The Future of Food (Delivery)
Michael Houck
May, 2019
Disclosure
All ideas presented in this deck are my views alone and are based on publicly available information. An exhaustive list of sources cited is in the appendix.
I am a shareholder in and former employee of Uber, where I spent 2.5 years helping build the food delivery arm of the company, Uber Eats.
I have not been commissioned or requested to create or share this analysis by any individual or corporation. It’s just for fun :)
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Contents
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What is the current state of food delivery?
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Current State > Market Size
A 2018 study by the Swiss multinational bank UBS estimated that the total addressable market for food delivery would grow 10x, to $365B USD, by 2030
That market breaks down into (1) restaurant / takeaway and (2) grocery + meal kits
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Current State > DSPs
Restaurant
Others: Amazon, Postmates, Foodora, Just Eat, Caviar, Food Panda, Skip the Dishes, Delivery Hero, Zomato, iFood, Rappi
Others: Google Express, Shipt, FreshDirect, Peapod
Grocery
Delivery Service Partners (DSPs) currently focus on either restaurant or grocery delivery.
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DSPs are typically available regionally, with no DSP having full global reach.
Current State > Availability
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While the US generates a large portion of the current annual revenue in the space...
Current State > Revenue
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…penetration is behind that of other valuable markets, creating a significant opportunity for further growth.
Current State > Market Penetration
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Current State > Competition
Investment has resulted in ruthless competition on end consumer price and for enterprise partnerships
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Restaurants are struggling to adapt as they are aggregated by DSPs
Current State > Impact on Restaurants
However, DSPs have considerable leverage
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Why is the category experiencing explosive growth?
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Category Growth > Consumer Confidence
Consumer confidence in delivery is higher than ever, due to transparency and cultural shifts
Transparency
Cultural Shifts
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Investor optimism has led to huge influxes of capital into a variety of business models over the last 5+ years
Category Growth > Investor Optimism
85
121
$8B USD
$17.3B USD
2014-2016
2017-2019
2014-2016
2017-2019
Investments
Capital Invested
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"People are so used to living their lives with one click of a button… Do we want to wait and be disrupted, or do we want to be the disruptor?"
Category Growth > Enterprise Interest
Established brands are excited to expand their reach while not taking on the full logistical complexity of operating a delivery network
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What competitive differentiators are emerging?
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Differentiators > Overview
To build defensible moats, DSPs are innovating by exploring new business models and utilizing data
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One strategy is to identify ways to create exclusive restaurant supply
| Virtual Restaurants | Dark Kitchens | Exclusive Partnerships |
What | Brands that only exist on DSPs but are cooked out of existing restaurants | Industrial kitchen space rented out to restaurants, sometimes owned by DSPs | Availability contracts |
Who | Existing restaurants | Existing or new restaurants | Enterprise chains or high value restaurants |
DSPs Offer | Incremental revenue with minimal cost | Low cost, high flexibility, geo-expansion | Low commissions, data sharing |
DSPs Get | Exclusively available restaurants | Exclusively available delivery-only restaurants | Exclusivity, advertising budget |
DSP Value | Medium | Very High | High, but only for the length of the contract |
Dark kitchens, in particular, have generated interest from some big names in tech.
Travis Kalanick, Uber’s co-founder, purchased and has been growing City Storage Systems, a dark kitchen pioneer, in Los Angeles for over a year.
Differentiators > Exclusive Supply
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Subscriptions have emerged as a differentiator in the US market, with DoorDash’s DashPass fueling massive growth by saving money for frequent users
Differentiators > Subscriptions
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Outside the US, food delivery is simply one of many services offered by Super Apps like China’s Meituan-Dianping
Super Apps have quickly grown in China, India and southeast Asia where companies are (and modern life is) often mobile-first.
Differentiators > Super Apps
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Consumer Discounts
Similar to how ride-sharing grew, DSPs are offering considerable subsidies.
These will not be sustainable, particularly for smaller DSPs with smaller warchests.
Differentiators > Other Strategies
DSPs are also pursuing other, less defensible strategies to gain short-term market share
Reliability
Similarly, DSPs are often paying excess incentives to drivers to ensure they can fulfill consumer demand.
Tech Improvements
With how much venture capital investment the space has received, there is top tech talent at most DSPs.
Catching up to competitors who improve their tech or launch new products often does not take long.
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Areas for Continued Innovation
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Pay-to-Play will become more common
(DSPs will need to turn a profit eventually)
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Innovation > Pay-to-Play > Overview
No DSP has been able to prove consistent profitability with their existing business model. It follows that they will need to explore additional revenue streams as they scale.
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DSPs have a few quick-win options available to generate incremental revenue
Innovation > Pay-to-Play > Quick Wins
Auctions
DSPs can learn from Google Ads and create bid-based systems, where restaurants or brands can pay to be found in search.
Instacart already does this, as seen below.
Add-On Items
DSPs leverage machine learning to recommend items they predict consumers will like.
Ethics aside, they could charge partners for inclusion in these recommendations.
Visibility Boosting
DSPs can charge partners to temporary index higher in their machine learning algorithms (and show up more often to consumers).
Booking.com does this for travel.
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Innovation > Pay-to-Play > Winners and Losers
Winners
Losers
Who | Why | Impact |
Other Restaurants / Brands | Brands with less capital flexibility will have the tough choice between less visibility to consumers or increased costs. | Medium |
Consumers | Some may consider this a win for consumers, but they will need to be more discerning to find organic results. | Low |
Who | Why | Impact |
Top-Tier Restaurants / Brands | Well known brands with significant capital at their disposal will now have a way to ensure they are visible to consumers. | Medium |
DSPs | Charging for premium services will create incremental revenue and potentially be the difference in reaching profitability. Additionally, the revenue will allow DSPs more flexibility to strategically invest in growth. | High |
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Continued growth in urban areas will drive down consumer costs
(Density up, prices down)
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Cost is currently the number one reason why people who consider using a DSP don’t end up placing an order
Innovation > Lower Costs > Overview
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Venture Capitalists see a future where that isn’t the case...
...but how do we get there?
Innovation > Lower Costs > VC Viewpoint
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For DSPs, “batching” is the concept of assigning one driver to pick up multiple orders simultaneously. This is typically only done when the orders will be dropped off close to one another.
The benefit for DSPs is that they are able to save on costs with minimal impact to food quality.
Innovation > Lower Costs > Batching
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VCs like Andrew Chen know that in Chinese cities, where order density* and batch rates are both very high, low costs are already the reality for consumers.
Ordering in can be cheaper than dining out.
*Orders per square mi/km
Innovation > Lower Costs > Chinese Market
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Uber Eats, as shown, looks to concentrate demand / orders on certain restaurants at certain times through time-gated discounts.
They set the expectation for batching upfront in these cases.
Other DSPs have since followed suit, both inside the US and internationally.
In the US, DSPs have begun creating ways to artificially increase batching opportunities
Innovation > Lower Costs > US Market
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Winners
Who | Why | Impact |
Consumers | Lower cost = lower barrier to entry = higher accessibility | High |
Restaurants and grocers that embrace delivery | A greater share of the total market for food will go towards those who become delivery-favorites | High |
Drivers, in the short term | Any improvements to cost will create an influx of orders. Since it takes time to grow the amount of drivers in a market, drivers will likely enjoy boosted earnings immediately following any significant decreases in consumer cost | High |
Losers
Who | Why | Impact |
Drivers, in the long term | After the supply base is grown to match the higher order volume, earnings will likely return to current levels. The difference will be that, with the added density, drivers may be asked to do more to earn it. | Medium |
Restaurants and grocers that don't adapt | With the reduced barrier to entry for delivery, it makes less financial sense to avoid taking part in the phenomenon, as a restaurant or grocer. | High |
Innovation > Lower Costs > Winners and Losers
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New technology & situations for delivery will be normalized
(Aka: Don’t pack a picnic lunch, order one to meet you at park via drone)
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Autonomous technology will have a profound impact on food delivery
Innovation > Tech > Autonomous
Price
Removing labor costs from the equation will, perhaps counter-intuitively, likely be dramatically cheaper for DSPs than maintaining a fleet of autonomous vehicles will be.
Quality & Consistency
Temperature-controlled autonomous vehicles, such as those being built by Nuro (pictured), will allow for a more consistent experience for consumers.
Speed
Autonomous food-trucks that cook food to order as they drive to the consumer already exist, with the Bay Area’s Zume Pizza leading the way.
Between that and more clear-cut opportunities like drone delivery, DSPs will be able to go from receiving an order to dropping it off significantly more quickly.
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There is also an opportunity for DSPs to add incremental business through logistics and integrations
Locations
DSPs can geo-encode GPS points to act as pick-up zones.
This enables consumers to order from, essentially, anywhere.
Domino’s already does this.
Integrations
DSPs have begun to integrate with traditional POS systems but, in many cases, are better suited for the job themselves.
In what’s the first of what’s sure to be many startups that pop up to support DSP integrations, LA-based Ordermark aggregates inbound orders from all DSPs to one central device.
Many enterprise chains have custom configurations and metrics that they use to track productivity, so this space is likely to continue to evolve.
Event Partnerships
There are logical opportunities to improve the experience for events like stadium sports and movie theaters via in-seat ordering.
Some DSPs, like Caviar, have already begun offering this at certain stadiums.
Innovation > Tech > Logistics & Integrations
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Winners
Losers
Who | Why | Impact |
Drivers, for the obvious reason | Automation could eventually lead to there being no need for drivers | High |
Who | Why | Impact |
Consumers | All of these changes increase convenience and some also potentially reduce cost | High |
DSPs | These are big problems being solved. They're being solved because they're also big opportunities | High |
Drivers, for the non-obvious reason | Until autonomous tech and drones can handle all situations, consumer demand will likely increase more quickly than available autonomous tech | Low |
Merchants | Historically, consumers have either needed to be at a merchant's location or at their home to place an order. That is no longer the case | Medium |
Innovation > Tech > Winners and Losers
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The first Super App in the US market will emerge
(And M&A will continue)
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Innovation > Super Apps > Paths to a Super App
The mobile-first Gen-Z will create opportunities for multiple approaches in the US market, which already has many established DSPs.
Horizontal & Vertical Expansion
Established DSPs will look for adjacent verticals (retail, pharmaceuticals, etc.) or complementary pieces of the value-chain (payments, distribution, etc.) that require minimal integrations.
Mergers & Acquisitions
DSPs looking to gain market share quickly in new verticals or regions, or fend off competitive threats, will continue to look to acquire other DSPs or pieces of the value-chain.
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Super Apps allow for high-margin verticals with low overhead, like travel booking, to subsidize low-margin ones with high overhead, like food delivery.
For food delivery, where transactions are frequent and new customer acquisition is high, this is critical.
Innovation > Super Apps > Subsidy
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DSP | Current Positioning | Likelihood of Success |
| DoorDash Drive is an existing product that focuses on verticals other than restaurant delivery | High; it will only become easier to acquire users for their subscription, DashPass as they offer more services with it. Similar to Amazon Prime |
| Their acquisition of Whole Foods put them in prime position (no pun intended...) | Low; Amazon Restaurants has not made a dent in the US market over the last few years and the company seems to be prioritizing other business lines |
| Uber-as-a-platform is their current strategy; grocery-centric roles are currently posted on their careers site | High; despite losing market share to DoorDash, Uber has already proven it is more than a one-trick pony. Its Rides product gives it a huge advantage here |
Foreign Super Apps | None have expressed an intent to do so | Medium; it would be surprising to see none make an attempt, but their understanding of the US consumer will be key to their success |
The most likely DSPs to attempt to become a US Super App are already major names in the US market.
Innovation > Super Apps > Current Positioning
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Winners
Losers
Who | Why | Impact |
Consumers | Discounts and convenience will both increase | High |
Whichever DSP(s) can successfully become a Super App | Compounding effect of more data resulting in a better offering for consumers resulting in more data. Plus, obviously more revenue | High |
Drivers | More verticals means more jobs | Medium |
Who | Why | Impact |
Every Other DSP | Once it clicks for US consumers, not having a multitude of services available will make it impossible to compete | High |
Restaurants | Becoming one piece of an app rather than the main focus will make it more difficult to stand out against other restaurants | Low |
Innovation > Super Apps > Winners and Losers
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Relationships between DSPs and established brands will evolve
(They’ll fight for control of the consumer experience)
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Innovation > Brand Relationships > 1-to-1
The 1-to-1 exclusive relationships of today do not serve the best interests of either DSPs or established brands
For DSPs...
Having greater restaurant selection is a more flexible path towards creating stickiness and increasing the retention of consumers.
For Established Brands...
Being available on a single DSP greatly restricts established brands from maximizing their reach, relevancy and revenue.
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Ride-sharing has a similar dynamic.
Uber and Lyft don’t demand exclusivity from drivers since it would be worse for both platforms if they did, and the most successful drivers drive on both platforms to ensure they get the most jobs.
Innovation > Brand Relationships > Ride-sharing Example
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Established brands will likely be the catalysts of this shift by exploring a variety of strategies.
Strategy | Available on all DSPs | Aggregation of DSPs | Create Their Own Delivery Network |
Available On | DSPs | Own App | Own App |
Pros | High consumer reach | Control of consumer data, flexibility in negotiations with DSPs | No commissions to DSPs, happier franchisees |
Cons | High commissions, unhappy franchisees, low data visibility | Consumer friction to ordering | Considerable logistical and technical expertise needed, consumer friction to ordering |
Likelihood | High | Medium | Low |
Chance of Success | High | Low | Low |
Innovation > Brand Relationships > Strategies for Brands
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Who | Why | Impact |
Other Established Brands | By not exploring their options, brands will struggle to keep up with competitors who shift towards delivery | High |
Other DSPs | Less differentiation with more well established players | Medium |
New DSP Investors | A commoditization of services means less opportunity to generate a sizable return | Low |
Franchisees | Established brands will likely pass off the burden of less favorite deals with DSPs to their franchisees | Medium |
Winners
Losers
Who | Why | Impact |
Established Brands who pursue new strategies | Despite needing to trade-off between increasing reach or more favorable deal terms with DSPs, brands will have their options | High |
DSPs with superior user experience | Comparable restaurant selection across apps means the focus will be on other competitive differentiators | High |
Consumers | Can use their app of choice | Low |
Drivers | More options on what app to earn money on | Low |
Innovation > Brand Relationships > Winners and Losers
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New opportunities will emerge for non-tech workers
(And not just in food delivery)
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Startups creating non-tech work opportunities have been met with controversy due to perceived low earnings, a lack of support from companies and the looming threat of automation.
But, as DSPs expand into adjacent verticals or complimentary businesses, the need for new types of roles will grow.
Innovation > Future of Work > Overview
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New working models and types of work will grow in popularity as companies expand their control over the value-chain
Employee Classification
Instacart employs in-store shoppers at high volume grocery stores.
Career Growth
Jyve offers ways for gig-economy workers to graduate to higher paying tasks based on performance.
“Having the confidence that you can find experienced help quickly from a trusted source like Instawork is invaluable. It ensures our restaurants are running smoothly and it’s a seamless process for our chefs and managers.”
Innovation > Future of Work > Opportunities
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Winners
Losers
Who | Why | Impact |
Some current full time workers | With expanded gig-economy work, there will likely be some cases where roles currently done by full time workers will dissolve. | High |
Who | Why | Impact |
Gig-economy workers | Being able to both explore a variety of work and potentially grow / gain responsibility will help gig-economy workers feel more valued than many currently do | High |
Gig-economy companies | More gig-economy roles being offered will likely bring continued scrutiny on gig-economy companies, but that is outweighed by the benefit of having an even more flexible workforce that serves more use cases | Medium |
Large businesses | Gain the ability to cut costs while not fully automating roles | Low |
Small and medium sized businesses | Have a backup in case staffing is needed unexpectedly | Medium |
Innovation > Future of Work > Winners and Losers
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Summary
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Takeaways
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Appendix
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[2] https://www.statista.com/outlook/374/109/online-food-delivery/united-states#market-globalRevenue
[3] https://www.foodandwine.com/fwx/food/ubereats-going-take-huge-cut-restaurants-delivering-food
[4] https://pos.toasttab.com/blog/average-restaurant-profit-margin
[5] https://www.emarketer.com/content/three-trends-driving-restaurant-delivery-growth
[6] https://www.cnbc.com/2017/02/16/consumers-pay-more-for-on-demand-convenience-personal-touch.html
[7] https://www.crunchbase.com/hub/food-delivery-companies#section-funding
[9] http://www.mymiltonkeynes.co.uk/2018/05/09/17114/
[10] https://www.businessinsider.com/mcdonalds-ceo-delivery-tech-crucial-to-survival-2017-7
[11] https://medium.com/@hanstung/a-deck-meituan-dianpings-expasion-f4b269127bcf
[14] https://www.gloriafood.com/online-food-delivery-statistics-2018/
[15] https://twitter.com/andrewchen/status/1120906146573946881
[16] https://www.gloriafood.com/online-food-delivery-statistics-2018/
[17] https://www.bloomberg.com/features/2019-meituan-china-delivery-empire/
[18] https://techcrunch.com/2018/12/10/uber-ads/
[19] https://bgr.com/2018/12/10/uber-eats-pool-cheap-delivery-option-coming/
[20] https://www.eater.com/2017/5/17/15653132/food-delivery-robots-san-francisco-ban-laws
[22] https://www.ispot.tv/ad/IE9A/subway-tear-away-pants
[23] https://jyve.com/what-we-do
[24] https://shoppers.instacart.com/role/in-store-shopper#role-description
[25] https://blog.instawork.com/were-in-socal-c1727a754819
[26] https://www.chicagobusiness.com/restaurants/mcdonalds-franchisees-dump-delivery
[27] https://table.skift.com/2019/04/12/ubers-ultimate-success-could-depend-on-uber-eats/
[28] https://table.skift.com/2019/04/12/uber-eats-chain-partnership-strategy-is-a-risky-business/
[31] https://www.mckinsey.com/industries/high-tech/our-insights/the-changing-market-for-food-delivery
[32] https://www.wsj.com/articles/investors-are-craving-food-delivery-companies-1540375578
[33] https://table.skift.com/2019/04/22/uber-eats-cant-keep-both-restaurants-and-investors-happy/
References
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