There has been a huge boom in the number of delivery only restaurant model start-ups in the last 6 -12 months. Just to be sure, we know the definition being referred to – a food delivery company is the one who takes the customer order on its system and transfers it to a food production unit/ restaurant, followed by a delivery boy picking up the order from the restaurant and delivering it to the customer who made the order. Food delivery start-ups do not/ cannot do food quality control while their core proposition remains convenience for customers. Unfortunately, the core value proposition for the customer is slightly different – the taste and quality of food, something they can’t influence.
The basic issue like most of the other situations is – Can they generate more revenue per order from restaurant/ customer than the cost of delivering one order. Right now, it seems that some of the startups are incurring 3x cost in delivering an order as compared to the revenues being generated by an order. Obviously, they are unprofitable. However, the hope is that as the delivery force becomes more efficient, at some point of time in future the revenue per order would exceed cost in delivering the order and it would become an insanely profitable business. The same logic has been repeated for various other consumer tech businesses and situations.
But this time it has become even harder to execute.
Like many other businesses in consumer tech it faces similar challenges of Unknown location of demand origination, Unknown location of demand completion as well as the inability to influence external circumstances (in cab delivery business this is traffic on the roads, in grocery delivery it is the availability of SKUs and in food delivery it is the speed at which the restaurant would make the food item).
These companies are trying to solve these problems by becoming more and more hyperlocal. Therefore, they deliver only from a small radius from where you order. In this way, they minimize the scope of variation in point of origination, point of food pickup as well as the probability of outlier orders. The same strategy has been followed by grocery/ medicine delivery companies.
However, there are two additional operating constraints for food delivery start-ups which is not the case of cabs/ grocery or medicine deliveries.
- Most people want all their food orders to be delivered in 4 operating hours (no more, lest the food gets cold and no less) of the day which is neither the case for cab delivery, grocery delivery or medicine delivery. They typically have a much wider operating time frame.
- Any food delivered beyond 60 mins of production tends to go cold, degenerates in taste etc. And we Indians hate that. Again medicines or groceries don’t get spoilt even in few hours.
These operating constraint can’t be wished away however hard we may try. And this implies that it’s near impossible to make more than a certain number of food deliveries in a day. Therefore, it also means that it’s just not possible to make money easily in the food delivery business whatever be the overall volume – the unit economics will always set the limits.
What then will likely happen to these start-ups?
Well, there is no logical case for the existence of a pure food delivery start-up. Incidentally, delivering food adds to the efficiency metrics for grocery delivery start-ups. Remember, customers want groceries delivered at either end of the day and food in the middle of the day. Therefore, very soon we should see the grocery delivery start-ups adding food delivery to their list further hastening the end of pure food delivery start-ups.
Note: The views are entirely personal and do not represent the views of my employer.
About Author:
Aditya Somani have been in Investment Management for more than 10 years now in Private Equity with an overall work experience of more than 13 years. He invested across sectors – Consumer businesses, Education, IT Services, Banks , Pharma , Construction and Real Estate. He invested across deal sizes ranging from USD 2 million – USD 80 million while investing in various stages of a company. Some of the investments have seen IPO led as well as strategic exits. A couple of years of experience in M&A and Equity research also brings understanding of Technology and Telecom space.