The Billion Dollar Food Delivery Wars

Comment

Image Credits:

Martin Mignot

Contributor

Martin Mignot is an early stage investor with Index Ventures actively looking after Index’s investments in Algolia, Blablacar, Capitaine Train, Deliveroo, Drivy, Rad, Swiftkey and TheFamily.

Over the past 12 months, food and grocery delivery has been one of the hottest VC sectors. More than $1 billion was invested in 2014 – an almost fourfold increase year-on-year – with a further half a billion dollars invested in Q1 2015, according to CB Insights.

Since the successful IPOs of Just Eat and Grubhub/Seamless a year ago, almost every week has brought fresh news of large-scale funding announcements for existing players, or the launch of a new service, making it one of the most competitive sectors currently.

However, competitive does not mean saturated: with online penetration at roughly 1 percent, food and grocery delivery remains one of the largest markets still overwhelmingly offline, and its transition to online/mobile in the coming years will create a wealth of opportunities for entrepreneurs.

As a board member at Deliveroo, I have had the chance to watch the space’s evolution over the past eighteen months, and have come up with three thesis, and three predictions, as to how the current “food delivery war” may play out.

Ubiquitous smartphone penetration has made it possible for anyone to become a courier, and for startups to build delivery fleets at a fraction of the cost incurred previously

1. Convenience always wins: on-demand will take-over the world

flow chart food

The first time I described Deliveroo to my parents, they listened politely for a while, eventually asking: “That sounds nice, but who needs that?”. They assumed that demand would be the issue; that people would simply be happy in perpetuity with the existing set-up of driving to the grocery store to shop for a week’s worth of food, ready to be cooked at home.

The take-up rate of services like Instacart, HelloFresh, JustEat and Deliveroo suggests otherwise. Today, there’s little doubt that people place enormous value on the ability to buy back their time and attention, the key currency of the 21st century.

Changing behaviors have always elicited criticism, if not mockery (this article about the “Shut-In Economy” is a good example), but freeing up time from must-do chores to focus on more productive or enjoyable activities has always been the key driver of human genius and technological progress.

And it turns out that grocery shopping, meal planning and cooking are considered chores by a good chunk of the population – and that any service which offers to free us up from them will receive a lot of organic demand.

This is why we believe that in the long run, at constant prices, the most convenient option will win. And that the delivery of groceries, recipes or prepared meals will all eat away at the dominance of traditional grocery retailers.

Within this new crop of delivery options, the meal delivery services, with their promise of high quality, ready-to-be-eaten food, delivered in less than 30 minutes, are bound to be the fastest-growing segment of the space, and eventually take market share from other ways of obtaining food.

2. Choice is key: managed marketplaces are the superior model for consumers.

There are three main types of meal delivery services: software-only marketplaces, on-demand marketplaces and fast-food 2.0.

As described below, ordering a meal online involves three main sequential steps: 1. Ordering, 2. Cooking and 3. Delivering.

Print

The first generation of restaurant delivery services (JustEat, Grubhub, Delivery Hero) focused on the first step: they act as a pure software layer that aggregates a fragmented offering of independent restaurants (mainly takeaways), which manage their own fleet of couriers.

These software-only marketplaces’ main selling point to restaurants is to bring a lot of new orders and replace their antiquated phone-ordering system with an optimised Web and mobile platform, that integrates with their kitchen workflow.

As they don’t touch the food itself (neither cooking, nor delivering it), these platforms tend to charge a lowish fee of 10-15%. As any pure software business, they’re highly scalable and have all experienced remarkable growth. But their reliance on the restaurants’ own couriers mean that they are somewhat limited in their offering of cuisines and price points: they have become mainly associated in consumers’ mind with relatively low-end takeaway food (pizza, burgers, Chinese, sushi etc.). It also means that they cannot control and optimize the speed and quality of the delivery.

The next generation of restaurant marketplaces (Doordash, Deliveroo, Caviar), which emerged in the past two years, focus on step 1 and 3 of the process: they bring extra traffic and orders to the restaurants, but also manage the delivery for them, through their fleet of independent couriers connected by an Uber-like mobile app.

They are both software and logistics companies and have a very significant amount of operational work to do (couriers’ hiring and training, equipment maintenance, shift planning, etc.).

These on-demand marketplaces are therefore not as easy to scale as the pure-software one, but benefit from stronger barriers to entry and scale advantage: it will be very hard for a new entrant to compete against these optimized networks of restaurants and couriers, once they will have reached maturity in a city. They also charge higher commission, 25-30% on average. Their killer feature is that they can offer a range of restaurants and price points that software-only marketplaces cannot.

The third category of meal delivery startups, which includes Sprig, Maple and Spoonrocket, is defined by CB Insight as “Fast food 2.0″, as they opted for a full integration of the process: they developed their own app through which consumers can order a limited range of meals, reheated in their own fleet of cars as orders come in, and delivered in 15 minutes (as they save on the kitchen preparation time). They trade choice for convenience and a highly curated experience.

In our view, the on-demand marketplaces offer the best overall value for customers’ money due to the wider range of food options, through a reliable delivery experience, at no additional costs vs. in-restaurant.

Print

As they scale, the data they gather on past deliveries will allow them to keep on optimising routes and pick-up/drop-offs patterns, giving them an unassailable technological advantage, on top of the natural network effect of a three-sided marketplace.

3. Demand generation is essential and on-demand marketplaces have unfair advantages

The challenge for food delivery platforms does not lie in the supply. Their value proposition is a no-brainer for restaurants with high fixed costs and low variable costs: every additional order goes straight to the bottom line and helps improve the return on the initial capital investment (kitchen, etc.) and staff, who are working anyway.

Rather it is the demand side of the marketplace that is the most challenging part: restaurants will not want to integrate ten different services into their workflow, and will naturally congregate towards the one or two dominant platforms, who drive the most significant volume of daily orders.

Ability to generate demand is therefore critical and on-demand marketplaces benefit from two unfair advantages. First, as mentioned above, they offer the best value proposition for the consumer, with their large choice and reliable delivery experience. Second, they benefit from two significant competitive advantages in raising consumer awareness:

1. Partner restaurants have a strong incentive to promote the platform both offline and online. Working with popular national brands offers a powerful free advertising channel that software-only or fast-food 2.0 services do not have access to.

2. While coordinating hundreds or thousands of couriers in the street in real time is a massive operational headache, it is also a unique asset. With their branded jackets and delivery boxes, Deliveroo and Doordash couriers act as highly visible advertising panels on wheels, whose reach increases as the company grows, creating a second and very powerful type of network effect.

InDexVentures-CrossTicksDiagramA

Assuming these three core thesis come to be validated, here are three predictions for how the food delivery sector could evolve in the future:

1.  Software-only marketplaces (a la Just-Eat) will try to bring delivery in-house, while on-demand restaurants (a la Maple) will outsource it.

As on-demand services and last-mile delivery options proliferate, consumers’ expectations will increase rapidly, and currently nice-to-have features like real-time courier tracking will soon become indispensable.

Software-only marketplaces will therefore have to invest a significant amount of resources into offering a competitive experience, either through in-house development, or, more likely, by picking up one or a few of the smaller specialized startups that have popped up in recent months. Expect a lot of M&A activity in the space in the coming 12-to-24 months.

Eventually, they may simply decide to partner with one of the leading logistics companies, which will be able to command better prices at scale through their superior routing algorithms and operational efficiency. Uber, Postmates, or newcomers like OnFleet could all play this role, unless they decide to address consumers directly and to try to compete against the incumbents heads-on.

Meanwhile, Fast-food 2.0 companies will eventually come to the conclusion that building and running their own nationwide delivery infrastructure would require enormous investments, and pose great challenges as competition for couriers heats up, and will instead turn to third-party providers. Some of them may even end up joining on-demand marketplaces to get access to their superior customer base, turning into “virtual” restaurant chains (with no physical locations).

2. On-demand marketplaces will unleash a wave of new “virtual” restaurant chains

This is a trend that is likely to extend beyond fast food 2.0: on-demand marketplaces will soon offer a powerful enough distribution infrastructure (through both very large customer bases and efficient nationwide delivery networks) to spare emerging chefs the hassle and high upfront investment of launching a physical restaurant.

They can instead rent space in industrial kitchens located in their delivery area of choice, and test new concepts on the cheap, the on-demand marketplaces acting as discovery/distribution channels for them – appstores for food.

All the more so that not needing a physical storefront could enable them to cut fixed costs (no more waiting staff, front of house, cleaners, rents, furniture depreciation, etc.) and drastically lower the price of food delivery vs. in-restaurant, growing the market the same way as Uber did with UberX and UberPop.

3. Drones will supercharge this shift and the competitive advantage of on-demand marketplaces

As they grow, on-demand marketplaces will accumulate droves of data about delivery routes, demand patterns (correlation with the weather, the day of the week, sports events, distance to/from payday, etc.) and food preparation characteristics, which will allow them to keep on optimizing their service.

In the long run, this data may prove highly valuable for developing routing algorithms to power fleets of drones, which seem well-suited for food delivery – as the value per unit of weight is high, packages are not excessively heavy or voluminous, the content is not toxic/dangerous, and being able to ignore traffic should give them a significant speed advantage vs. mopeds and bicycles. Drones could also help reduce delivery costs and further enlarge the market.

As with all the other on-demand services, these developments will make living in dense urban areas evermore attractive, accelerating the shift back to a “village economy” well-described by my colleague Terrence Rohan. And as the largest offline sector moves online in the coming years, one thing is beyond doubt – extraordinary opportunities lie ahead.

More TechCrunch

Tags

Meta’s Oversight Board has now extended its scope to include the company’s newest platform, Instagram Threads. Designed as an independent appeals board that hears cases and then makes precedent-setting content…

Meta’s Oversight Board takes its first Threads case

The company says it’s refocusing and prioritizing fewer initiatives that will have the biggest impact on customers and add value to the business.

SeekOut, a recruiting startup last valued at $1.2 billion, lays off 30% of its workforce

The U.K.’s self-proclaimed “world-leading” regulations for self-driving cars are now official, after the Automated Vehicles (AV) Act received royal assent — the final rubber stamp any legislation must go through…

UK’s autonomous vehicle legislation becomes law, paving the way for first driverless cars by 2026

ChatGPT, OpenAI’s text-generating AI chatbot, has taken the world by storm. What started as a tool to hyper-charge productivity through writing essays and code with short text prompts has evolved…

ChatGPT: Everything you need to know about the AI-powered chatbot

SoLo Funds CEO Travis Holoway: “Regulators seem driven by press releases when they should be motivated by true consumer protection and empowering equitable solutions.”

Fintech lender SoLo Funds is being sued again by the government over its lending practices

Hard tech startups generate a lot of buzz, but there’s a growing cohort of companies building digital tools squarely focused on making hard tech development faster, more efficient and —…

Rollup wants to be the hardware engineer’s workhorse

TechCrunch Disrupt 2024 is not just about groundbreaking innovations, insightful panels, and visionary speakers — it’s also about listening to YOU, the audience, and what you feel is top of…

Disrupt Audience Choice vote closes Friday

Google says the new SDK would help Google expand on its core mission of connecting the right audience to the right content at the right time.

Google is launching a new Android feature to drive users back into their installed apps

Jolla has taken the official wraps off the first version of its personal server-based AI assistant in the making. The reborn startup is building a privacy-focused AI device — aka…

Jolla debuts privacy-focused AI hardware

OpenAI is removing one of the voices used by ChatGPT after users found that it sounded similar to Scarlett Johansson, the company announced on Monday. The voice, called Sky, is…

OpenAI to remove ChatGPT’s Scarlett Johansson-like voice

The ChatGPT mobile app’s net revenue first jumped 22% on the day of the GPT-4o launch and continued to grow in the following days.

ChatGPT’s mobile app revenue saw its biggest spike yet following GPT-4o launch

Dating app maker Bumble has acquired Geneva, an online platform built around forming real-world groups and clubs. The company said that the deal is designed to help it expand its…

Bumble buys community building app Geneva to expand further into friendships

CyberArk — one of the army of larger security companies founded out of Israel — is acquiring Venafi, a specialist in machine identity, for $1.54 billion. 

CyberArk snaps up Venafi for $1.54B to ramp up in machine-to-machine security

Founder-market fit is one of the most crucial factors in a startup’s success, and operators (someone involved in the day-to-day operations of a startup) turned founders have an almost unfair advantage…

OpenseedVC, which backs operators in Africa and Europe starting their companies, reaches first close of $10M fund

A Singapore High Court has effectively approved Pine Labs’ request to shift its operations to India.

Pine Labs gets Singapore court approval to shift base to India

The AI Safety Institute, a U.K. body that aims to assess and address risks in AI platforms, has said it will open a second location in San Francisco. 

UK opens office in San Francisco to tackle AI risk

Companies are always looking for an edge, and searching for ways to encourage their employees to innovate. One way to do that is by running an internal hackathon around a…

Why companies are turning to internal hackathons

Featured Article

I’m rooting for Melinda French Gates to fix tech’s broken ‘brilliant jerk’ culture

Women in tech still face a shocking level of mistreatment at work. Melinda French Gates is one of the few working to change that.

1 day ago
I’m rooting for Melinda French Gates to fix tech’s  broken ‘brilliant jerk’ culture

Blue Origin has successfully completed its NS-25 mission, resuming crewed flights for the first time in nearly two years. The mission brought six tourist crew members to the edge of…

Blue Origin successfully launches its first crewed mission since 2022

Creative Artists Agency (CAA), one of the top entertainment and sports talent agencies, is hoping to be at the forefront of AI protection services for celebrities in Hollywood. With many…

Hollywood agency CAA aims to help stars manage their own AI likenesses

Expedia says Rathi Murthy and Sreenivas Rachamadugu, respectively its CTO and senior vice president of core services product & engineering, are no longer employed at the travel booking company. In…

Expedia says two execs dismissed after ‘violation of company policy’

Welcome back to TechCrunch’s Week in Review. This week had two major events from OpenAI and Google. OpenAI’s spring update event saw the reveal of its new model, GPT-4o, which…

OpenAI and Google lay out their competing AI visions

When Jeffrey Wang posted to X asking if anyone wanted to go in on an order of fancy-but-affordable office nap pods, he didn’t expect the post to go viral.

With AI startups booming, nap pods and Silicon Valley hustle culture are back

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

A new crop of early-stage startups — along with some recent VC investments — illustrates a niche emerging in the autonomous vehicle technology sector. Unlike the companies bringing robotaxis to…

VCs and the military are fueling self-driving startups that don’t need roads

When the founders of Sagetap, Sahil Khanna and Kevin Hughes, started working at early-stage enterprise software startups, they were surprised to find that the companies they worked at were trying…

Deal Dive: Sagetap looks to bring enterprise software sales into the 21st century

Keeping up with an industry as fast-moving as AI is a tall order. So until an AI can do it for you, here’s a handy roundup of recent stories in the world…

This Week in AI: OpenAI moves away from safety

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine