Many more miles to go for food delivery
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Many more miles to go for
food delivery Aslam Dalvi - Portfolio Manager
The global online food delivery market has grown at
an impressive 80% per year since 2018. However,
despite rapid growth it is still regarded as an emerging
market, with online food delivery accounting for less
than 10% of the total food service market (charted on
the next page).
9
Many more miles to go for food delivery
Market growth has been spurred on by the obvious convenience Uber Eats. In Europe, Delivery Hero and Uber Eats lead the pack,
of ordering takeout, where the wide range of choice and while Just Eat Takeaway commands an impressive 50% share of
improved price transparency has resulted in a customer the UK market. Emerging market food delivery companies hold
experience far superior to the traditional call-and-collect way of strong positions in their respective markets, including IFood in
ordering takeout. As geographic coverage expands and broad Brazil, Swiggy and Zomato in India, Food Panda, Go-Jek and
consumer awareness increases, so the market continues to grow. Grab in Asia (ex-China). China, however, accounts for a massive
55% share of this market, where Meituan and Ele.me dominate,
The food delivery model is also highly attractive for the
together commanding around 98% share. With over 500 million
restaurant industry, which typically does not have the scale,
users at present, Meituan is the only profitable food delivery player
financial resources, digital marketing capabilities or technical
in the world, as it benefits from unmatched scale and several
expertise to generate online demand as efficiently as the
unique market factors including lower customer subsidies, low
leading food delivery players.
incentives for drivers and relatively high urban density.
This large growth opportunity has attracted significant
The food delivery model
investor capital in recent years, which has resulted in a rapid
While food delivery is a global business, local market factors
rise in competition. However, most food delivery platforms
evidently affect long-term success and profitability. Like other
are currently loss-making and the ongoing battle to attract
platform businesses, competitive advantages are established
customers adds significant uncertainty to the potential
through valuable local network effects: as more customers join
evolution of profitability for the sector.
a platform, orders increase; growing demand attracts new
The global online food delivery landscape restaurants that in turn benefit from increased volume; and
While competition is fierce, regional markets tend to be greater volume and network density provides more earnings
dominated by only a small number of firms, with Uber Eats opportunities for delivery partners - encouraging more
arguably the only true global player. As illustrated on the next efficient and timely delivery. As a result of a wider choice and
page, North America is dominated by Door Dash, Grub Hub and a more efficient and reliable delivery network, customers
Online food delivery market revenue Global food delivery penetration*
70 10% 9.4%
66
Penetration
60
8% 7.4%
50 6.5%
44
5.8%
6%
USD billions
40 5.0%
4.3%
30 3.8%
25 4%
20
11 2%
10
4
1
0 0%
2015 2016 2017 2018 2019 2020 2014 2015 2016 2017 2018 2019 2020
*Online food delivery penetration is measured by online food delivery sales as a
percentage of the overall food service market (food prepared outside the home).
Source: Kagiso Asset Management estimates Source: Kagiso Asset Management estimates, Bernstein researchorder more frequently and for a broader range of occasions, (take rates) currently sit at 25-30%, which we believe cannot be
establishing a virtuous circle that is continuously reinforced to raised much more over time as commission is already very high
the benefit of all participants within the network. in the context of the gross profit margin for independent
restaurants (estimated to be 60-70%).
There are currently two prevalent business models in the
online food delivery industry: Key expenses in the fulfilment of an order include customer
A marketplace or third party (3P) model is capital light and acquisition costs (vouchers or discounts on meals) and
° structured so that the food delivery platform acts as the marketing, delivery and payment costs (related to completing
agent - charging a fee for bringing together buyer and the transaction). We estimate most food delivery platforms
seller. This model is well established with gross margins outside of China are loss making before even accounting for
typically in the 55-65% range. indirect costs (ie operational overheads, central marketing and
The first party (1P) model has evolved from the original funding). See chart on following page.
° marketplace model, whereby the delivery platform also
Ideally, the platform will scale over time, generating much
provides delivery services for an additional fee. This
higher revenue at only a small incremental increase in costs.
enables platforms to include many more restaurants and
However, it is problematic that a large proportion of costs are
to better control the quality of delivery - directly impacting
variable and will, therefore, grow as the volume of orders
the user experience.
increase. Delivery fees remain a primary fixed cost item, but it
All food delivery companies are now shifting to a 1P model, is unclear whether this can be sufficiently reduced with scale,
however this comes with significantly higher capital given the point-to-point nature of the delivery service that is
investment, which materially changes the underlying generally quite inefficient. For example, a typical food delivery
economics of the business model. driver travels the same route several times a day, utilisation of
the delivery network is low outside of mealtimes and the small
Unpacking the economics
size of the vehicles used places a limit on the number of orders
Food delivery platforms generate revenue mostly by charging
that can be delivered per trip.
commission on the order value. Industry commissions
Global food delivery landscape
Europe Russia
North America Japan
Middle East
China
India
APAC
South America Africa
Australia
Source: Kagiso Asset Management, ForbesMany more miles to go for food delivery
Generating sufficient fixed cost leverage is challenging and large Flexible labour laws: Ridesharing and food delivery
global delivery/logistics companies eke out very slim margins
° business models have become heavily reliant on the so-called
despite achieving significant efficiency from well-established “gig economy”, referring to the trend of hiring contractors,
1
hub and spoke delivery models . freelancers, contingent workers and other similar roles
instead of traditional full-time workers. This benefits fast
Long-term success factors
growing companies through lower labour costs and
Due to the hyperlocal nature of food delivery models, there are
increased labour flexibility. Delivery models are more likely
often several market specific factors that can have a large
to succeed where labour laws remain flexible but there is a
impact on profitability. Tipping culture, customer price elasticity
growing risk that governments and regulators will
to delivery fees, traffic congestion and weather are just a few
intervene to ensure workers are better protected and
examples of these. Common factors that we believe are critical
receive equivalent benefits to permanent staff.
to long-term success include:
Demographics and urban density: Urban density is a key Evolving models encourage novel thinking
° driver of profitability and the economics of delivery is likely The recent introduction of “dark kitchens” is evidence that food
to be better in countries where a significant proportion of delivery models are evolving and they are a small but growing
the population reside in a few large cities or close together. addition to many delivery business models. Dark kitchens are
Low competitive intensity: The cost of acquiring new fully equipped commercial kitchens created solely with the aim
° customers is lower in less competitive markets as less of fulfilling online delivery service orders. They are often built
marketing spend is required to attract new customers and using prefabricated structures or shipping containers, which
keep existing customers on the platform. Scale is not as are quick to set up and allow food delivery companies to easily
costly to achieve as the pool of potential customers are grow supply in under-served areas with good demand. Delivery
divided between fewer players. Furthermore, better scale platforms are adept at capturing user data and the use of
leads to improved pricing power (ie higher commission algorithms enable them to accurately match newly created
rates) and thus, better economics. supply to current customer demand.
1 These models avoid route duplication and allow for optimal scheduling/efficient transit
routing and high asset utilisation The online delivery platform often incurs the upfront cost of
setting up these kitchen facilities and, typically, multiple
Food delivery profits (excluding China) restaurants operate out of a single dark kitchen, with each
restaurant employing its own staff and managing its own
operating costs (generally far lower than a traditional
0 restaurant). This allows for lower meal prices, in turn improving
-118 affordability and further stimulating demand.
-241 -202
-500 -300
Possibly a long road ahead
-1 000 While the potential growth opportunity for online food
-1 062 delivery platforms is exciting, we remain cautious given the
USD millions
-1 500 uncertainty around the longer-term profit evolution of 1P food
delivery business models. In our view, profitability is likely to
-2 000 vary significantly by market due to the impact of unique
factors on the overall economics of delivery. Additionally, given
-2 500
the nascent stage of these business models, investors should
-2 604
-2 761 be prepared for many years of material investment ahead. Our
-3 000
2014 2015 2016 2017 2018 2019 2020 clients have exposure to these businesses via our Prosus and
Naspers holdings.
Source: AFS for Delivery Hero, Uber Eats, Just Eat, Takeaway.com,
Door Dash, Prosus Food DeliveryKagiso Asset Management (Pty) Limited
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