-partnership strategies that these companies can deploy, especially now that they are public and have $Billions of dollars in the bank. None of these strategic moves have up to this point, however, solved the problem of profitability. It will be interesting to follow this space in the years to come, as a divergent strategy is likely what is required to break away from the pack and expand the margins in the business model.
Interestingly, one of the big problems that plagues this category is the lack of customer loyalty. The Subscription model combined with increasing Loyalty rewards may help rectify this, but another area where we may see some divergence strategically is to implement a more community-centric program (whether for consumers, restaurants, both) that brings people closer together (digitally, physically, both) and increases loyalty.
Fundraising and Valuation
Outside of Uber Eats, which was incubated within UBER (a public company), the companies mentioned above had raised large amounts of venture capital before a wave of consolidation (via Mergers and Acquisitions) hit the market in 2019 and 2020.
After Amazon invested $575 Million in UK-based Deliveroo, UK-based JustEat merged with Dutch-based Takeaway.com in a transaction valued at £6.2 Billion (~$7.8 Billion) in April 2020. JustEat Takeaway then announced an all-share deal to acquire US-based Grubhub in June 2020 for $7.3 Billion.
DoorDash IPO’d in December 2020 and raised $3.37 Billion. Roughly around that same time, UBER finalized its acquisition of Postmates for $2.65 Billion.
The publicly-traded companies (DASH, UBER, TKWY) currently trade at, or near, the peak of their valuations. With $Billions in the bank and continued investor interest, they continue on their aggressive acquisition sprees. An example is Uber’s recent acquisition of liquor-delivery service Drizly for $1.1B in cash and stock.
Food Delivery Apps Business Model Canvas
A business model is defined as:
Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.
On-demand food delivery service from local restaurants and grocery stores
- Consumers: Convenience
- Restaurants (Merchants): Creates new channel of customers, handles delivery logistics
- Drivers: Steady revenue stream (replaces employment in some markets)
Business Model Analytics
As we can see throughout this post, the Food Delivery market (built around restaurants) is a rapidly-expanding, high-volume market with potential for future innovation around Subscriptions and expansion into adjacent markets like Grocery. But it also extremely competitive and unprofitable, meaning we should think about certain Metrics/Analytics that can help us make sense of the trend in this industry going forward.
When we look at the DoorDash S-1 for example, they continually talk about GOV (Gross Order Volume) increasing and a shift towards a positive Contribution Margin in 2020.
Uber’s Q4 2020 Investor Presentation shapes a different narrative, one built around shrinking EBITDA losses on a Quarterly basis and trending towards profitability, with a bright future around Subscriptions.
These narratives, however, are company-driven and hard to break down into Business Model Analytics.
Below of some Metrics/ Analytics that could be used to break down how the business model is evolving.
- Average Spend Per Order: Caviar (acquired by DoorDash) had the highest average order size while Uber Eats had the lowest (Feb. 2020 data)
- Customer Exclusivity (Loyalty): DoorDash had the highest % of loyal users at 56%, while Uber Eats had 43%. Postmates (acquired by Uber) had the lowest at 36%. The graphic below shows that about 40% of the competitor’s customers ordered from DoorDash, for example, the biggest company by Market Share in the US
- Order Frequency: while it is a slightly older data set (2018), users on Uber Eats ordered about 7.7X per year and spent $220.37 on average (Slice Intelligence)
The overall pattern we are looking for is if the companies can monetize the loyalty they have built and increase the Average Order Values (AOV) on an individual customer level. If these companies have to continue to spend money on Sales & Marketing to acquire customers (CAC) and lose money on a per order basis, they will continue to lose money in the long run despite the way the financials are trending (losing money on each order, net). Clearly customers ‘switching’ and using multiple apps is still a big problem, so these Subscription/Membership programs will be interesting to follow; they can increase AOV and Take Rate, but only up to a certain number of orders per month (~5), so those programs need to be optimized.