The App-Driven Food Delivery Industry
Welcome to the uberification of service economy. In this iPhone era of ultra convenience, getting your food delivery to your door is now easier than ever, and thanks to the technology that buys you time and saves you effort, almost no human interaction is required. Web and mobile technology are just making it so simple. There’s huge demand for delivery. Companies like Amazon and Uber are operating and expanding services that allow shoppers to order something online and have it that same day, without ever leaving home.
People have become conditioned to expect Amazon to deliver practically anything to them. Consumers expect what they want, and they want it brought to them. Similar to the consumer value online direct-to-door shopping fulfills, consumers are now accustomed to ordering quality food online, pay from from their smartphone, and having them delivered to their door quickly. Restaurants have to meet those heightened expectations with new value propositions that give people what they didn’t realize they wanted.
As consumers’ expectations escalate, the restaurant industry is entering more and more challenging times, as operators are facing increased labor costs resulting from the Affordable Care Act and a higher cost environment in general. California and New York are becoming the first states to raise the statewide minimum wage to $15. Restaurants may be forced to raise menu prices up to 1.4 percent annually over the next five or six years to offset labor costs. In addition to wage hikes, the restaurant industry is facing other government mandates that are expected to raise labor costs. New overtime regulations expected to be put in place in as soon as a month will almost certainly cost restaurants money. And that will result in price increases. As costs increase, they increase menu prices and have less traffic in to the restaurant, or do they hope to have more customers at a decreased level of profitability.
According to the National Restaurant Association, restaurant-industry sales are projected to total $782.7 billion in 2016 and equal 4% of the U.S. gross domestic product. Take out and delivery sales account for approximately 6% to 12 % of total sales in restaurant sales. Food takeouts and deliveries are estimated to generate about $70 billion annually in the U.S. 61% consumers who would be likely to order delivery from a tableservice restaurant if offered. Traditionally, offering delivery required restaurant owners to staff, pay, insure and manage delivery drivers. But now, restaurants can add delivery services without the traditional risks and costs. With the delivery apps, tech companies act as a middleman connecting merchants and couriers with customers, and they pass the service charges on to the consumer.
Millennials (18-34 year-old) are more likely than other generations to choose delivery, which already represents about a fifth of their foodservice occasions, versus a tenth of occasions for baby boomers (52-70 year old). Heavier usage by younger consumers is a signal that delivery demand will continue to grow as these consumers move through their peak spending years. According to the NRA 2016 Restaurant Industry Forecast, 74 % percent of millennials said they would order delivery from a tableservice restaurant if available. Eight in 10 millennials (ages 18-34) said they likely would use delivery, compared with 60 percent of all adults.
Restaurants need to think beyond the paper takeout menu and delivery phone line. For small and newer restaurants, having a partner that can help revenue growth is an invaluable asset. Limited marketing budgets and word-of-mouth alone aren’t always enough to generate the visibility and tangible orders young establishments need to jumpstart their brands. Reducing the cost of customer acquisition and outsourcing the delivery all together is a value proposition for the restaurants. Restaurateurs can choose from an increasingly wide array of delivery and carryout options from online ordering services to third-party deliveries. An increasing number of restaurant chains attempted to find their way in the growing crowd of third-party players pitching on-demand service.
The biggest food ordering app around is GrubHub Seamless. Seamless is dominant in NYC, Grubhub in Chicago, and nationally they are the leader. Seamless was one of the first to pop up in the U.S., founded back in 1999, and GrubHub soon followed in 2004. In May 2013, Seamless announced the signing of a definitive agreement to merge with GrubHub to create a combined company to drive more orders to restaurants and for better user experience. GrubHub (NYSE:GRUB) went public in April 2014, at $26 per share. The company has more than 44,000 restaurant partners in over 1,000 U.S. cities and London. The company processes more than 267,800 orders/day and has 6.97 million active diners. 60% of its orders are generated through mobile phones. GrubHub reported full-year revenues of $361.8 million, up 43% from a year ago, and gross food sales of $2.4 billion in 2015. The company is currently valued at around $3 billion.
GrubHub and Seamless are sales-driven, customer acquisition companies, creating demand for restaurants. The combined company offers its own delivery service for restaurants that don’t do it themselves. They provide their services to consumers for free. Restaurants pick up the tab. Restaurants can choose from four commission levels (12.5%, 15%, 17.5%, and 20%). The more a restaurant pays, the higher up it will appear in the search results. GrubHub and Seamless charge an average commission of 13.5% for restaurant orders placed through their websites and apps. And restaurants pay more to appear higher in search results, which isn’t apparent to diners. Restaurants can choose their level of commission rate, at or above the company’s base rates, to affect their relative priority in its sorting algorithms, with restaurants paying higher commission rates generally appearing higher in the search order than restaurants paying lower commission rates.
Following the success of GrubHub, a handful of companies have quickly reached big valuations, encouraging even more new competitors. On-demand food tech start-ups raised a record $5.5 billion globally in 2015, an increase of 185% from 2014, according to research firm CB Insights. The San Francisco food delivery startup DoorDash is a logistics and technology-driven company which manages a delivery force for restaurants. DoorDash serves by delivering from the restaurant to doorstep of customers who place food orders online through DoorDash. Consumers pay a $5 to $7 flat fee for deliveries, depending on the market, and participating restaurants pay a commission. Usually, the percentage of commission from restaurants is 20%.
Postmates, a competitor that focuses on restaurant delivery, operates a network of couriers in major American cities who deliver goods from local restaurants and stores to customers within an hour. Customers place orders through the Postmates app and can track their delivery in real time. Similar to DoorDash, consumer pays $5 delivery fee, depending on market. The company generates revenue through delivery fees and services fees, and also takes a cut of some transactions. Postmates expects to generate $225 million in revenue on $740 million in gross sales this year, according to financial documents from April reviewed by Bloomberg.
As evidenced by the mergers of GrubHub/Seamless, consolidation will accelerate as competition grows. While delivery players Postmates and DoorDash keep trying to be Grubhub’s main competitor, Amazon and Uber enter the food delivery game in a big way with their Prime Now and UberEATS platforms. Both companies are hoping to make their services profitable by charging steep percentages to restaurants using their delivery services. Amazon is looking to take a 27.5 percent chunk from partnered restaurants, and Uber is going a step further at 30 percent. The team behind UberEats says charging any less would be “unsustainable,” according to the New York Post.
Amazon Prime is the hugely popular loyalty program that has become a smorgasbord of free two-day shipping, online video, and other perks like access to the Kindle Lending Library. Prime members place their orders through Amazon’s standalone Prime Now app, which also offers one-hour delivery of a wide range of everyday products. Aside from the Prime subscription fee, food delivery comes with no additional markups or fees. Amazon is also guaranteeing that people will pay the exact same price as is listed in restaurant menus. Amazon takes a cut of the sales for each delivery it makes, but it does not charge customers delivery fees in any of the markets where it operates. The company has no immediate plans to tack on extra charges.
According to a Wall Street analyst, Amazon Prime has nearly 70 million members, who also raised its price target on the Amazon (NASDAQ:AMZN) to $1,000. Amazon has an advantage because of Prime members, $99-per-year Prime service offer free 2 day shipping as well as other benefits, including access to the company’s video-streaming subscription service. According to Consumer Intelligence Research Partners, Amazon Prime members are spending on average about $1,100 per year, compared to about $600 per year for non-members.
“If we can get you a car in five minutes, we can get you anything in five minutes,” Travis Kalanick, Uber’s CEO said in an interview about the company’s limitless ambitions. Uber’s food-delivery service, UberEATS is an expansion to utilize the back-end logistics framework built for its ride-hailing service, and take advantage of the vast network of drivers the company already has on the roads. UberEATS, give users the choice between a couple of menu items daily and allows them to pay via the same cashless system used for Uber car rides.
UberEATS service partners with top local restaurants in each city and allows users to order directly from same Uber app they use to get a ride, give users the choice between a couple of menu items daily and allows them to pay via the same cashless system used for Uber car rides. At this time, orders are not customizable and will be delivered to customers curbside in 10 minutes or less. If UberEATS delivers in your area, you can see the menu and order directly through the app. The app syncs up with existing Uber accounts it will charge a $5 delivery fee, depending on the market. The company also launched UberRUSH, which connects Uber user with a bike messenger to make a delivery. UberRUSH is currently available in the New York City, San Francisco and Chicago. Uber’s advantage, an existing dispatch and routing infrastructure, takes only a small piece of the equation in the company’s favor.
Google trained consumers for a faster search, Amazon has taken the lead in delivery and consumers have become more accustomed to their convenient and fast shipping and Uber did their best to enable consumers to have services delivered by pushing a few buttons on their smartphones. As a result, they use apps and information to find exactly what they want, as well as where and when they want it—often for the lowest price available.
It’s a low-margin business, and as Jeff Bezos said:
Your margin is my opportunity.