Are delivery apps unnecessarily competing with upstarts?
Rapid grocery delivery is only the latest low-margin, high-cost segment which has captured the attention of venture capital
In 2016, Grubhub CEO Matt Maloney lamented the concept of platform-to-consumer delivery apps, which deliver food to customers through their own driver platforms instead of relying on the restaurant to do the dirty work.
Grubhub had since inception been a marketplace for takeaways, providing the menu, contact details and payment services. Takeaways paid a commission to be on the marketplace and received additional custom through it.
The introduction of platform-to-consumer added additional costs to run the business, while also forcing Grubhub to ask for higher commissions.
Due to a mix of investor and internal pressure, Grubhub started competing in this “shitty business” against Uber Eats and DoorDash, but it failed to beat the upstarts, losing market share in consecutive years from 2016.
In 2021, Grubhub sits in third place in the United States with approximately 15% market share, while DoorDash has cornered almost half the market.
While it’s clear Grubhub needed to launch the delivery service if it wanted to compete with DoorDash, there is a case to be made that it would have been better served not getting into it at all.
DoorDash and Uber were both backed by billions in venture capital, which seemed almost endless in 2017 and 2018. In comparison, Grubhub was a public company and was unable to rapidly build out the service.
It also came into the platform-to-consumer market as a competitor, not a leader, at a time when it was responsible for 75% of online food orders.
Could Grubhub have survived with its takeaway operation? It’s possible. Some businesses may have preferred Grubhub with its lower commissions.
DoorDash and Uber are also looking to be the answer to everything delivery — groceries, alcohol, toys — but it’s not certain this model will ever generate meaningful returns.
Grubhub would’ve also had a steady cash flow with several key high retention markets, such as New York, Boston and Chicago.
This may have been too hard a sell for Maloney to shareholders who saw DoorDash and Uber as the next wave of food delivery, however, Grubhub could have also tried to acquire DoorDash or Postmates to bolster its service.
The next-next wave
If nothing else, the Grubhub scenario provides us with an outlook to the new wave, led by Getir, Gorillas and GoPuff, which offer rapid delivery of groceries and other items.
Through the use of strategically located warehouses dotted around the city, these apps aim to deliver in under 20 minutes, with some even offering less delivery in 10. Fine tuning this sweet spot appears to be the goal.
London is the hotbed for these delivery apps, with more than a dozen launching in the capital this year. Similar to Grubhub, the old guard have started to launch similar services to compete, despite doubts as to whether this industry is sustainable long-term.
Most of these apps offer delivery for £2 and hire their drivers, which means to break even they would need to a rider to deliver to more than five customers an hour. Add to that heavy discounts, vouchers and freebies offered to entice customers, and nobody is making a profit right now.
But that doesn’t matter, because VC is in love with rapid grocery delivery. $8 billion has been invested in these services in 2021, with a few having mega bi-annual rounds(Gorillas had Series B in March, Series C in September) led by acclaimed VC firms such as Tencent, SoftBank, Accel, Sequoia Capital and Tiger Global Management.
That puts Deliveroo, DoorDash and Uber in a precarious position. All three are still loss making, with timelines to profitability in the next few years, and moving into this other loss-making category of delivery may push the path to profitability even further back.
Add to that Just Eat Takeaway and Delivery Hero are eyeing up expansion into grocery delivery, and it looks to be quite the crowded market.
It also may be true that these upstarts, like DoorDash to Grubhub, have a better handle on this type of delivery, which makes them more efficient.
Even though food delivery had a strong 2020, on the back of the coronavirus pandemic making these apps critical for millions of people, that shine has worn off, with Uber and Deliveroo stock down YTD and DoorDash only slightly up by 3.3%.
That may be why Deliveroo and Uber are partnering, the former with supermarket Morrisons and latter with GoPuff, instead of diving headfirst. DoorDash’s discussions with Instacart and Gorillas also hint that the food delivery giant may be concerned about a drawn out battle for market share.
In comparison to Grubhub vs DoorDash, the food delivery and rapid grocery delivery businesses are less complementary. The platform-to-consumer business was more hands on, but it was still food going from a merchant (restaurant/takeaway) to a customer.
Rapid grocery delivery is a different logistics operation, with one menu of items and “dark warehouses” in and around the city, which stock them.
It’s unlikely that Gorillas or Getir will overlap with the old guard, at least not at that scale. We have seen Dija in London partner with an assortment of suppliers, but again the scale makes it difficult to ensure rapid delivery without a huge workforce and sophisticated optimisation of routes.
What’s even less likely is that any of these major players want to be left out of the grocery market, valued at $1 trillion (US) and €2 trillion (EU). So we can expect all the largest operators to dip their toes in, although some with more gusto than others. Deliveroo CEO Will Shu remarked that rapid delivery may be the new “e-scooter fad”, but is trialling it anyway.
Without true belief that it can work or be successful, Deliveroo may see similar returns to Grubhub when it tried to compete with DoorDash.
We should expect that if these older operators do not succeed, acquisitions may be the next step. However, in the current climate, antitrust regulators may not approve of a larger delivery service (Uber, DoorDash) swallowing a competitive service, even if it is marginally different to its own.