#1 - Food Delivery FAQ - What does the competitive end state of food delivery look like around the world?
This post is the first in a FAQ series on the food delivery industry. There’s no real structure or method to my madness. As I come across interesting questions related to the industry I’ll update them here on a periodic basis.
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What does the competitive end state of food delivery look like around the world?
As of writing this in January 2022, food delivery has consolidated to four major global players; Uber Eats, Just Eat Takeaway (JET), DoorDash, and Delivery Hero. In addition, there are a few players that are large but the majority of their business is concentrated in a few countries (Rappi, Deliveroo, iFood, Swiggy, etc.).
With the numerous mergers and acquisitions in the last three years (Caviar, Postmates, Just Eat, Grubhub, Wolt, Glovo, etc.), we are likely nearing the end of consolidation given some of the structural idiosyncrasies of food delivery. But why four global players, why not ten, twenty, etc.?
Most large (US, UK, etc.) and medium (Canada, Australia, etc.) sized markets can technically support up to four national players but you will likely end up with two or three players in most cases. The primary reason is because the industry is highly competitive and to have a comparable cost structure, you need a certain amount of scale and network density:
The cost per delivery drops significantly as order density goes up and drivers complete more deliveries per hour. I.e. Imagine you’re trying to target gross earnings of $14.00 per hour. At one delivery per hour you’d pay the driver $14.00 per delivery, two deliveries per hour $7.00 per delivery, three deliveries per hour $3.25 per delivery, etc. Most players scaled players (Uber Eats, DoorDash, etc.) are averaging around two deliveries an hour and players who aren’t able scale demand often get stuck at roughly one to one and a half deliveries an hour, an unsustainable cost structure
The other reason is simply amortization of fixed costs, especially in R&D and marketing. DoorDash for example, will likely spend over $1B USD in marketing in 2021. They’re able to spread fixed marketing costs (i.e. TV commercials) over a larger national audience which gives them a cost advantage over smaller players
So you may be asking yourself, OK - what about new entrants? Won’t there be new players that spring up and get to scale globally? I’ll likely cover this as a separate question but the short answer is likely no. As of writing this, funding in the private market for food delivery has largely dried up minus a few exceptions (i.e. iFoods, Bolt, etc.). On top of this, you’ve got two structural barriers to entry:
The classic chicken and egg problem means building a marketplace city by city from scratch is very expensive (i.e. it’s not uncommon to lose up to $50 per order at launch)
There are some weak to moderate network effects at play between restaurants, drivers, and users. Layer on some lock-in mechanisms (ex. subscriptions) and it’s quite the uphill battle to steal users from existing incumbents
That being said, I think there’s a real possibility that a large consumer company like Amazon enters the food delivery space within the next few years, likely through a combination of organic and inorganic means (i.e. acquiring Deliveroo).