#2 - Food Delivery FAQ - What are the next growth avenues for food delivery co's?
In today’s FAQ, I’ll summarize what I find interesting in the near term growth areas for food delivery co’s; new verticals, white-label, corporate ordering, ads, and subscriptions. Something I’ll save for another FAQ is the question of how much growth is left in the core restaurant delivery space and what long-term penetration might look like.
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What are the next growth avenues for food delivery co's?
This has been by far the largest investment area for food delivery co’s over the past 12-18 months. General retail (pet food, fashion, etc.) is available but the most prominent categories are grocery, convenience, pharmacy, and alcohol. The thesis behind expanding into new categories is fourfold:
Create new on-ramps to acquire users who typically wouldn’t be interested in food delivery (which you then cross-sell once they’re in your ecosystem)
Amortize your fixed R&D and marketing costs and further monetize the existing user base
Improve retention rates through increased frequency, “top of mindness”, and in the case of subscriptions, increased “value”
Retain tenured talent by providing fresh growth opportunities (i.e. faster pace, less bureaucracy, etc.)
The jury is still out whether this playbook will work in developed markets but here’s a positive teaser from Uber’s Q2 21; 7% of users are engaging with new verticals, $3B GB run-rate, frequency is up 1.5x, and monthly retention is up by 10%.
One of the most interesting dynamics playing out right now is how Uber and DoorDash are taking contrasting approaches to new verticals. The former is leaning into M&A and partnerships while the latter has been investing more into building proprietary and vertically integrated products. I’ll summarize their progress to date below, plus JET:
Uber recently bought Cornershop, the “Instacart of Latin America” and are now scaling this globally including the US (i.e. currently piloting with Costco). In the “instant grocery” space, they’ve partnered with GoPuff and several traditional retailers such as 7-11 and Carrefour but are testing their own vertically integrated “dark stores” in Taiwan and Japan. Uber also recently bought Drizzly, a US online marketplace that connects consumers with alcohol retailers who provide their own delivery.
DoorDash has been aggressively rolling out their vertically integrated grocery and convenience offering, DashMarts, while also partnering with traditional retailers like Albertsons. I am a little skeptical of this hybrid approach, grocers have been very vocal about their concerns that aggregators will become direct competitors once they reach scale. I suspect DoorDash may have some difficulties in signing up all of the merchants that consumers really care about like Costco, Walmart, etc. Over the last few years, DoorDash has also built their own proprietary pharmacy and alcohol delivery products.
JET has several brands globally, each in different stages of expanding categories. Jitse has outlined that rolling out grocery and convenience products as a primary strategic pillar for Grubhub to win back market share in the US. In the UK, Just Eat has recently started to pilot grocery delivery for several large chains such as Asda. SkiptheDishes, their Canadian brand, has announced they’ll be expanding their dark stores nationally.
The last comment I’ll make on this topic, it’s important to distinguish between which verticals can be serviced through a generalized logistics platform vs. which need something more idiosyncratic. For example, alcohol delivery in the US is a tangled web of state regulations. What counts as marketing to minors? What is a valid proof of age? How do cross-border state taxes work? All things being equal, vertical specific solutions provide a better partner and user experience, and therefore should outcompete a generalized platform approach. In that vein, I think Uber’s acquisitions of Cornershop was prescient and will allow them to go-to-market much faster than DoorDash and JET.
Though Uber was the original pioneer in this space with the launch of UberRUSH in 2015 (deprecated in 2018), it’s really been DoorDash that’s been pushing the category forward. Tony has been espousing for some time a vision where white-label delivery is as big if not larger than it’s core food delivery marketplace. The analogy I’ll use here is similar to Amazon’s AWS, by taking on all the complexity and fixed costs of building and operating a delivery network, they become the underlying infrastructure that powers local commerce.
All of the major global players now have their own white-label product but there’s an ugly monster rearing its head; delivery aggregators. Startups like Olo and Deliverect aggregate all of a merchants white-label delivery services in one place and automatically picks the cheapest option. The risk here isn’t just a race to the bottom or disintermediation but that Olo or Deliverect vertically integrate and start competing directly. For now delivery co’s have been able to maintain their position in the value chain but it’s an area worth keeping an eye on.
Corporate ordering can be split into two subcategories; catering and expensed meals:
Catering includes one-off or recurring large orders (i.e. more than 25 meals). The business looks simple on the surface but using independent contractors for delivery makes this very challenging. Delivery co’s cannot provide the necessary equipment (i.e. trolleys), guarantee 100% fulfillment (an unfilled order has ~100% churn), or crucial add-on services (i.e. set up and tear down of the meal).
The other subcategory is expensed meals. These are individual orders that are automatically expensed on a corporate card. Think meals during travel, late nights in the office, onsites at a client, etc. The value proposition here is that employees are more productive because they spend less time on administrative paperwork and there’s better transparency and cost control (i.e. you can set geographic and time parameters to the meals).
Corporate ordering is highly profitable, not just because orders are much bigger than your typical consumer but because discounting is almost completely absent. Business users tend to have a much higher willingness to pay, so economics are materially better.
JET’s Seamless brand in the US is the clear market leader here. They’ve spent years building out the technology platform, operations, and salesforce for corporating ordering specifically. And their relationship with customers often include recurring contracts, so there’s much more lock-in vs the consumer side of the business. That being said, Uber is the real dark-horse to watch here. Pre-pandemic, Uber ride-hailing was the most expensed vendor in the globe. They’ve spent the past six years building an enterprise platform and salesforce which has real synergies with Uber Eats.
As a side note, it goes without saying that the pandemic has crushed corporate ordering and there’s still an open question mark as to when and how much it rebounds.
This isn’t new to the food delivery space, Grubhub has been serving up ads for years but there are a few recent innovations:
First, surfacing of ads has become much more sophisticated. Instead of just top of the feed “sponsored listings”, they also appear in menus (i.e. upselling a Coke) and search results. Uber’s also been experimenting with surfacing restaurant ads in their ride-hailing app.
Second, the model has changed from fixed fees to bid based cost per click (similar to Google or Facebook) or cost per transaction (DoorDash’s model). This is much more scalable and allows smaller mom and pops to compete with larger advertisers.
Finally, it isn’t just restaurants that are advertising now. With the expansion into new verticals, CPG brands are experimenting more and more with on-demand platforms. Similar to Amazon ads, these platforms are closed loop, so you can more confidently calculate your ROAS vs. Google or Facebook.
Uber is by far the most advance here and has recently poached Amazon ads executive Mark Grether to scale the business globally. I forecast that medium-term ad spend can reach between 2-3% of gross bookings and Uber Eats and Cornershop will generate roughly $200M-400M in ad revenue in 2022 with a >70% gross margin. The one caveat I’ll add here for anyone modelling this out, restaurant ad spend is partially cannibalistic and comes at the cost of future commission increases.
DoorDash launched DashPass in 2018 and it’s been a primary driver of growth since then. It likely accounts for >40% of gross bookings, with similar trajectory in penetration for Uber and Grubhub. For a flat fee, users get a zero dollar “Delivery Fee” and a discount on the “Service Fee”. Both Uber and Grubhub were slow to copy DashPass because on the surface it seems like the cannibalization of highly profitable users with a variable cost structure wouldn’t work. DoorDash’s innovation rested on merchants subsidizing some of the discount in return for more demand and the insight that despite lower gross profits per order, overall gross profits per customer go up.
The last interesting point I’ll make here is how subscriptions intersect with other verticals. As more services (grocery, pharmacy, etc.) are bundled with zero dollar “Delivery Fees”, users feel like they get more “value”. And as subscriptions are priced at break-even to maximize gross sales and build scale advantages, you can monetize this engagement (re: CPC model) through ads. All of this leads to set a of interconnected and self-reinforcing flywheels which, if well executed on, should lead to durable growth in the medium term.