In their recent deep-dive report, Citi’s Consumer Discretionary team points to some of the key shifts taking place today in online food delivery. Platforms are introducing services such as cloud kitchens, technology integration and raw materials sourcing. So far, food delivery platforms have not ventured into other parts of the food delivery chain, such as prepared groceries and meal kits or waste reduction.
This is an intensely competitive space. For individual platforms, the drive to profitability is about scale and sufficient capital. Globally, many of these businesses are at differing stages of maturity depending on the market and top-down factors, such as internet penetration.
Online food delivery has come a long way in a short time. Telephone orders moved to website orders. Those orders then moved to apps, and now there are last-mile logistics networks.
Consolidation has already been a significant feature, and that is likely to continue as access to profit pools and scale, even at a local level, invariably hold the key to profitability.
The first online food delivery models launched in the early 2000s as marketplace models, providing an online platform to connect restaurants and consumers in one place for orders and payments. The platform would take a commission from the restaurant based on the value of the order, with delivery still managed by the restaurants. But delivery times were unpredictable and choice limited to restaurants that offered delivery—often cut-price, fast-food joints.
From 2013, the logistics-based model launched, addressing the lack of selection and improving the user experience by introducing order tracking, more dependable delivery times and better customer support. The platforms hired riders to manage the process, ushering in the gig economy era. As smartphones proliferated, usage shifted from websites to apps. The commission charged to restaurants is higher, as the operators are now responsible for filling orders, and customers are also charged a delivery fee and sometimes a service fee too. This shift to a logistics model means that local scale becomes more important than national scale.
Figure 1. Evolution of the Online Delivery Model
Source: Citi Research
Platforms connect consumers, restaurants and riders, and the business model’s development is based largely on making home delivery faster and more convenient for consumers. For restaurants, and other partners, online food delivery drives demand and volume, takes potential sticking points out of the process and helps to improve operational efficiency and reach.
The appeal of food delivery as a business is the potential for lots of transactions—21 meal occasions a week—and attractive customer retention stats. Within online consumer services, online food delivery platforms have among the highest rates of customer retention.
Figure 2. Average Customer Retention (After 18 Months)
Online delivery is developing rapidly, and the dynamics are shifting fast.
For more information on this exciting subject, please see Deliveroo (ROO.L): Several Routes for Roo to Navigate.
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