"Uber Eats is ripping off restaurants", "With such a big commission, Uber must be making heaps of money", "We can build the same thing and charge a restaurant way less" have been headlines for years, but have really come to the front again as the hospitality industry looks towards a transition to level 3 next week and new competitors line up.
From my experience leading the Uber Eats business in New Zealand for the last few years, the story needs a bit of a reality check.
Before I begin, I want to caveat that I'm not involved in the food industry anymore and that this is by no means a piece to defend Uber Eats. I know everyone is hurting and I would love to see them do more to support small NZ businesses during this hard time.
With that said, throughout lockdown, I've been fielding phone calls from a lot of people asking my opinion on different iterations of new, 'Uber Eats like' delivery businesses. With the company coming out today saying they have no room to move on restaurant fees and even our PM Jacinda Ardern weighing in, I figured I'd share a few thoughts and considerations as Kiwi entrepreneurs and restaurant owners think about diving headfirst into the space.
For a restaurant industry that is now being forced into delivery due to the restrictions applied on them at Level 3, jumping on UberEats, the only food delivery business in NZ with a large delivery fleet, reliable tech and an enormous customer base seems like a no brainer; until you do the economics of a restaurant marketplace fee of 30% to 35% on each order.
If your food business can already stand on its own two feet by covering overheads with regular instore or direct customers, you may as well go for it if your unit economics are still positive. After all, every incremental, non-cannibalising dollar is worth it. However as soon as you don't have the base business and you need to cover all your overheads from these sales too, it quickly gets pretty tough for a restaurant.
Thus the questions from smart, driven people asking me of late; "With 35% on the table, Uber must be making heaps of money. Surely we can build the same thing and only charge a restaurant 10%?".
Unfortunately, the economics aren't as flash as they may look on the surface.
The largest piece that's most consistently misunderstood is the ever-increasing labour cost of a delivery driver. As the minimum wage continues to rise, the cost of each delivery gets even higher. If you assume a driver can only do 2 food deliveries per hour, the restaurant needs to cover about $10 to pay a driver from that order before any other costs. If an average restaurant delivery order is $30, there goes your 35% pretty quick.* That leaves you with just the delivery fee to the customer to cover your business expenses.
With industry-standard delivery fees at only $5-$7 to the customer, you don't have much room to cover business costs such as transaction fees, marketing, customer support and refunding missed orders. The list goes on and the business needs to have a little fat left in the system to make a profit. Now you could increase the delivery fee to the consumer, however elasticity when it comes to food delivery is relatively flat, and when money gets tight at home, that higher charge quickly makes customers look at other alternatives for their dinner.
Well, why don't we have drivers carry more orders at once, and in turn customers share the cost per order? This is the holy grail of the industry, in some neighbourhoods in China 'batching' as it's known, can be as high as 8:1. That's 8 orders to 1 driver on one journey!
Unfortunately, you need China level density and demand to make that happen, and even at the peak times in the most popular neighbourhoods in NZ, the numbers don't stack up consistently without customer experience taking a huge hit. No one likes their Big Mac 40 minutes late and cold after doing an extra lap around the city.
Finally, the demand pattern is super spiky. Building a business to cater to a sharp dinner peak comes with huge challenges to balance a flexible labour base. Drivers don't want to show up for only 2 hours work a day and sit around making no money for the rest of the time. And it only gets worse in winter when it rains. However, there is an opportunity here in smoothing that curve with the increased demand of other goods being delivered throughout the day.
If you can design a business that can actually start to make money, which Uber Eats have proved is possible, you still need a huge scale to make it really worthwhile. Unfortunately in NZ, like with supermarkets, there is probably only room for a couple of players, not the countless amounts trying to stand up during lockdown.
I know that this is an incredibly challenging time for everyone in the industry, and I take a lot of heart in the ambitious nature of Kiwis to build cool innovations in the hospitality space. I hope we come out of lockdown to find easy, waiter-less ordering at tables, self-collection of meals directly from the kitchen and not having to wait in a line at the end of a meal to pay my share of the group bill.
I do hope we see another local food delivery player grow and create more competition in New Zealand, however, I hope everyone who puts their hand up for the challenge truly knows what they're looking down the barrel of, even if they do have the Prime Minister's endorsement.
*These numbers are purely for illustrative purposes and do not encapsulate all aspects of the business model, nor do they reflect actual amounts, however, the economics remain similar.
Andy Bowie was formerly country manager for Uber Eats in New Zealand. He worked with the San Francisco-based company for five years, and now runs his own business, My Auto Shop, a digital vehicle servicing platform.