Food Delivery, Part 3: Restaurant Evolution

Prepared food delivered to the home from local chefs and restaurants is the most significant area of investment and activity in food delivery based on capital raised to date. The notion that prepared meals delivered to the diner will supplant home-cooked meals, as well as the need to shop for ingredients, as logistics matures is an article of faith for these companies and their investors.
 

Globally, food delivery companies are worth approximately $19 billion after initial public offerings by GrubHub ($8.7 billion public market cap), Berlin-based Delivery Hero ($8.9 billion), and London’s Takeaway.com ($2.42 billion). U.S. delivery companies have raised $1.45 billion in venture funding, led by DoorDash ($721.7 million), GrubHub, which raised $276.6 million in venture funds before its IPO, Postmates ($278 million), and Freshly ($107 million).

It remains to be seen whether the current $641.53 billion grocery store market, as measured by the U.S. Census Bureau will retain customers or lose them to the $799 billion restaurant industry as it expands into home delivery.

Technology is disintermediating meals and their makers. Logistics systems allow raw ingredients, prepped ingredients, or prepared food to be delivered in comparable timeframes. The introduction of platforms such as GrubHub and UberEATS has disrupted the traditional marketing and sales relationship that the restaurant maintains with the customer. So much of the restaurant experience that has revolved around the physical proximity of diner and server, the locus of upselling to increase average ticket price per diner, must evolve in the age of delivery.

The growth in prepared food delivery justifies that reinvention. As many as 22.3 million U.S. consumers are expected to spend $22.4 billion on delivery food in 2018, according to Statista, which also projects the market will grow to $44.6 billion in 2022. Food delivery is more prominent overseas, for example China’s 2018 delivery revenue alone is expected to be $48.5 billion. For purposes of this analysis, the focus is the U.S. market.

The emerging market for prepared food delivery has focused on two primary approaches: On-demand ordering from existing restaurants ferried by a driver to the home, and; Centralized kitchens offering prepared food through their own or third-party couriers.

Overcoming moving targets, spoiling food

Restaurant delivery is more complicated than grocery and boxed ingredients delivery because it is time-sensitive. Customers who order a prepared meal are waiting for a meal delivery, where grocery delivery can take place in a longer window of time. No grocery delivery service promises service in less than an hour, but every restaurant delivery suffers from each passing minute after it is boxed.

Sour Greenshoots Photography

An hour is an eternity in food service. Many delivery services, notably Uber EATS, emphasize the worst aspects of customer experience by requiring the customer to wait at the front door or curb for the driver. Phone in hand and dressed for the cold, I recently watched on the UberEATS map my dinner’s progress as the driver stopped for a pizza, got stuck in traffic, and ultimately arrived 20 minutes later than promised. The food was cold and my customer experience consisted of the driver’s repeated apologies.

Nonetheless, prepared delivery is growing by leaps and bounds.

The NPD Group, a Chicago-based market research company, reported that delivery sales surged by 20 percent in 2017. App-based orders grew to 51 percent of delivery sales, as well. “Delivery has become a need to have and no longer a nice to have in the restaurant industry,” NPD Group senior vice president of industry relations Warren Solochek said. Diners order delivery or visit restaurants to pick up food more than 1.7 billion times annually in the U.S.

The U.S. market is dominated by GrubHub and UberEATS, which saw 2018 gross food sales of $3.8 billion and $3 billion, respectively. Second Measure, an analytics firm, reports that GrubHub accounts for 52.1 percent of the U.S. delivery market, while UberEATS took 19.9 percent in 2017. DoorDash and Postmates, the next tier of restaurant delivery services that account for 32 percent of the market, are reportedly discussing a merger to hold their position.

After deducting the cost of food, delivery providers take between 25 percent and 30 percent of the cost of a meal, which is tacked on as a fee. Out of this, they pay the courier, their marketing costs, and operating expenses.

GrubHub’s public numbers demonstrate how difficult restaurant delivery can be. While active diners increased by 77 percent in 2017, the company’s revenues reached $783.1 million, up only 26 percent year-over-year. On $3.8 billion in sales, GrubHub eked out a net income of $99 million, a margin of 2.6 percent. UberEATS, which said in December that it is profitable in more than 40 cities globally, did not disclose enough information to calculate a margin, but its delivery fees hover around 30 percent of the meal price.

Platform coordination meets the dinner rush

The traditional restaurant’s business model is under assault because logistics eliminates the ability to plan food purchases based on seating capacity. Restaurants have long been able to estimate how much food they need based on being able to seat and turnover tables a predictable number of times a day. With delivery, demand may soar one day and evaporate the next, leading to more dissatisfied customers on busy days or immense food waste on unexpectedly slow days.

Source: Meal Prep Delivery

Waste compounded by the time element in prepared food delivery increases costs, too. For years, pizza delivery companies have sought ways to keep pies delicious, even going to the extreme of completing cooking in the delivery vehicle. All food, warm or cold, spoils with the passage of time.

The time-honored tradition of sending back a poorly prepared meal is virtually impossible in the delivery era, and it would only amplify the difficulty of earning a profit from deliveries. Nevertheless, we believe diners’ sense of accountability will eventually empower them to send back spoiled food – the service is too expensive to support a “no returns” policy.

Since local restaurants must decide to be on one or all of the local delivery services available, they face a daunting in-restaurant challenge: Managing inbound orders from multiple sources in addition to their management systems. Reuters showed in late 2017 an example of one location with five dedicated tablet devices needed to respond to orders on GrubHub, UberEATS, DoorDash, and other delivery platforms. The integration of delivery services into restaurant management systems should be a prime focus for the major platforms.

The primary argument in favor of the national and global delivery platform brands, such as GrubHub, UberEATS, Postmates, and DoorDash, is their ability to market and attract diners. They have concentrated more on delivery than merchandising and selling restaurants’ unique features. Consequently, specials of the day based on local ingredients or challenging to acquire ingredients such as fresh fish, are deemphasized in the ordering process.

Chefs who build a media persona can leverage the desire to taste their food, but delivery is a departure from the traditional world where chefs and waiters provided extensive information, explaining specials and greeting diners to build word of mouth. All these are absent in restaurant delivery. Customers are not likely to spend additional time while ordering required to upsell to the most profitable dish. Wine and beer sales, a staple of restaurant profit margins, are segregated to specialized delivery services designed to confirm customers are of age to drink. The opportunity to sell a dessert at the conclusion of the meal is missing.

We believe restaurants will need a more dynamic menu and selling system to communicate naturally with diners as they order – it will likely need voice interfaces and real-time chat or conversation. Consultative communication is the essential tool for individual or small chain restaurants to increase their profitability through upselling and specialization.

At larger scales, however, a media-savvy regional chef is enabled to scale their business using a platform in ways that were impossible before.

The old dream from the IBM commercial about selling a guitar to “every person on the Internet” flickers back to life here, but we are sophisticated enough 20 years later to recognize that exclusivity is essential for high-value experience to be attractive. Not everyone wants a guitar, nor do they all want Cat Cora’s cooking. But a lot more would like to try Cat Cora’s meals than can do so today. Connecting and staying engaged with a loyal and growing following based on extensive media asset investment does promise to make some chefs as ubiquitous as McDonald’s or Chipotle, which also have joined the delivery race.

Centralizing local food preparation

Meal times remain relatively fixed around the industrial workday. Such regularity has enabled a promising version of prepared food delivery, the centralized kitchen that prepares and serves meals via courier.

Source: Shopfitting Concepts

Peach, a Seattle-based startup, for example, developed a successful lunch delivery program featuring food from local restaurants prepared in a centralized kitchen. With $10.7 million in funding, it is a small player in an emerging locally focused approach to food preparation that focuses on serving offices with more than 50 workers. In essence, Peach schedules meals ahead of time, and so can order with clear supply requirements in mind and serve out large deliveries to increase efficiency.

Munchery, a San Francisco centralized delivery company assembles many chefs and staff to prepare a wide variety of foods, is taking the concept to the home. The company, with $125.4 million in venture funding to date, offers a wide range of a local food market without having to connect dozens of kitchens to couriers and, ultimately, customers. Like Peach, it enjoys better inventory management while offering a much broader array of foods than a single restaurant could.

Munchery and Peach’s focus on local ingredients also makes this category the most sustainable form of prepared food delivery. As Millennials and Gen-Z age into adulthood, they will demand planet friendly services – 73 percent already do, according to Nielsen – and local sourcing is the most efficient and least environmentally taxing form of food production.

The centralized kitchen approach may also be the path for local restauranteurs to step into competition with national delivery services. Whether by offering their kitchen to share with other chefs or by moving into collective kitchens with a delivery component, local restauranteurs could achieve similar scale advantages as GrubHub or UberEATS. The local chef’s ability to differentiate by celebrating food in season, developing rituals around local foods and in-season specials, place them on a more intimate footing with diners than the national delivery platforms.

As restaurants, which face declining sales as the delivery tide rises, close or consolidate, the centralized kitchen appears poised to be the strategy of necessity for local chefs seeking to earn a living. These facilities, like major national players, must build around robust communication, an extensive library of food-related content, and local reviews and customer word-of-mouth programs that:

  • Provide context and expertise to diners seeking unique, not merely consistent, food experiences;
  • Respond quickly and efficiently to changing food supplies throughout the year;
  • Improve the utilization of food purchased and the profitability of food prepared and delivered;
  • Support the full-meal experience, including beverages paired with foods (which means establishing a method for providing alcohol with the meal), upselling of specials and high-margin dishes such as dessert, and, perhaps, home clean-up after a meal.
  • Provide transparent and fair payment for cooks, couriers, and the enabling technology companies.

In the final installment of this series, we’ll look across the three major categories of food delivery, groceries, pre-prepped boxed ingredients, and restaurant delivery to identify essential themes for future development.

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SoftBank takes control at Uber: Stay out of Asia

SoftBank completed its $9.3 billion transaction with Uber, making it the largest shareholder in the company and returning handsome profits to early investors, as well as making Travis Kalanick a billionaire. The cost: Uber must turn its focus to the United States, Europe, Latin American countries, and Australia to become profitable. 

The Financial Times reports that Rajeev Misra, Softbank’s Uber board member, said Uber can be profitable with a focus outside Asia, where SoftBank has investments in several mobility companies, including Ola and Didi Chuxing. In a pricelessly SoftBankian phrase, Misra said of Uber’s potential: “Who cares if they lost a billion more or half a billion less?”

On closing, SoftBank comes away with 15 percent of Uber for its money.

Home Delivery: Gen Z, Millennials, and Their Values Define The Market

2018 will be a watershed year in local on-demand, particularly home delivery of food. The industry has set down roots in North America, Europe, Asia, and the Middle East. McKinsey projects 25 percent growth for food delivery companies in 2018. UberEats reportedly accounted for $3 billion in 2017 revenue, suggesting that its revenue could climb by as much as $750 million in sales this year. GrubHub could see more than $170 million in additional revenue.

In short, there is $1 billion in growth to be captured by food delivery companies this year.

UberEats, which is reportedly driving more revenue than the company’s car services in some markets, has carved out an early advantage in prepared meals by partnering with McDonald’s and smaller local restaurants in the U.S., Europe, Asia, and elsewhere in the world.

Deliveroo (restaurant delivery), GrubHub (restaurant delivery), DoorDash (restaurant delivery), Instacart (groceries), Amazon (groceries), Home Chef (meal boxes ready for cooking), Blue Apron (meal boxes), among others, are the chief competitors in UberEats’ markets. Deliveroo and  Peach have invested in centralized kitchens to prepare their own and local restaurant’s recipes for delivery. Multiple models for the preparation of food are emerging:

  • Distributed Restaurant Delivery Networks, such as UberEats and GrubHub;
  • Centralized Kitchen Delivery Services (office- and home-centric, which account for 16 percent and 82 percent of the market, respectively), a la Deliveroo and Peach;
  • Delivery of Prepared Ingredients for Cooking, and;
  • Grocery Delivery.

Generational progress is poised to reinforce the trend.

Millennials, who live at home in Depression-era numbers in their 20s and early 30s, and the 18-and-younger Gen Z, who have not had a chance to move out, are redefining the values that influence buying decisions. In particular, they want healthier, responsibly produced food and are more selective than older people, who weren’t offered as much information about their eating choices.

Source: USDA Economic Research Service; Information Resources Inc.

Where older Americans order less food at home, younger people are showing early signs that they have embraced the convenience of home food delivery. Millenial eat out in restaurants more than their parents. The quality and provenance of food, notably its sustainable production, are the levers of differentiation for these generations.

Given the growing values-based scrutiny young consumers apply to their decisions, which may trump convenience and price when deciding what to order, differentiation of services will be essential to food delivery services. Millennials prefer to eat out — for the experience — rather than stay in. However, they haven’t entered their parenting years en masse and we can expect home delivery to displace some dining out as they age. Even when living with their parents, Millennials tend to buy more prepared food, notably candy, than older Americans.

Gen Zers, on the other hand, may be even more home-centric. These 18-year-olds and younger save more,  exercise resistance to impulse buying, and already represent $44 billion in discretionary spending. They also seem to impact their family’s spending more than previous generations, based on their parents’ reported spending. Gen Z has embraced the frugality of the times with discipline and digital information, doing more research and tapping social sources of recommendations more than earlier generations.

Source: McKinsey & Co.

Millenials and Gen Z will account for more than 60 percent of the U.S. population when they have grown to their majority. They will transform food consumption from a commodity to a values-supported experience. Food and information will be combined to delight the customer and confirm the sustainability and healthfulness of meal tim. There lies the missing link: Human trust.

Usability is currently the focus on food delivery platform and app experience. Simplicity, however, does not remove the tedium from selecting meals day in and day out. So much new information, from calorie counts to organic certification, is involved in choosing the next meal. Ordering for children, as well as keeping within a food budget, are just two complexities that Choosing meals is work that will be outsourced, too.

The need for local curators or influencers to craft menus by customers’ personal and demographic preferences is the critical gap in this process. A story of why the food one buys and eats, that they feed to their family, is essential to food delivery success.

Food choices are strongly influenced by media, by tastemakers, and chefs. Especially chefs, who are brand unto themselves these days. The Food Network and its myriad competitors prove the importance of suggested meals and stories to support consumers’ embrace of new foods and unfamiliar cuisines.

A local food media and influencer network closely attuned to regional tastes, trends, and crop quality is the missing layer of this market. As infrastructure investment-driven growth tails off and people find the limits of their patience with meal selection tools, human contributions to the customer experience will transform food delivery from the current gradual growth rate to hockey stick adoption.