At first glance, one would assume food delivery services are thriving, especially because they’ve emerged as lifelines during lockdown for some. Admittedly, the services benefitted from the influx of people’s delivery orders. In fact, total spending on food delivery increased by 70 percent during the last week of March, due to both more frequent delivery requests and more food purchased per order.
Yet even when the stock of other quarantine companion companies like Zoom and Netflix soared, shares of Grubhub (one of the industry’s only publicly traded companies) remained down by 14 percent. In a Cowen Report from August of 2019, Uber Eats was reportedly losing $3.36 per order. A few months later, CNBC reported major layoffs from Postmates, including the closing of their office in Mexico City. Even DoorDash, the leader for food delivery in the U.S. market, lost approximately $450 million in 2019, according to the New York Times.
So, why are delivery companies still losing money when so many people seem to use them?
A Flawed Service Model
For starters, the food delivery market is incredibly undifferentiated. Despite numerous players in the field – including DoorDash, Grubhub, Uber Eats, Postmates and Caviar – each business model looks almost identical. These third-party courier companies take customer orders through their respective app and pay independent drivers to fulfill each order.
Some restaurants are only available through certain carriers, but in most cases, the same restaurant is available across multiple platforms. Even if a specific restaurant is not available on one app, there is likely a restaurant with similar cuisine available on another. As stated bluntly by Grubhub in its letter to shareholders, “Online diners are becoming more promiscuous.” With so many delivery platform options, undifferentiated business models make it hard for diners to stay loyal.
Plus, the model is mediocre at best. The delivery drivers who pick up the orders may not know a restaurant well enough to tell if an order is correct or not. They may mistime a drive and leave an order waiting on the counter to grow cold. Moreover, drivers may not know a neighborhood well enough to navigate efficiently, and food can sit in the car, as drivers move in circles searching for an address. Finally, restaurants could bear the unjust blame for lackluster dishes that were never intended or built for delivery at all.
Restaurants Lose, Too
Third-party couriers have also faced backlash for hurting restaurants with steep commission rates. Restaurant owner Anil Bathwal estimates that Seamless – a New York City based delivery service – has reduced his business’s overall profits by up to five percent. Grubhub, which owns Seamless, has also been accused of hurting restaurants with an exploitive “Support for Supper” program during the pandemic with bogus delivery call fees. During lockdown, many delivery apps marketed their services as a restaurant’s saving grace, but in reality, they may be anything but.
Can Delivery Apps Save Themselves?
Despite a tumultuous existence, third-party delivery apps aren’t ready to stand down. European delivery service Just Eat Takeaway recently acquired Grubhub for $7.3 billion, and Uber Eats is rumored to potentially purchase Postmates for $2.6 billion. Such acquisitions would further consolidate the market so that companies can compete with DoorDash, which captured almost half of the U.S. market as of this May. Still, services must somehow turn a profit with a business model that has been losing money for years.
Third-party delivery apps are an example of a service that is good in theory and bad in practice. Some delivery services are trying to redeem themselves by lowering commission fees and expanding delivery options. Whether it’s enough to save a market where companies consistently lose money is hard to say. Ultimately, it’s up to restaurants and their customers to decide whether third-party delivery apps survive.
