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All About Food Delivery

If you're curious and want to read more, here are the business model posts so far:

1. Intro

2. Big Pharma

3. Marketplaces

4. Software

5. Restaurants

6. Ridesharing


Now, moving onto #7 in the series...



As you can see from above, the last two posts in this series were about restaurants and ridesharing. This post will be a combination of the two: food delivery networks.


Before getting into the delivery networks specifically, there are two main business models in this sub-industry. The first is the aggregators. This is what GrubHub used to be; simply a website with a bunch of restaurants and their menus. A user would log onto GrubHub, pick a meal, then the restaurant would either handle the delivery themselves or use a third-party courier.


In this model, the aggregators take a percentage of the meal price.


Pretend the commission is 10%. If a meal costs $10, the user still only pays the $10 but the restaurant takes in $9. The restaurant actually chooses how much commission it pays, which affects how high it surfaces in the search rankings, similar to GoogleAdWords. For example, the restaurant could choose a 15% commission rate to pay the aggregator and it would reach more potential customers than a competitor who decides on a 10% aggregator commission.


To be clear, the value proposition of these aggregators is scale. If you're running a restaurant, you likely don't have the time or money to run GoogleAds. All you want is more people to buy your food!


In this way, an aggregator works well as another marketing channel. GrubHub would recruit thousands of restaurants so that users would have a lot of options. It would then leverage that restaurant base to sign-up a lot of users which would then incentivize more restaurants…Meanwhile they were taking a cut of each transaction.


This business model was very asset-light because it was just a website/mobile app. The real hassle was kick-starting the network effect by signing up as many restaurants as possible. Once that was going, it acted like a toll-booth on online orders. Essentially, it was disrupting the phonebook. Rather than users calling-in orders, they could just do it through a simple web interface.


But it was also much simpler for the restaurants. Each order could be immediately transmitted to the chef versus relaying each phone call. And the transactions were handled digitally.


The aggregator model worked for a while, until competition forced it to evolve.


A New Model

The second model is the integrated delivery network. This is what GrubHub does nowadays, along with Uber Eats, Potmates, and DoorDash. Each of these have their own apps and websites where users can find a variety of restaurants, but they also run their own delivery networks. Much like Uber and Lyft, these companies employ independent contractors as delivery drivers.



Much like the aggregator model, this model provides the needed scale for restaurants, but it goes a step further. Rather than hand off the logistics to a third party, or requiring restaurants to hire their own delivery personnel, food delivery networks handle everything from the digital orders to getting to food to users ASAP.


I won't get into the difference between each delivery network's business model because the differences are typically trivial. For example, DoorDash's delivery fee is typically $5.99 whereas Postmates offers a $3.99 delivery fee if the user orders from a "Partner Restaurant." This incentivizes restaurants to create exclusive partnerships with Postmates as users will get a better deal. These details could go on and on, so I'll save you (and me) the headache.


Here is usually how it breaks down.


Food delivery networks handle commissions like the aggregators. Pay us more and we'll show your restaurant more. But the difference is that these networks can charge both the users and the restaurants a delivery fee (usually a commission for the restaurant but a fixed amount for the user).


The reason nearly every food delivery company in the US is becoming a network is because there are more revenue opportunities. Rather than hand off the delivery, just do it yourself.


To put it another way, an aggregator is like if Uber was just a website driver profiles and then users picked their favorite drivers. It wouldn't be as efficient as a huge network owned by a single entity. [It's not a perfect comparison but that's the idea.]


Under the aggregator model, it makes more sense for restaurants to not even offer a delivery option. If they have to pay commissions to the aggregator and then deal with another company on the delivery front, it becomes a headache.


Delivery Math

Let's do some math to figure out when it would make sense to offer delivery themselves.


It all comes down to how much the delivery commission is for the restaurant versus an hourly delivery wage. If the commission is 10%, like Uber Eats, and the average order value is $15, then the restaurant would need to do more than 10 orders per hour or they should hire a delivery person for $15/hour.


Average order value: $15 * 10% commission = $1.5 per order


$1.5 per order * 10 orders = $15


*More than 10 orders/hour = the company should hire its own delivery person.


But that's not how reality works. A delivery person would be unable to fulfill 10 orders in an hour. That would be an order every 6 minutes. It is not likely that every order is within 3 minutes driving distance (accounting for there and back), or else people probably would just pick it up themselves.


So you'd probably need to hire at least two delivery people to fulfill 10 orders per hour. That means you'd be paying $30 per hour. So, as long as you do fewer than 20 orders per hour, it would make more sense to go with the food delivery network.


And with the network, you get the added benefit of scale. Rather than hiring two drivers, you would have access to the thousands of drivers working for any one of the food delivery networks.


In this light, it's easy to understand why these food delivery networks have grown so fast. It simply makes more sense for restaurants.


From the delivery network's point of view, it is very similar to ridesharing. The business model benefits from localized scale. The more drivers you have on the road, the better wait times for users and therefore, a better value proposition.


Imagine you want to order food online and you go to DoorDash's website and it says "Get your food in 10 minutes" and then you go to GrubHub's and it offers a "30 minute guarantee."


DoorDash would be a no-brainer. Which means more users would flock to its platform and naturally, more restaurants would join as well. That is why these delivery networks are spending so much money to have drivers sign-up: better wait times.


From the restaurant's point of view, it is a little more nuanced. Obviously, they want a better user experience (a low wait time, hot food, the correct order) but they also want the reach of multiple platforms.


Some users might like Postmates for some reason and if the restaurant isn't listed on there, it could miss out on a sale. But Postmates might not have the best user experience. This is likely an edge case but would be considered by restaurants.


In summary, it is not always simple for the restaurants. Throw in all the complexity of the small differences in delivery network's business models and it becomes confusing. Some restaurants are even second-guessing the value of these networks.


The Future

That is one reason company's like DoorDash and Uber Eats are now pushing for dark kitchens and virtual restaurants. Instead of having a storefront, some delivery networks are leasing kitchen space to restaurants where chefs cook the food and then drivers come straight to these "dark kitchens" and deliver food from there. This drives down expenses as the restaurants don't need to worry about a building or staff. The business model is just get some great cooks and then drive the marketing through the delivery networks.


I predict that we will see a big rise of this concept in our lifetimes. I don't think it is far-fetched to see restaurants become like bricks and mortar retail stores. Some people enjoy the experience of going out to dinner but for the most part, people just want the convenience of eating from wherever and with whomever they like.


Picture a big kitchen with 4 virtual restaurants handling operations in one space. The company who owns the kitchen and leases it out could get paid a percentage of total food sales so then, the only assets a virtual restaurant would own is the cooking equipment.


Conclusion

Next time you order online, just know that there is a lot going on behind the scenes.


The rise of autonomous vehicles would add another layer of complexity but would probably reduce the costs per delivery in the long term.


All in all, food delivery started with aggregators but has since migrated to the food delivery network model as companies see the potential of owning the last-mile customer relationship.


It's much more effort to build a network, but the potential is much greater.



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