If you thought the red-hot food delivery business was entering its consolidation phase, think again.
The pressures are starting to show on some weaker apps, prompting the first stirrings of mergers. But this looks like being just the beginning of a long and very expensive battle for the world's collective stomach, with plenty of red ink yet to be spilled.
European online ordering and delivery services Just Eat and Takeaway.com last weekend confirmed plans to combine their businesses. This week, both companies revealed a dent in profits from rising competition, as rivals turn to subsidies to win customers.
In the US, Grubhub — which, like Just Eat, began as an online food ordering service before adding its own delivery operation in response to a wave of new competition — has been wilting under the same pressures. Its shares jumped 7 per cent on Monday on merger hopes, only to drop nearly 15 per cent as the company also warned of a dent to its profits.
These ructions reflect the arrival of competitors with deep-pocketed backers in what is still a highly fragmented market. Taking a leaf out of Uber's book, for instance, DoorDash in the US has been on a fundraising tear, taking in nearly US$2 billion ($3b) since early last year.
The theory is brutally simple: out-raise and out-subsidise less well capitalised rivals to win over diners and become the dominant delivery marketplace. DoorDash has already overtaken Grubhub to become the leader in the US.
It could beat Uber at its own game. With little growth in its ride-hailing business, Uber still leans heavily on the Uber Eats business to show it can be a growth company. But its underwhelming initial public offering has changed the equation, sending a clear message that Wall Street's tolerance for losses is limited.
Some of the biggest private-market investors have been lining up to pour money into delivery apps. They include Temasek, the Singapore government vehicle, and Naspers, the South African investment group, which has led a US$1b round into Swiggy in India and US$500 million in iFood in Brazil.
And SoftBank, being SoftBank, seems happy to play all sides at once: its Vision Fund has backed both Uber and DoorDash, as well as dropping US$1b on Latin American delivery company Rappi earlier this year.
Plenty of others still seem to be working out how to play this sector. They include Amazon, which closed a failed US delivery service of its own and is now reportedly looking to enter India, while also awaiting regulatory approval for a big investment in Deliveroo.
The enthusiasts claim the food delivery market will rival or even exceed ride-hailing in size. According to one big investor in the sector, the margins also look better — particularly away from large cities, in suburbs and towns where a higher proportion of families leads to larger orders.
Margins, of course, depend on what customers are willing to pay, whether that means restaurants (for whom the delivery apps represent a valuable source of additional eaters to help cover fixed costs) or diners (who pay fees for the convenience).
The impact in the restaurant sector is already being felt. Domino's Pizza, whose name has long been synonymous in the US with hot food arriving on the doorstep, has seen its same-store sales suffer from the new competition, wiping 12 per cent from its stock price last month. As Domino's executives warned, the economics of the food delivery aggregators are "an open question in the long term" — but for now, the new apps have cash to burn and there's no way to predict how long this will last.
As with all sectors facing the arrival of a new set of digital aggregators, the threat to restaurants is clear. Many have rushed to sign up the delivery services, reportedly handing over a big slice of the money from take-out orders to secure the extra business. But the apps, amassing eyeballs, could end up with the upper hand.
Thinking of ordering from your local pizza restaurant? DoorDash will be in a position to suggest a rival chain, or put a cut-price offer in front of you. Or in future it could take you out of the restaurant sector altogether and feed you from a cloud kitchen — one of the low-cost, purpose-build facilities that are starting to spring up to act as food factories for the burgeoning delivery sector.
That points to a fierce battle ahead, as restaurants try to keep the upper hand and avoid becoming the victims of new digital aggregators, like music companies, retailers or newspapers before them. The biggest chains started out by signing exclusive deals with delivery companies but seem to be rethinking that strategy.
McDonald's, which signed a deal with Uber Eats two years ago, recently agreed to test DoorDash. As with all digital storefronts, smaller restaurants with less brand recognition are likely to be the ones to lose out.
Negotiating leverage, for the aggregators, will come from scale. That guarantees that plenty of cash will be burnt on subsidised deliveries — and happy eaters will get to enjoy a lot more subsidised food — before the dust settles.
Written by: Richard Waters
© Financial Times