How we will eat tomorrow: new business models in the food delivery industry
Food and dining industry has been a long-time sweet spot for sophisticated entrepreneurs looking to make a difference beyond earning money. Why? Well, we all have to eat, don’t we? But with the development of the civilization, fairly easy process of eating becomes more and more complicated. That’s where the startups with new food business models come in. And a huge, if not the easiest to target, chunk of the market they are going for is food delivery. At GR Capital, we quite often come in contact with this particular segment and I’ve got a number of fellow investors constantly quizzing me on the insides of how this business is organized. Thus, I decided to shed some light on the most basic concepts of food deliver business models, in case you are interested in the industry.
Let’s put all models in food delivery on the chart where we have Ingredients — Prepared food on the X-axis and Basic technology — High-end technology on the Y-axis. And now let’s discuss each group of companies starting from the lower left corner.
Delivery from supermarkets
Online grocery platform is an e-commerce model, which allows a number of supermarkets to present their full catalogs online. As a customer, you can pick any product, define its quantity and even outline in how many bags it should be packed in. It’s further processed by the employee in the supermarket, who will contact you in case any issues with the order arise and even make sure your frozen products are placed in special boxes to sustain the same temperature. After the order is packed and ready to go, it’s delivered by store’s or 3rd party couriers.
Pros:
- Not capital-intensive model — fully based on strong tech solutions, effective fulfillment and fast delivery
- Wide choice — you have several supermarkets on your platform, so you are not limiting the customer to one seller
Cons:
- Big retailers can take the significant market share at any point in time — they want to have a full control of their brand and want to know their customers
- The margins are low — you need to have the very high turnover to break even
- Integration with internal supermarket systems can take years
Trends:
- Retailers are actively moving into the space: Amazon is already in with the Amazon Fresh; Target acquired Shipt in 2017 for $550M
Meal Kits
Meal kit is a box delivered to your home with ingredients and receipts to prepare specific dishes. The key advantage of the model that you are not spending time buying those ingredients. Moreover, the waste in the case of meal kits is minimal compared to the classical of the food preparation. There is a lot of buzz around the meal kits, not least due to big marketing behind the service. It’s understandable though — who wouldn’t want their meal recipes created but the top Michelin chef and high-quality products hand-picked by the team of the best suppliers. There are even tries to implement all sorts of AI technologies in different stages of the process, which are in a nutshell — another of marketing stunts for progressive investors.
Pros:
- Execution model, not a tech play — technologies can improve the fulfillment process but not drastically
Cons:
- Low margins — similar to grocery business
- Low stickiness — people are price sensitive, so they can switch to old-style groceries any time
- Low barriers to entry for the new players
Trends:
- Retailers are entering the space: Amazon went into the market and ruined the IPO of Blue Apron; Albertsons acquired meal-kit rival Plated in 2017
Full stack supermarkets — one supermarket?
The business model entitles full online catalog of all products, plus the delivery service. The difference compared to delivery from supermarkets is that this model is capital intensive. The concept is not a brand new one, so you can see several existing public companies on the market.
Pros:
- Lower costs compared with offline supermarkets
Cons:
- High capital expenditures — you need to heavily invest in logistics and stock
Trends:
Courier services
The business model allows for platform users to request delivery of any product from any pharmacies, grocery stores, etc. Service is deeply integrated with the catalogues of the most popular groceries. The business model includes delivery and service fee, which is calculated from the total value of the order. The business model was initially created by Postmates in the US that had significant problems with execution, but now they are scaling to Latin America. Similar models evolved in Indonesia (Go-Jek) and South Europe (Glovo). Interesting enough, Go-Jek company initially started as Postmates clone and currently is Uber competitor in Indonesia. Platform allows you even to order a masseur to be delivered via motorcycle to any address you order to. Same applies for beauty specialist, plumbers, cleaners etc. Goes without saying that driver can also pick you up and cater you wherever you’d like to go. Thus, Go-Jek became a full stack business in Indonesia that covers all services that could be given using the motorcycles. Glovo has a similar model and is growing actively in Europe and recently launched in Latam.
Pros:
- Significant number of restaurants — user can even order food from the restaurant which does not have any delivery service
- Not dependent on one category — user can ask to deliver the courier any product he wants from any store or pharmacy
- Low capital expenditures — company is fully dependent on tech and city managers, who ensure growth of the company
Cons:
- Courier unions — allows for couriers united strikes for higher salary demands
- Difficult unit economics on competitive markets — every delivery company meet competition from both grocery delivery and restaurant delivery service
Trends:
- Partnership with big chains: Glovo partnered with McDonalds — efficient move for a strong order flow
Software only
The oldest model in the food delivery, initially launched at scale by US pubic company GrubHub. Currently the hottest market for the food delivery is Europe and South Eastern Asia. Provides a very simple solution: a website with up to date menus of restaurants, where you can choose the dishes you want to order. From there the order is sent to the restaurant via API, CRM or email. The delivery and order processing is fully done by the restaurant. The business model is a commission on each order.
Pros:
- Highly scalable — you need to have strong business development manager who actively connects restaurants, and effective customer acquisition
- Low capital expenditures — the model is only about execution, not about high-end technology
Cons:
- Easy to replicate — to launch the platform like Delivery Hero would cost ca EUR 100–200K in 3 months
- Market is limited — the significant part of restaurants are not able to adopt the model, as they do not provide their own delivery services
- Low margin business — it is a broker model in restaurant business
Trends:
- Companies with the business model are trying to dive into the delivery business: Delivery Hero acquired Foodora (provides delivery service for restaurants)
- Big Taxi companies are moving in this space (Uber Eats had $3B GMV in 2017 according to the rumors, Ola acquired Food Panda Asia), because they have a fleet to fulfill such orders
Own fleet and logistics
The hype model in the investors community. It can basically be described as software only model + delivery. The model enables restaurants that don’t have food delivery service to reach a broader market. GR Capital invested in one of the leading companies in European markets — Deliveroo at $1B valuation. The reason for our investment is grounded in our believe in the model’s efficiency and the quality of the executive team. Taking into account, the current public valuation of the competitors and complexity of the model, we expect to exit at $5B+ valuation at IPO.
Pros:
- CAPEX light — there is no need to invest in stock or bikes, technology and marketing are the main expenditures in this model
- Easy to scale — effective marketing and experienced city managers are the key things for the growth
- Broader menu offer and restaurant coverage due to own fleet
- Ability to advertise on packaging and on delivery vehicles
Cons:
- Difficult unit economics on competitive markets: the majority of companies subsidize both clients and couriers to gain the market share
- Dealing with rider strikes
Trends:
- Own kitchens to optimize fleet utilization and increase delivery area: Deliveroo launched own kitchens in partnership with top-tier chefs
- Launch of subscription services: Deliveroo and Uber Eats launched subscription service for those users who are not willing to pay for the delivery of each order
Vertically integrated
Such solutions are in a nutshell — virtual restaurants. They prepare food by themselves and in some cases have their own delivery. The model is the most sophisticated yet, and requires strong tech and quality control. We invested in Maple — vertically integrated player in the space of casual food in New York. Company had a significant competition on the market and high CAC, which required significant marketing budgets — to grow into a big market player, the company needed to close big rounds ($100m+). Board of Directors decided to join the forces with Deliveroo. As the result, they launched Deliveroo Editions —”virtual restaurants” . We are investors in Deliveroo, and we doubled our initial investment at Series E.
Pros:
- High margin business — you own the margin because you are involved on each stage
Cons:
- High capital expenditures — you need to build your own kitchens with professional equipment
- Quality of the food is a key issue — any problem with this can result in business closing down
- Long payback period — you need to keep your client to purchasing because usually the client becomes profitable only after 4–5th order
- Waste management — in developed countries you need to take care of the waste and it could significantly decrease your margin
- Limited menu choices — you can’t be a restaurant with the Asian and French kitchen, so you are automatically decreasing the number of your potential clients
Trends:
- Many of the players with such model failed and the investors are very bearish on such companies
- Strong focus on corporates — e.g Foodcheri (acquired by Sodexo)
So that was a brief overview of the business models in the food delivery market. In the next article, we will talk about the future of the food delivery.
