Feast or Famine: The Precarious Future of Food Delivery
In a Bloomberg interview last December, Jim Chanos, a famed short seller and founder of Kynikos Associates, remarked, “DoorDash, to single out one company, actually has higher losses per order now than a few years ago” (Weisenthal & Alloway). With a myriad of fees being tacked on to every order, almost adding up to the food’s total order value, it might seem incredulous how companies such as DoorDash and other delivery apps continue to lose money. The answer is that these companies, which are commonly referred to as aggregators, have continued to spend much of their profits to accelerate their growth and customer acquisition efforts. Aggregators, which “aggregate” orders from all the users from their platform and match delivery drivers with hungry eaters, continually wage price wars with each other to gain market share by offering subsidies to attract and retain their customers. The endgame, for the aggregators at least, is to amass a critical share of the market to outcompete all other rivals. If a single aggregator is able to acquire enough of the market and become a monopoly, the winner will be able to exploit their monopoly status by raising prices and increasing fees and, consequently, turn a profit. This playbook is how US market aggregators in the food-delivery industry operate–companies like DoorDash, GrubHub, and Uber Eats. The influx of funding that allowed these companies to subsidize operations to outcompete competitors in a bidding war has made most of these otherwise pricey services palatable to most customers. “Younger, digitally adept diners ages 18–34 are the top users of delivery aggregators — but they’re also the most promotion-sensitive, with 63% checking for promotions and deals before ordering or only ordering with a promotion” (Morgan Stanley Research). Often, when I check the promotions tab on delivery apps, it’s not uncommon to see 50–60% off coupons or $20 off an order.
However, such steep subsidies cannot last forever–investors don’t have unlimited money or patience, and a choppy macroeconomic environment has caused investors to call for fast-growing tech companies to focus on profitability. Given the unprofitable nature of these companies, a growing number of short sellers, Chanos included, argue that aggregators have been forced into a corner where they are doomed to fail. In a December 2022 note, RBC analyst Brad Erikson stated, “[DoorDash’s] execution & management are widely considered the class of the sector but approaching ’23, we are uncomfortable with a potentially unfavorable risk/reward given likely hypersensitivity to order deceleration,” (RBC). Chanos and short sellers theorize that since aggregators can no longer accelerate growth at a reasonable price, the only way to survive is to raise prices and cut back on subsidies–which will precipitously decrease revenues as customers flock away from their services to competitors or stop ordering food delivery altogether. While some have called food delivery aggregator businesses unsustainable and doomed to fail amidst a changing macroeconomic environment, I argue that the food delivery business will continue to sustain itself because a large portion customer base is not as price sensitive as these detractors project.
First, let’s start with how on-demand food delivery became mainstream. Food delivery in today’s sense, where drivers were assigned on-demand and did not work for restaurants but instead did gig work, had not existed in any large capacity before startups like Doordash and Grubhub began operating. Food delivery was still a growing but niche market before these market aggregators received a generational headwind–COVID. With the respiratory virus forcing lockdowns across the country, it became much harder for those at home to enjoy their favorite restaurants. On the other side of the coin, restaurants had no in-person dining. Aside from shutting down, the most sensible option for most establishments would be to onboard these delivery apps in the hope of sustaining through the pandemic. As such, both hungry eaters and desperate restauranteurs flocked to market aggregators. The growth of the food delivery industry skyrocketed. According to Statista, a consumer data research firm, the platform-to-consumer food delivery market grew from 12.9B in 2019 to 19.4B in 2020, representing a remarkable 50% growth in one year after the lockdowns.
However, as the pandemic has subsided, many tailwinds that had previously bolstered these marketplace aggregators have died while headwinds strengthened, causing short sellers and other detractors to forecast aggregators’ unstainable paths to growth will begin to show cracks in the business. The pandemic benefited aggregators on two fronts: COVID brought them more business, and the US Federal Reserve continued to promote economic activity by setting interest rates near zero. However, both of these factors have subsided recently and are working against aggregators–the pandemic and lockdowns have subsided, and the Federal Reserve is pushing aggressive rate hikes to clamp down on inflation and an overheated economy. In addition, shareholders have pressured fast-growing companies to focus on profitability and reducing cash burn amidst a tougher macroeconomic market. To become profitable, aggregators must increase revenue or cut down on costs. However, since these companies are deeply unprofitable, cutting costs will not be enough to bring these companies to profitability. Revenue is simply the profit made on each order multiplied by the number of orders. Therefore, these aggregators can either grow their order volume or charge higher fees on their current order volume. Given that Bank of America analysts predict in 2023, “as many as 450,000 new drivers could flock to [Uber and Lyft], and that 600,000 new couriers could give DoorDash Inc. and Uber Eats a try,” it might seem logical to assume that given the already high fees, this influx of drivers would enable initiatives to expand order volume (Sumagaysay, 1). However, actually achieving increased order volume is difficult. Aggregators have been waging subsidy wars to gain customers since their inception, so inventing radically cheaper marketing strategies for apps that have traditionally been generous with discounts is a tough sell. Combine this is a worsening economy, where consumers are less likely to spend on expensive food delivery over cheaper alternatives, and it becomes all but impossible to grow order volume at a reasonable price. That leaves one option: increasing prices, which short sellers argue will spell doom for aggregators.
The famous short seller Jim Chanos, who shorted and profited from the collapse of Enron, initiated a short position in DoorDash in 2021. In essence, short positions profit when a company’s stock price decreases. Therefore, Chanos holds a bearish view towards DoorDash, believing it is currently overvalued and its stock price will be worth less in the future. In an interview with Bloomberg in June of 2022, Chanos commented, “‘…the companies we were talking about were some of the gig economy darlings in 2020 and continued to be so in 2021…what became pretty apparent to us in a number of them, particularly some of the well-known companies like Uber and Lyft and DoorDash, which came public later, is that the unit economics were terrible. And not only that, they were terrible at a time when they should have been Nirvana, right?’” (Weisenthal & Alloway). Chanos believes that if DoorDash had such market power in the pandemic–when nobody had any alternatives other than ordering delivery–and was still unable to increase prices to turn a profit, then it signals that they were unable to raise prices because they forecasted a larger drop in revenue from decreased order volume compared to the increase in revenue from raising prices. Chanos believes these aggregators are doomed to fail because of one economic concept–elasticity of demand. It might seem commonplace for businesses to raise prices, given that everybody is doing so in our inflationary environment. But one critical economic metric companies keep in mind when raising prices is churn, which is the reduction in customers or business after a price increase or product offering change. Churn is influenced by many factors, but one large factor is the elasticity of demand for a company’s product. If a product’s demand is more elastic, a smaller price shift will result in a large decrease in demand, and on the other hand, a less elastic demand will cause a comparatively smaller decrease in demand. While many factors contribute to the high elasticity of demand, some that impact the food delivery business, in particular, include the fact that food delivery is not an essential good like life-saving medicine, and many diners using food delivery are price and promotion sensitive. Therefore, once prices rise and promotions end, many of these customers will no longer want food delivered and may look for cheaper alternatives such as picking up food or cooking meals at home. While Chanos may argue that diners using food delivery are very price sensitive, I argue diners are increasingly using food delivery services with a less elastic demand, which is enough to sustain these food delivery aggregators despite price increases.
There are two main groups of people who have less elastic demand than short sellers predict–those dependent on the convenience of food delivery and those driven by influencers. First, let’s dive into those dependent on food delivery’s convenience. There have been countless reports of those who have become obsessed with the convenience of fast food delivery. Whether it is an easy way to get food after a busy workday, or just somebody who wants food at the tap of a few buttons, these people no longer abide by rational decision-making. These users often rack up exorbitant fees on apps by ordering from restaurants half a mile away. It may not even be by choice– companies now exploit the time savings from food delivery to extract more from their employees. This practice has become commonplace in Wall Street–with many young professionals receiving 30-dollar DoorDash vouchers for dinner every weekday, so they spend less time getting food and more time working. These effects have been reflected in DoorDash’s financial performance. According to DoorDash’s investment prospectus, “as customers make DoorDash a regular activity, repeat use has resulted in a greater proportion of our Marketplace GOV being generated by existing consumers on our platform” (DoorDash). To give some numbers, DoorDash states, “Marketplace GOV from existing consumers increased from 68% in the third quarter of 2018 to 85% in the third quarter of 2020” (DoorDash). In the same prospectus, DoorDash management states that, for the oldest cohort, encompassing customers who started using DoorDash in 2016, the gross order value of customers using the app after four years is 1.57x that of the GOV in 2016, and “newer cohorts have increased their spend faster than older cohorts.” The upshot of all this is that existing consumers are being hooked onto DoorDash’s services at an increasing rate, and the product’s stickiness is only increasing. One thing to note is that this cohort’s GOV growth was measured in real dollar terms, so it doesn’t account for inflation. However, given that inflation is normally anchored at 2% per year, and the 2016 cohort data is taken before the inflation due to the pandemic, 57% GOV growth in 4 years significantly outpaces the possible GOV growth from inflation. Amidst a growing dependence on the convenience and comfort of food delivery, these “locked-in” customers are willing to brave the price increases that short sellers would argue would cause a mass exodus.
While the convenience of food delivery is intoxicating to some, aggregators have begun to realize that this prioritization for convenience can be cross-sold to other goods and services. According to a Deloitte report titled Future of Food, “convenience is not just about saving time on cooking. It’s also about getting the food you want, when and where you want it. Technology-enabled delivery — for groceries, prepared meals, and ready-to-eat meals — has increased dramatically over the last decade.” As these customers become ever more accustomed to having everything done with a touch of a button, these aggregators have recently made moves to fill that demand. It’s not only food that can be delivered at the touch of a button–groceries, office supplies, and packages are all part of DoorDash and Uber’s repertoire of offerings. As prices rise, these power users may continue to use more and more services within these aggregator’s apps and subsequently generate more revenue for these aggregators. As an example of the success of this strategy and “eating what you kill,” we can observe the recent troubles at Lyft. Unlike rivals such as Uber or DoorDash, Lyft has solely remained in the on-demand ridesharing market and has failed to expand into new verticals, unlike Uber and DoorDash. Therefore, Lyft can only provide ridesharing services and has refused to harness the power of its power users. This failure has been reflected in Lyft’s poor business performance due to the recent downturn, and morale in the company is at all-time lows. Unlike Uber or DoorDash, where resilient power users continue to spend across all of their services, Lyft has no such ability. Due to the macroeconomic environment, Lyft has seen sharp withdrawals from its price-sensitive user base. As a dire measure to keep the company afloat, a 30% reduction in the workforce was announced in mid-April, and the current founders are leaving the company and being replaced by a new CEO. This shakeup indicates that Lyft’s single-minded focus and failure to build up a loyal user base is not the industry’s future. This exemplifies the benefit of having power users, as they will continue to use gig delivery despite rising prices or waning subsidies, which can be vital when aggregators have tough times.
The second group and bastion of inelasticity within these delivery aggregator businesses are the groups of influencers starting “ghost franchises.” Social media influencers have recently been launching food businesses in troves, and much of how these new restaurant brands operate relies on a trend that has only taken off during the pandemic: ghost kitchens. Ghost kitchens are restaurants without a physical storefront that solely operate on delivery apps by renting a kitchen space in a warehouse or other shared space. While ghost kitchens were rare before the pandemic, they have proliferated delivery apps during the pandemic due to the rise in takeout orders. Projections indicate that while the ghost kitchen industry was accelerated by the pandemic, with a market size of 61B in 2021, future projections pin the value of the worldwide ghost kitchen market to 300B in 2027, with optimistic projections from firms like Euromonitor arguing that the ghost kitchen industry will be a 1T market by 2030. While the ghost kitchen market has a long road ahead, the industry received a boost when it would play a major part in a craze that began in late 2020–influencer food brands.
Jimmy Donaldson, more widely known by the name Mr. Beast, is an influencer with one of the largest followings on Youtube, with over 100 million subscribers. In late 2020, Mr. Beast launched Beast Burger, a fast food chain that boasts Mr. Beast’s favorite burgers and fries on its menu. Ghost kitchens were the only cost and time-effective way to launch a fast-food brand to satisfy the cravings of an audience that is geographically spread across the United States. Traditional storefronts or franchises would be a nightmare, as the physical locations would all have to be branded and staffed. However, with ghost kitchens, Mr. Beast and his team were able to deploy the Mr. Beast Burger brand for a far greater audience and for a fraction of the price of opening traditional restaurants. Under the new playbook, cooks would learn the menu, branded food service items would be distributed to locations, and ghost kitchens would be provisioned. When a customer has a complaint, they will interact with the Mr. Beast Burger brand, not the kitchen itself. The key for aggregators in this new paradigm of anonymous kitchens is that because the ghost kitchens don’t have a storefront, gig workers serving on-demand orders from diners are often the only option to get the food from kitchen to customer.
What Chanos and other short sellers have not factored in their analyses is the potential flood of consumers flocking to order food from these new ghost franchises–wherein delivery needs to be serviced through an aggregator. The new paradigm of the influencer-led food brand has led to a renaissance for the ghost kitchen industry. Traditionally, influencers promote food from a sponsored brand by posting pictures or videos of them eating food on their social media channels. The issue is that the food itself is not created or centered around the influencer. This lack of connection and personalization has led this approach to be largely unsuccessful. According to Markus Pinyero, found of a ghost kitchen named Oomi Kitchen, “We want people to order our food instead of ordering a burger that comes from some influencer that you post to your Instagram and never order from again. The return rate on some of these virtual brands is practically non-existent” (Joanna Fantozzi). However, this all changed with the launch of Mr. Beast Burger–fans were ordering many times from the influencer’s network of ghost kitchens.
While it might be easy to dismiss the impact of influencer brands, many, if not all, influencer food brands offer equal or worse value propositions than other restaurants on delivery apps on price and taste. Most have simplified menus offering fast food items, and often restaurants of varying quality and caliber prepare the food. In an article titled, You’ve Heard of Ghost Kitchens. Meet the Ghost Franchises, a mom of teenagers recalls ordering Mr. Beast Burger for her children. “The teenagers, like most ghost kitchen customers, had no idea where the food was made. ‘They didn’t care,’ Ms. Kaufman said. ‘The wrapper had the MrBeast stickers on it, so they thought it was great.’” These ghost franchises rely on the influencer’s cult following and fanbase to rack in orders, not food quality. Mr. Beast’s ghost franchise seems to see continued success–while only starting with 300 virtual locations, Alicia Kelso, a restaurant industry reporter for Forbes, writes, “[In September of 2022, Mr. Beast’s] virtual brand has already surpassed 1,700 locations nationwide (for context, Applebee’s has about 1,600 locations), while his physical restaurant generated a crowd of 10,000 people in the first 10 minutes.” This is perfect for aggregators–a new medium of ordering food where consumers are not price or quality sensitive and where delivery drivers must fulfill all orders–no wonder aggregators are excited to hop onto the influencer brand trend.
The success and durability of demand for Mr. Beast’s Ghost franchise is not some isolated success story. Over 150 influencer-led ghost franchises have launched in the past two years, spearheaded by big influencer names such as FaZe Clan, one of the largest professional esports and entertainment organizations with 120 million unique fans. These influencer-led virtual dining brands have led to enormous growth in the number of virtual brands and associated interest from restaurants. According to an interview with John Mullenholz, Uber’s head of virtual Restaurants and Dark Kitchens for the U.S. & Canada, “In 2021, [Uber] hosted 10,000 virtual brands, but that number rose to 40,000 [in 2022]” (Littman). To that end, in March of 2023, “[Uber] rolled out an initiative called the Certified Virtual Restaurant Program…which will connect small and medium restaurant partners to virtual kitchen companies…to create more effective brands…” (Littman). This is a strong signal from aggregators that they see these virtual kitchens as key to their success amidst a challenging macroeconomic environment–likely due to the nature of customers ordering from these brands. Much like how power users are not as price-sensitive, consumers who order from influencer brands display similar attributes. We all know how far some are willing to go for their favorite influencers or personalities–from spending thousands to see one’s favorite musical artist at a concert or spending tens of thousands on an NFT to get exclusive access to their favorite creator. When prices increase, these super fans will be more willing than the average user to continue ordering food–thus, they have a markedly lower elasticity of demand.
Ten years ago, impossible tasks–from asking a chef to cook and ship ready-made meals to your doorstep or hiring a person to shop for groceries–have become seamless. Gig work, once a fringe sector, is now one of the hottest, and projections estimate that another 30 million people will join the gig economy within the next year. While the concept of elasticity and demand is an important metric for delivery aggregators today, it is essential to realize the speed at which the gig economy has grown. Detractors may argue that aggregators are in a tough spot on financial terms. However, these detractors miss the forest for the trees, and only focus on what aggregators are not doing, instead of focusing on the rapid pace of innovation and repositioning that aggregators do. There is always a threat looming on the horizon–whether it be the macroeconomic environment or drones–but a threat is not fatal if one can adapt. To quote Max McKeown, “All failure is the failure to adapt; all success is successful adaptation.”
Works Cited
Alicia Kelso. How MrBeast Burger’s Success Could Impact The Restaurant Industry. https://www.forbes.com/sites/aliciakelso/2022/09/08/how-mrbeast-burgers-success-could-impact-the-restaurant-industry/?sh=6d3c4cd01228. Accessed 31 Jan. 2023.
Conrad, Marissa. “You’ve Heard of Ghost Kitchens. Meet the Ghost Franchises.” The New York Times, 25 Feb. 2021. NYTimes.com, https://www.nytimes.com/2021/02/25/dining/ghost-kitchen-mrbeast-burger.html.
DoorDash Inc. S-1. https://www.sec.gov/Archives/edgar/data/1792789/000119312520292381/d752207ds1.htm. Accessed 31 Jan. 2023.
Joanna Fantozzi. “The next Generation of Ghost Kitchens Is Stepping out from the Shadows.” Nation’s Restaurant News, 31 Oct. 2022, https://www.nrn.com/delivery-takeout-solutions/next-generation-ghost-kitchens-stepping-out-shadows.
Joe Weisenthal and Tracy Alloway. Jim Chanos on the Tech Bust, Crypto, and Fraud. https://www.bloomberg.com/news/articles/2022-11-23/transcript-jim-chanos-on-the-tech-bust-crypto-and-fraud. Accessed 30 Jan. 2023.
Joe Weisenthal and Tracy Alloway. Jim Chanos on Why Some of the Worst Hit Parts of the Market Still Have More Pain Ahead. https://www.bloomberg.com/news/articles/2022-06-16/transcript-jim-chanos-on-why-some-of-the-worst-hit-parts-of-the-market-still-have-more-pain-ahead. Accessed 29 Jan. 2023.
Morgan Stanley Research. “Can Food Delivery Apps Deliver Profits for Investors?” Morgan Stanley, https://www.morganstanley.com/ideas/food-delivery-app-profits. Accessed 29 Jan. 2023.
Statista. “U.S.: Revenue in the Online Food Delivery Market.” Statista, https://www.statista.com/forecasts/891082/online-food-delivery-revenue-by-segment-in-united-states. Accessed 29 Jan. 2023.
Sumagaysay, Levi. “Uber, Lyft and Instacart Drivers Fear Losing out If a Recession Fuels Influx of New Gig Workers.” MarketWatch, https://www.marketwatch.com/story/uber-lyft-and-doordash-drivers-fear-losing-out-if-a-recession-fuels-influx-of-new-gig-workers-11672955425. Accessed 30 Apr. 2023.
Tay, PeiChin, and Oliver Large. Making It Work: Understanding the Gig Economy’s Shortcomings and Opportunities. Tony Blair Institute for Global Change, Apr. 2022. institute.global, https://institute.global/policy/making-it-work-understanding-gig-economys-shortcomings-and-opportunities.
