Online food delivery: The disruption heading to destruction
Uber Eats has exited the Middle East, or rather passed the baton onto its wholly-owned regional subsidiary, Careem. The publicly listed company made the announcement in a filing shortly before Careem announced a 31 per cent job cut and the suspension of its bus service. Unicorns clearly possess no magic to protect against the impact of the Coronavirus.
In total, Uber has pulled its Eats business out of eight markets (Egypt, Saudi Arabia, UAE as well as Czech Republic, Honduras, Romania, Ukraine and Uruguay) which together account for just 1 per cent of the company’s total revenues. Although an insignificant portion of their business, it signifies defeat in the face of one of the most competitive sectors in technology – online food delivery.
It is not just Uber Eats that has struggled, the majority of third-party food aggregators around the world have yet to turn a profit, the notable exception is UK-based Just Eat which until recently left it to the restaurants to fulfil the actual delivery of orders.
The rest operate at a loss, backed by vast amounts of venture capital (VC) money and up until now, investors have been happy to plough hundreds of millions into the likes of UK-headquartered Deliveroo and US-based Grubhub in a bid to secure the largest market share. But the Covid-19 pandemic is causing damage to these companies. Deliveroo, which last month secured regulatory approval for investment from Amazon, is currently at risk of collapse.
Instead of delivering burritos and burgers, third-party aggregators have now started delivering groceries as people around the world keep a closer eye on expenses and take advantage of time at home to cook. But this pivot has not been enough to shield them from the overall loss in demand as a result of the pandemic.
The “cash-guzzling” business model that focuses on fast growth in order to attain market leadership and thus eventually lead to profit, is one backed by a “disruption” story and the promise of profitability. VC firms, particularly in Silicon Valley, were not only charmed by charismatic entrepreneurs, but supported the lofty valuations based on top-line growth instead of profitability in their hopes to make a good return on their investment. But this business model has crumbled. It started with WeWork and is now at the door of online food delivery aggregators. High cash burn startups are not pandemic-proof and investors are now enacting triage, demanding clearer routes to profitability, and increasingly, determining the valuation of startups themselves.
For the food aggregators in particular, the disruption they initially brought to the food and beverage (F&B) market brought efficiency and ease and, in many cases, great exposure to the restaurants. But with commission rates of 30 per cent on every order, which can sometimes be as high as 35 per cent, they have eroded the oxygen of their own supply chain.
“At the beginning they turn you on, they give you a lot of customers and then it starts to disappear, then they say you need to discount. How many businesses can afford to give up 30 per cent of income?” says Ian Ohan, founder of Krush Brands, who decided to shun the third-party aggregators and set up his own ordering platform instead. “They think they own us, but I’m their customer and that’s the amazing thing, they don’t treat you like that.”
For the aggregators that fulfil the last mile delivery, their losses run even deeper. The cost of delivery in the UAE is about Dh25 ($7) per order, right now customers pay about Dh7. Even third-party last mile delivery providers run at a loss, charging Dh13-18 for each delivery. At every stage of the process, a loss is incurred, and this loss is currently subsidised by the investors.
“Last mile delivery is a cost centre, not profit. It costs me Dh20 to deliver one order, it costs Deliveroo more because their drivers are idle until an order comes through. It is not a very efficient business model,” says Ohan.
The only way it can become efficient is with bulk delivery – where one driver delivers to multiple customers in one trip. The only company that is doing this in the region is UAE-based LUNCH:ON and DailyMealz in Saudi Arabia.
Since the lockdown, and restrictions on restaurant opening times and dining capacity, restaurants have suffered greatly. In Dubai, 100 members of the F&B industry including Marriott International and café chain Tim Hortons signed an open letter stating that they are losing more money staying open during the pandemic than by remaining closed. They urge the government to “intervene and find a solution”, requesting an extension of licences, waiver of tax and a reduction in the fees charged by the aggregators. The restaurants claim to be losing Dh1 billion ($272 million) a month during the pandemic.
A campaign on social media started by food blogger Food Sheikh called on the aggregators to lower their commission rate. Careem NOW responded by dropping its rate by 15 per cent across its markets, the others like Talabat and Deliveroo have not budged. And so Food Sheikh in partnership with UAE-based ChatFood, launched deliverdxb.com – a commission-free website that allows consumers to order directly from the restaurant.
Within days 300 restaurants had signed up to the deliverdxb.com platform, today there are more than 1000 restaurants listed.
“We’ve had restaurants that have said their direct orders have matched those coming in from big aggregators which is really, really positive. Others have had their orders triple. And some have had to close because they’ve had so many orders come through – these are all really positive feedback,” he says.
The online food delivery market globally is worth $123 billion according to Statista with 1.1 billion users. Last year the market in Mena was worth more than $3 billion with 22.7 million users. Despite the recent slowdown, consumers will not cease ordering their meals online, but the sector is currently ripe for another disruption – one with healthier unit economics.
One solution is a subscription-based model, where restaurants pay a monthly fee to access an online food ordering software instead of paying commissions on every order. This model initially emerged in the Middle East, developed by ChatFood, whose technology allows consumers to order directly from the restaurant’s website or social media channels.
“We built ChatFood to help restaurants take back control. The delivery business picked up drastically through Deliveroo and Uber Eats, it was a great new sales channel, but the restaurants lost business and their relationship with their customers,” says Benjamin Mouflard, co-founder at ChatFood. “This represents a massive part of their revenue that is going to a third party that are charging 30 per cent fees on every order.”
ChatFood aims to help restaurants “find the right balance” between having direct channels to their customers as well as maintaining a presence on third-party aggregators. Unlike the aggregators, ChatFood gives the restaurants access to valuable customer behaviour data.
“This enables a healthy and sustainable ecosystem. We created a community concept, you can order from all other restaurants that use our technology without putting in your credit card details every time. This is the main killer of online ordering, the hassle of signing up every time when ordering from individual restaurants. We provide this unified ordering experience across all the restaurants,” says Mouflard.
Right now, the aggregators have a lower customer acquisition cost, which tips the power in their favour, but this is slowly changing as restaurants begin to come together against the conditions imposed by the aggregators.
“We were on all of them to see what it meant for us. I determined early on there was nothing good from being on those third-party platforms,” says Ohan.
No matter how the battle between the two pans out, the winner will be determined by the consumer. Studies show that consumers tend to order regularly from four or five restaurants and so if restaurants can offer their customers the same ease and convenience that platforms like Deliveroo can offer, the landscape could change.
Afterall, not only is it easier to order your favourite meal from your favourite restaurant through Whatsapp, it is also less time-consuming and more personable than browsing a plethora of deals and restaurants on an aggregator platform.