Will food delivery services ever deliver profits?

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelley. Last week, food delivery, app delivery stopped taking orders in Australia. Its British parent company said it wasn't generating enough money, leaving deliver Australia without any backing to continue operating. But Deliveroo isn't the only food delivery company to fail or downsize recently. Voly and Send also went bust this year. Gopuff gorillas and get here are all cutting staff in search of profits. It's wednesday, the 23rd of November. And today I want to know why food deliveries are collapsing and what's going to be left for me. Hung over this Sunday morning. To do this, I'm joined by my colleague here at Equity Mates. It's Darcy Cordell. Darcy, welcome to The Dive. 

Darcy: [00:00:49] Hi, Sascha. Thank you. I think I'll be joining you on Sunday. I need to know who's going to be left. 

Sascha: [00:00:55] Exactly what are we going to do? So, first of all, I should note that we're grouping two slightly different businesses in today's episode. There's restaurant food delivery, which is the likes of Uber Eats, Menulog and Deliveroo. But then there's also the super fast 15 minute grocery delivery services made famous by the likes of Getty Gorillas Gopuff. And here in Australia we have a milk run and we did Voly.

Darcy: [00:01:20] Yes, that's two separate businesses, but they're both joined by some pretty terrible unit economics. 

Sascha: [00:01:26] You're spoiling the end, Darcy. We'll get to that in a minute. Most of us I'm well, I'm definitely putting my hand up. I have ordered from a restaurant delivery service like Uber Eats or Deliveroo, most likely, as I said on a Sunday morning when you're feeling not so great from the decisions of the night before. But can you explain briefly to me how they work? 

Darcy: [00:01:49] Basically, they partner with local restaurants or supermarkets and deliver their food to customers for a fee. They take a chunk of the profit from the restaurant and then they add other service fees and charges to the cost. So I can open up my phone now, open the Ubereats app and there's a bunch of restaurant or food options in there I can order through the app. The restaurant prepares the food and then Uber dispatches a rider or driver to pick up the food and deliver it to where I want. 

Sascha: [00:02:14] It's pretty convenient, isn't it?

Darcy: [00:02:16] It's very competitive.

Sascha: [00:02:17] And over the pandemic, the number of food delivery services really shot up. They were popping up left, right and centre. And I think our appetites, pardon the pun, for instant food delivered right to our doorsteps was rising with it. But that seems to have reversed course this year. Which companies have we seen fail to last the distance? 

Darcy: [00:02:37] The latest one is delivery. 

Speaker 3: [00:02:39] And as of tonight, Australian customers will no longer be able to place orders. The company says riders will receive a four week payout that's based on their average earnings and some restaurants will receive compensation. Administrators have now been appointed and the first creditors meeting will be later this month. 

Darcy: [00:02:57] They were the fourth biggest delivery service in Australia. They had partnerships with over 12,000 venues or restaurants and used about 15,000 local riders. It's actually been a tough year for Deliveroo. They also pulled out of the Netherlands and Spain. The British parent company said that Australian takings made up just 3% of its overall earnings. Then there's also Valley, which you mentioned before they launched in 2020 and promised food and grocery delivery in 15 minutes or less. But a couple of weeks ago they confirmed they'd be folding after they couldn't raise enough money to stay afloat, then they'll send another grocery delivery. Start-Up, which collapsed in May. They'd raised about $11 million from investors, but they just weren't making enough money and had to pull out of the market. 

Sascha: [00:03:40] So that's the Australian climate. I feel like I know where this is going, Darcy, because you touched on what's happened in the Netherlands and Spain with Deliveroo, but what about the rest of the world? Are we seeing this play out globally? 

Darcy: [00:03:51] Yeah, Australia mirrors a wider global trend. One of the first dominoes to fall was in December last year when New York's 1520 delivery service shut down after burning through its cash just a couple of months later. Rival start ups boink and fridge no more followed in shutting down. At the same time, some of the biggest grocery delivery services are also cutting costs. Getty, A Turkish Start-Up, has just cut its workforce by 14%. That's almost 5000 workers. And that announcement was made just a couple of months after they had raised $770 million from investors. There's their rival Start-Up Gorillas and they've laid off half of their workforce recently. There are now rumours Getty could acquire them for about $1,000,000,000 and these two companies operate across Europe and the US. America's GOPUFF is cutting warehouse hours and hundreds of jobs, trying to save $40 million. Another Start-Up called Joker is reportedly trying to sell its business after reports came out saying the company loses up to $159 per order in the US, $159. 

Sascha: [00:04:54] That is insane and completely unsustainable. So who is left here in Australia? I know I've still got rebates to count on. 

Darcy: [00:05:03] Yeah, they're the dominant service. 

Sascha: [00:05:05] And I'm also thinking of DoorDash and Menulog because they have such a brilliant jingle. 

Darcy: [00:05:11] But are there the big three players now that Deliveroo is gone? Then there's milk run who offer grocery delivery in 10 minutes or less. It raised $75 million earlier this year, so it seems to have a bit of a buffer. Having said that, they need it because milk run has said it loses about $13 per order. 

Sascha: [00:05:28] Not 159, but still significant. 

Darcy: [00:05:31] Still significant. There's no doubt, though, that the number of delivery services is decreasing rather than growing like we saw during the pandemic. 

Sascha: [00:05:39] As you've outlined, so many companies have gone under or they're cutting back. They're just not that many left. And you might be thinking, why are these companies even trying anymore? And the answer to that is they want a slice of Australia's $100 billion annual grocery market. The U.S. grocery market is estimated to be worth around $1 trillion and the grocery market in Europe is a whopping. Get ready for this $2 trillion. So in a moment, let's look at the unit economics of food delivery services and what's changed that's caused these delivery businesses to be in financial trouble.

Speaker 3: [00:06:20] This shock decision will affect about 12,000 restaurants and about 15,000 riders and drivers. With Deliveroo admitting this afternoon it simply can't compete with the likes of Ubereats, DoorDash and Menulog. 

Sascha: [00:06:34] Welcome back to the dive. If you really enjoy our show and you'd like to get us an early Christmas present, then what about a five star review? Today we're talking about the collapse of Deliveroo in Australia and the wider trend of delivery companies struggling to stay afloat. I'm joined by my colleague Darcy. Darcy. During the pandemic, these companies were popping up everywhere and now it seems the virus is happening and they're collapsing right in front of our eyes. What has changed? 

Darcy: [00:07:01] Sacha If we take a wider lens of the global economy, we can say that delivery services aren't alone in feeling the pinch. 

Sascha: [00:07:07] That's very.

Darcy: [00:07:08] True. Most of them are unprofitable companies, and valuations for the majority of unprofitable companies have just taken a beating this year. More specifically, though, the era of easy money is over. 

Sascha: [00:07:19] I've heard that phrase quite a few times in the financial press this year. Let's unpack what that means. The era of easy money is over. I mean, money has never seemed that easy for me to get. So explain this to me. 

Darcy: [00:07:32] The past few years have been characterised by this willingness of venture capitalist investors to put large amounts of money into big ideas: electric cars, space web three, crypto, super fast grocery delivery, you name it. If you had a big idea and a vague plan of how to get there, it was likely you could find a venture capitalist to back you. 

Sascha: [00:07:52] That really feels no clearer than the story around lately. 

Darcy: [00:07:56] Yeah, well said. But that really turned to late last year. And earlier this year we saw high inflation start to kick in and that led to higher interest rates. And all of a sudden customers started tightening their belts and venture capitalists started closing their wallets. So many of these start-ups that weren't yet profitable went from 2020 and 2021, where they could keep raising money and they didn't have to worry about making money that March two, 2022, where there was no more money available from investors. 

Sascha: [00:08:24] Meaning, if they weren't able to get profitable very quickly, they would run out of money and go out of business. 

Darcy: [00:08:30] Exactly. There was a joke over the past few years, the, quote, millennial lifestyle subsidy. Notice how many of the services we use. Think Uber, Airbnb, DoorDash, milk run. They've all got more expensive recently. 

Sascha: [00:08:42] I know when I read that statement it really hit close to home. I don't want my subsidy to go away. 

Darcy: [00:08:48] It's because these venture capitalist investors were subsidising our lifestyle. They would keep giving these companies money and the companies would keep offering us cheap food vouchers, rides and holidays. But now the investors have stopped giving them money, meaning these companies have had to raise their prices. 

Sascha: [00:09:05] And the end of the era of easy money is only the first challenge for food delivery companies. They are also seeing their customers tighten their belts as food itself is getting more expensive. That's the next hurdle.

Darcy: [00:09:18] Food inflation in Australia is 9%. In America it's over 11%. Food is getting a lot more expensive and it's forcing customers to change their buying habits. In the last couple of years, customers may have splurged, having their groceries delivered in 15 minutes or less. But now we're seeing more customers save the money and go to the shops themselves.

Sascha: [00:09:38] We don't need to look at customers. Darcy, this is me. I definitely think twice about getting milk right now and decide to just put on my shoes and walk down to Coles. 

Darcy: [00:09:46] This episode is a case study of you, Sascha. 

Speaker 3: [00:09:49] Yeah, it.

Sascha: [00:09:49] Is.

Darcy: [00:09:50] As you said, they might have had their Friday takeaway, a hangover Sunday meal delivered to their door. But now we're saving money and walking up the street or cooking at home. 

Sascha: [00:09:58] So it all leads to the ultimate question. Does the unit economics of food delivery make sense? 

Darcy: [00:10:04] Food delivery is a simple business. 

Speaker 3: [00:10:06] Back in 2014, food delivery and the gig economy were just emerging in Silicon Valley. Back then, the barriers to entry were so low that anyone could open up their own food.

Darcy: [00:10:16] Delivery business in a matter of weeks with just a few thousand dollars. 

Speaker 3: [00:10:19] And a website. 

Sascha: [00:10:20] If the motor of 2022 is to become profitable fast, can these food delivery businesses actually get there? 

Darcy: [00:10:27] The simple answer is yes, they can be profitable. For simplicity's sake, if Uber eats charged a $30 delivery fee that would make them profitable. 

Sascha: [00:10:36] Wouldn't have many customers, though, would they? 

Darcy: [00:10:38] Exactly. That's not many customers. And that's the supply and demand challenge that they're battling or balancing. These companies became billion dollar businesses because of the sheer amount of customers that they grow. But now they want to find ways to raise prices without losing us as customers. So they're trying to do a variety of things to become profitable without raising prices too much. For example, milk run, they've implemented a $20 minimum order overwrites. They'll often try and have one rider deliver two orders to two houses near each other. DoorDash offers restaurant chains, a white labelled version of their app. And a number of these companies are experimenting with non-human delivery AI drones or delivery robots. 

Sascha: [00:11:18] I have heard a. I've seen videos and a friend of mine got a sausage roll delivered to his worksite once via drone. Yeah, it flew across from the back of the shop and dropped it off on his work site. Pretty cool. As cool as that is, the big question is, has that worked? Do any of these companies make a profit? Do they? Am I going to get a drone delivering to my balcony?

Darcy: [00:11:39] You might have a drone coming soon, Sascha, but the answer to the profitability question is no. Looking at some of the publicly listed companies, Uber lost about $500 million last year, down from 6.8 billion the year before. But that's the effect of cost cutting and higher prices. Just ate the owner of Menulog. They lost $1 billion last year and DoorDash lost $468 million. But I just want to look into DoorDash a bit closer and look at why they lose money. According to an analysis by Deutsche Bank, DoorDash take up to 30% of your food order, which is an average of $36 per order, but after their operational expenses. So paying the drivers advertising refunds and so on, DoorDash is left with on average just 2.5%, which on that $36 average order leaves them with $0.90. 

Sascha: [00:12:32] Wow. 

Darcy: [00:12:33] And that's their gross profit on an order. DoorDash has to account for the cost of building their app and running their business. It's pretty hard to do on 90 cent hits. What's worse, though, according to the Wall Street Journal, DoorDash has one of the best margins of all the food and grocery delivery companies. 

Sascha: [00:12:48] So they're the ones doing really well. So basically the conclusion is that delivering food is expensive and it's really hard to make a profit. 

Darcy: [00:12:58] Yes. And this leads to one of the biggest follies of the past decade. The era of easy money really started by looking at software businesses that lost money for years before becoming incredibly profitable. When you build software, you build it once and you can sell it millions of times. So you can sell more and more without incurring a lot of extra costs. That's called operating leverage. Venture capitalists then started applying that thinking to other non software businesses. They were willing to see them lose money for years in the hope that they would eventually become insanely profitable in the future. But delivering food isn't quite like selling software. Every time you make another sale, you've got to pay someone to deliver the food. There's no operating leverage. And it seems like this year investors have really woken up and realised this. Yeah. 

Sascha: [00:13:43] And it's not rinse and repeat. Every house is different. Every person is different. Every order is different. It's not the same as just the same software for every single customer. So finally, where to from here? 

Darcy: [00:13:55] All the focus now goes to profit. You need to become profitable or you're going to go out of business. And to do that, we're likely to see cost cutting and job losses. We're likely to see higher prices, and we're also likely to see consolidation. Delivery companies are going to merge to try and become profitable by getting bigger and taking all of the market share. There is a huge prise here. As you said before, the US grocery market is worth over $1 trillion a year, Europe more than $2 trillion. So if they can find these ways to become profitable, they can be huge successful businesses. But as we're learning in 2022, as more and more of these companies collapse, it's a big if. 

Sascha: [00:14:35] A huge if. Well, Darcy, I think it's time that we get ready to say goodbye to our millennial subsidies, which I'm sad about, but. 

Darcy: [00:14:43] Very. 

Sascha: [00:14:43] Sad reality bites. Before we go. I do just want to extend a huge thank you to you for listening to the dive from all of us here at Equity Mates Media. Because of you and because of your support, we're really thrilled to say that we won Gold for Best Business Podcast in 2022 at the Australian Podcast Awards. Thank you for listening. We could not have done it without you. If you've enjoyed this episode, then please tell a friend about it. It really is the best way for our podcast to grow. And if you've just joined us for the first time, then welcome. There's a huge back catalogue for you to go check out a gold winning back catalogue, even if I can say that. Remember, you can follow us on Instagram. We're at the dive business news. You can contact us by email thedive@equitymates.com and you can subscribe wherever you are listening right this second and then you'll never miss an episode again. Darcy, thank you so much for joining me today. 

Darcy: [00:15:36] Thanks, Sascha. Just want to add to that huge credit to you. We're stoked to win the award and happy days. Thank you to everyone.