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Finding winners in food delivery

The boom in food delivery of the last few years is predicted to reach more than USD40 billion by 2025. What are the top trends shaping investors’ appetite and who are the major players?

As the global pandemic left restaurants relying on deliveries, the food delivery market grew exponentially in 2020 and 2021, to the point that it is four to seven times bigger than in 2018. The rise in popularity is largely due to the increasing number of younger generations who prefer the convenience of prepared meals and having goods delivered. The economic structure of the food-delivery industry is still evolving rapidly, with the emergence of new competition, industry consolidation, and regulation changes.

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Intense competition

The food delivery industry is fragmented with new startups frequently entering the space. Large startups include Gorillas and Flink, both founded in Germany in 2020. The intense competition is making it more difficult for incumbents to expand their market shares to scale and in turn reach profitability. As a result, the industry keeps seeing a lot of players entering and exiting. For example, the giant Takeaway announced in early March it is exiting Norway and Portugal, where it lacks scale and registered a loss of roughly EUR10 million annually from the two countries. Similarly, Uber Eats made a similar move as last year it exited the Hong Kong market, after five years of operation.

Many consumers are beginning to see food delivery as a “commodity” service, with the least expensive option winning their business. Consumers tend to be constantly flipping between which service offers the cheapest options. This makes it costly for companies to retain users. Nonetheless, investors envision that eventually, the dominant players will have created large barriers to entry, that should deter potential competition.

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Additionally, services such as Uber Eats, that reached prominence quickly with a comprehensive advertising strategy may win, thanks to a good reputation and because of being the ‘standard’ option. Other winners are those services that aim for differentiation strategies such as health-conscious options. Using this strategy is Gousto, a London-based meal-kit service startup. Delivery giants are also increasingly jumping on the trend of delivering groceries in a short period of time, to gain scales in operations and to diversify from restaurant deliveries. Some specialise in meal-kit deliveries such as publicly traded German-based HelloFresh.

Continued consolidation

The food delivery sector is undergoing significant consolidation, with large players buying up smaller rivals to reduce competition and gain scale. At the end of 2021, Delivery Hero announced it would buy a majority stake of 39.4% in Spanish rival Glovo for USD2.6 billion. It also tends to be that companies sell operations in regions that are not profitable and buy rivals in regions of focus, to reach profitability through scale. For example, in 2020, Uber Eats sold its business in India to the local leader: Zomato. Delivery giants have also consolidated amongst themselves with two mega-mergers in 2020 that changed the landscape of the industry: Just Eat Takeaway.com’s acquisition of Grubhub for USD7.3 billion and Uber’s acquisition of Postmates for USD2.65 billion.

Increased regulation

The threat of regulation in the food delivery industry is real and can cap profitability.

Fee caps: New York City and San Francisco placed fee caps over how much third-party delivery services could charge restaurants. Cities cracked down as companies were charging as much as 30% per order. Some are temporary caps, only effective during the pandemic.

Anti-trust scrutiny: The US Federal Trade Commission is increasingly investigating deals in the food delivery industry. For example, Uber is being investigated for its acquisition of Drizly and exclusive partnership with GoPuff, on concerns over its increasing market power.

Dark stores: Some regulators are looking to ban ultrafast delivery services (10-15 minutes), which critics say turn local storefronts into small warehouses. In the Netherlands, four cities have already banned the “dark stores”.

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Workers: Some cities may provide app-based delivery workers with minimum rights. For example, beginning in 2023, in New York City, apps will have to pay drivers a minimum rate that will be set by the city. DoorDash settled a lawsuit for USD2.5 million on that exact issue in 2020.

Major players

Below are some of the largest players in the food delivery industry.

 

  • Doordash – American company, ticker: DASH, listed on the NYSE, Market cap: USD35.1 billion.
    The San Francisco-based company is believed to have a 56% market share in the US. Its platform is used by 450’000 merchants, serving a total of 20 million customers. The company is also active in Canada, Australia, and Japan. In November 2021 it acquired Finland-based Wolt for over USD8.1 billion.

 

  • Delivery Hero – German multinational, ticker: DHER, listed in Germany, Market cap: EUR12.5 billion.
    The group operates in more than 50 countries with key markets in Asia (41.9% of sales), North Africa (31.3% of sales), and Europe (11.3% of sales). It works with more than 550’000 partners, serving around 20 million customers. Delivery Hero has a large portfolio of brands due to its long history of making acquisitions, which include Foodpanda (Asia), bought in 2016 for EUR3 billion.

 

  • Just Eat Takeaway – Dutch multinational, ticker: TKWY, listed in Amsterdam, Market cap: EUR7.7 billion.
    The group owns brands that include Takeaway.com, Just Eat, SkipTheDishes, Menulog, and Grubhub. In February 2020 UK-based food delivery service Just Eat and Takeaway.com merged, and in June 2020 it acquired US-based Grubhub in a USD7.3 billion deal. Gruhub is in 3rd place in the US in terms of market shares, just after Uber Eat and Doordash.

 

  • Uber Tech (Uber Eats) – American multinational, Ticker: UBER, listed on the NYSE, Market cap: USD58 billion.
    Uber Eats, launched by Uber in 2014, has a market share in the US estimated at 30%. It owns other delivery companies such as Postmates and Drizly. It has more than 21 million active users and 500’000 restaurants on its platform. It is active in over 6’000 cities across 45 countries.  

 

  • Deliveroo – British company, Ticker: ROO, listed in London, Market cap: GBP1.9 billion.
    Founded in 2013, Deliveroo operates in over 200 locations across the UK, Europe, Asia, and the Middle East. Today it serves over 7.6 million users and partners with over 160’000 restaurants.

Conclusion

It is likely that the demand for food delivery is not going away anytime soon. However, investors cannot underestimate the risks of the intense competition and regulation of the industry, which can challenge long-term profitability. Weak stock performances in the last two years also suggest that investors are no longer willing to look past continual losses, in the hope of gaining large market shares and keeping competition at bay. Thus, while there could be interesting opportunities in the space, investors should focus on the winners and weigh the risks carefully.

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