AlixPartners: The brave new world of delivery

The US delivery market is the second largest in the world behind China with a forecasted value of $26.5bn by the end of 2020, dwarfing the UK in fourth position at around $6bn. Currently there are four major players; DoorDash, GrubHub, Uber Eats and Postmates, although in July Uber Eats announced it was acquiring Postmates, so that four will soon become three, with the balance made up of small regional players. As in the UK, Uber Eats was a later entrant into the market, but has managed to grow market share and compete through ubiquity of the Uber brand, driver network and customer install base, and signing up major accounts like McDonald’s.

Pandemic-accelerated growth

There are six major trends currently at play, the biggest being the rapid growth of online restaurant delivery during the Covid-19 pandemic, with consumers unable to eat out and restaurants desperately needing to generate revenue. Online restaurant delivery has grown more rapidly in 2020 than the previous three-year CAGR, as part of this platform-to-consumer grew by 22% vs 2019 (compared to 25% in UK), and restaurant-to-consumer grew by 14% (compared to 19% in UK). From our own anecdotal evidence working with platform-to-consumer companies, delivery has grown by up to 79% in some regions for the year to date. As an example, in the UK, Deliveroo recently announced it was looking for 15,000 new riders and drivers to join its ranks by the end of the year. The firm has been expanding fast since lockdown first came into force, prompting 11,500 new restaurants to sign up for its services and it now works with 44,000 across the UK. Rival Just Eat said that its UK operations recorded a 33% jump in lockdown orders as people increasingly reached for their smartphones for dinner options. Breakfast and lunch orders also rose sharply, by 50% and 80%, respectively. With England now entering another period of lockdown, delivery players are again set for a period of increased sales.

Labour efficiency

The next key trend is driving labour efficiency which is being achieved through evolving the customer service model. Labour remains the largest cost, and is set to rise further as drivers are recognised as employees rather than the independent contractors the gig economy makes them out to be. From our analyses, we estimate that the cost per order for the delivery companies is $7.50 and of that $2.50 (33%) is driver costs – by far the biggest portion. Delivery companies are looking to reduce this by changing the service model. Until now it has almost always been one order per rider trip but what we are seeing emerge is a bundling of orders, where a rider will wait for multiple orders at one outlet or collect from several restaurants, before delivering. However, this has two consequences; it is causing customers to wait longer for their orders to be delivered, and risks lowering food quality. As yet, aggregators in the UK have yet to explore the bundling model, preferring to expand their driver/rider estates to match order demand.

Covert listings

The third trend witnessed in the US (but not as yet in the UK), is controversial and involves delivery companies listing restaurants without them signing up and not informing their customers of this. This causes real challenges because some of the key things operators will scrutinise before signing up with a platform is whether it aligns with their brand promise to customers, are the menu items suitable for delivery, are they able to handle additional demand or ‘turn off’ delivery during peak times to smooth operations and ultimately who is responsible for customer service?

Consolidation

The previous large number of players in the US market has resulted in price wars, margin erosion and massive marketing costs, which in turn has driven consolidation. At the same time, our view is that each regional market can likely only support the top two major market players. Earlier this year, Uber Eats announced it would exit markets where it could not be number one or two in the market. It is arguable that if there is consolidation in the UK market, Uber Eats would at present be the most vulnerable player as it is behind Deliveroo and Just Eat in its penetration of the market, especially now that is has to share what were once exclusive contracts with the likes of McDonald’s and Gregg’s, with Just Eat. Lockdown resulted in increasing cases of operators moving from an exclusive agreement with an aggregator to working with two or three delivery partners, as they look at ways to make sure the safety net for their business through the crisis is as wide as possible.

Commission caps

Another, more recent, US trend is commission caps being introduced by city regulators. Several cities in the US have imposed caps that delivery companies can charge to restaurants, with the likes of Chicago, San Francisco, Seattle and New York placing caps of between 5-15%. Commission levels have been a long-term bone of contention in the UK, where, on average, operators are understood to pay 25-30% in commission fees, although many of the larger brands pay considerably less. Unsurprisingly, independent operators have continued to be more vocal on the fees charged and earlier this summer many came out to complain the aggregators were “forcing” restaurants to pay high commission rates which risked driving many out of business. Restaurateurs said delivery firms had seized a bigger share of their income at a time when they have no choice but to work with them. As yet, neither the UK government or local authorities have yet to get involved in the debate.

Differentiated experience

Finally, both US and UK operators are becoming more sophisticated at differentiating the online offering versus in-store. Many restaurants took a FOMO (Fear Of Missing Out) decision to go with delivery, with little understanding of the impact on sales, operations, finances, customer experience, or margin, and with the expectation that “if you turn it on, they will come”. There was also no clear view of the risk of cannibalisation and little support for marketing and SEO. This typically led to brand damage, disrupted in-store operations, negative in-store customer experience, constant “firefighting” and margin erosion with limited sales uplift. However, a more sophisticated approach is now the norm; higher prices online to account for delivery costs; reducing menu options for online delivery; and managing digital demand to smooth in-store operations. Operators are also flexing their site models, either designing sites with delivery purely in mind, for example Tortilla with its ‘Baby’ format or Nando’s with its Nino units, or by increasingly moving into the dark kitchen or virtual brand realm, something the UK is arguably ahead of compared to the US.

In the medium-term these six major trends will remain for operators both here and across the Atlantic, especially as the impact of Covid-19 continues into next year. We are certainly seeing unprecedented levels of new operators looking to join platforms, including established brands such as Pret A Manger. Our view is most will stay post-crisis, as they seek ways to diversify their business and continue to adapt to the changing landscape, including a greater focus on food quality and customer experience.

Covid-19 has impacted a number of consumer behaviours that will drive the continued growth of online delivery into the future. While there has been accelerated adoption across all age groups, we are seeing greater popularity among older people, and delivery becoming a regular part of the “at home” dinner mix. The lower relative costs of setting up a virtual brand may also proliferate the offering to cater for different and niche consumer tastes and lifestyles. Online delivery is having a ‘good’ crisis, so it will be fascinating to watch developments over the coming year.