How will quarantine and crisis affect the delivery market in a long-term perspective?

The world economy has tipped into a recession caused by the COVID-19 pandemic. The quarantine has impacted most industries. Airlines suffer enormous losses, cafes and restaurants are closed, small and medium businesses are on the verge of bankruptcy.

Currently, one may believe that delivery has become one of the few areas not affected by the economic downturn. Moreover, the industry seems to be gaining momentum. But is it really true?

Rapid growth

Considering the latest news in the delivery industry, one can conclude that the crisis has only benefited it. Grubhub, an American delivery service, states that the rate of new restaurants joining the platform has increased 4–5 times. Uber Eats demonstrates even higher results with 10-times increase rate. The Ukrainian office of our portfolio company Glovo has reported several times higher demand for the delivery from pharmacies and supermarkets. In March, downloads of such apps as Instacart, Walmart Grocery, and Shipt, increased for 218%, 160%, and 124% respectively, compared to February.

The situation is improving even for the companies which have been experiencing set-backs until recently. Shares of the American company Blue Apron, which delivers food packages and recipes for them, have been gradually getting cheaper since their IPO in 2017. Nevertheless, amid the pandemic and quarantine, the company’s capitalization has demonstrated growth.

Along with an increase in the user base, delivery services introduce new functions. Instacart, Uber Eats, Postmates, and Dominos have launched “contactless” delivery — one can ask a courier to leave the package on the doorstep to avoid personal contact. Chinese services Meituan Dianping and JD.com went further and began to deliver orders using autonomous vehicles.

Many companies have expanded the range of their services. UberEats and DoorDash have launched supermarket grocery delivery. Instacart has introduced a flexible ordering system which allows one to receive delivery within several days, which is convenient for those who plan the shopping ahead.

Impact of the crisis

All the above facts indicate that the delivery industry is experiencing its best times. But what will happen next?

The AARP survey has shown that more than half of Americans do not have savings for unforeseen circumstances. The situation is similar in Ukraine: 40% of citizens have no savings for the month of quarantine while 13% will have enough money for only a few weeks.

What does it mean? During the quarantine, the purchasing power of most people will decrease significantly, which will affect all areas of the economy including delivery services. This forecast is confirmed by the General Manager of Glovo in Ukraine, Dmitry Rasnovsky. According to him, demand is currently growing, but it is a temporary phenomenon. Restaurants will continue closing while the number of couriers will decrease due to the fear of infection; therefore, the delivery business will have to limit its operations.

Moreover, there is reason to believe that new directions established by delivery services ­– for instance, products from supermarkets — will not improve the position of such companies. When consumers’ financial resources are limited, the margin on products’ delivery will become an essential hindrance. Ultimately, there is a risk that companies in the industry may stop their operations for the quarantine period.

Recovery process

Still, there are some positive aspects in the forecast. One of the main peculiarities of delivery services is their flexibility. In such companies, income is closely interrelated with expenses: the less they earn, the less they spend. Accordingly, delivery services lose much less money passively than the restaurant business. When demand falls, the expenditure on wages fund for couriers also decreases; hence, only office rent and salaries for managers have to be covered.

There is one more important issue to consider. Sad but true, many restaurants will not survive the quarantine and the crisis. At the same time, such an outcome applies primarily to small cafes while large networks, though being affected by the downturn, will not close. That fact is paramount for the delivery services. For such companies, the Pareto principle applies, which means that 20% of restaurants provide 80% of revenue. Those are notional figures, but they are close to reality. Accordingly, during and after the quarantine, companies in the delivery industry will not lose their key partners.

These two facts indicate that even though delivery services will be affected in case of substantial extension of the quarantine, they have high chances for rapid recovery. Flexibility, a well-developed business model, and competent work with partners are the instruments which will help the mentioned companies make up the lost ground.