Optimizing Payments to achieve Profitability in Food Delivery (part 1 of 2)

Who would have thought a global pandemic would make your dinner options more diverse than ever? From sushi to groceries, the food delivery boom triggered by COVID-19 has rewritten the rules of convenience. But how did we get here, and what does it mean for the future of how we eat?

Not only has the size of the food delivery market grown, reaching unprecedented adoption levels, but the industry has changed through increased competition, technological innovation, and rising consumer expectations.

The food delivery industry is an ecosystem encompassing various services. Home delivery platform models, such as Uber EATS or Deliveroo, are intermediaries connecting restaurants to customers and facilitating the delivery of goods. Alongside, grocery delivery operators serve customers through the collection, packaging, and distribution of fresh ingredients and other home essentials. Such services can be operated by the goods provider’s own supply chain and delivery fleet (think of the traditional pizza delivery or Ocado), a platform’s network (such as Uber Eats or Glovo), or 3rd party providers (such as Everli and Seamless which use the fleet of more established apps). Some players operate from their traditional brick-and-mortar infrastructures where mainstream consumers continue to purchase/eat, while others use dark stores and kitchens specifically designed for the purpose of delivery. These business models are further customizable through subscription plans, reward programs, delivery speed, home delivery/click and collect, minimum order size, tracking capabilities, variety of choices, meal kits/ready-to-eat, etc. Food delivery is a hybrid and innovative industry in which the value proposition is rapidly evolving.

The market is expanding as rapidly as it is evolving, and it is displaying high revenue levels, making it an attractive segment. However, substantial upfront and operating costs, and a cutthroat competition in a crowded market space challenge profitability, which is not as lucrative as it first appears. As illustrated by the numerous acquisitions in the industry, order volume is crucial to profitability. The optimisation of payment acceptance is one of the keys to drive sales volumes, reduce declined transactions, and make food delivery operators profitable.

The food delivery market is an attractive industry, growing rapidly across the globe

The size of the food delivery market is substantial and has showcased rapid growth. According to EDC, it was worth 540 billion USD globally in 2022, almost 3 times its 2018 level of 190 billion USD. The food delivery market is projected to continue expanding, reaching 1.13 trillion USD by 2028.

Despite substantial revenues and rapid growth, the industry’s funding varies over the years

Following the COVID-19 pandemic, investors have shown enthusiasm for the food delivery market, almost doubling the market’s total funding value in 2021, compared to 2020. However, the number of deals and their value has been fluctuating since 2015 and is estimated to have fallen behind pre-pandemic levels in 2022. Thus, beyond the exceptional revenue and growth profile of the industry, investors seem to be unsure about the long-term attractiveness of the food delivery market.

One thing is for sure, the meal delivery industry is heading towards concentration. Several conglomerates have emerged in recent years, mainly through acquisitions.

There are eight main players that represent around 21% of combined meal delivery market share globally. This is a reasonable concentration among the thousands of corporations, local and independent entities operating around the world. This rising concentration stems from the need to leverage volume on a low-differentiation market, to increase profitability.

Despite substantial revenues, profitability is difficult to achieve in the food delivery industry

While recording sizable revenues and rapid growth, the industry has notoriously been struggling to make a profit. Jumia, the leader of e-commerce in Africa, had been operating its subsidiary branch Jumia Food for years before deciding to stop its grocery and restaurant-meal delivery service in all 7 African markets served by the end of 2023. While the e-commerce non-food branch of Jumia has proven to be quite successful, its food delivery business had never achieved profitability since its creation, symptomatic of the hardships observable throughout the industry.

While costs vary across the globe, it appears profitability is difficult to achieve across the industry. Large volumes of customers, orders and higher than average basket size are required to leverage economies of scale and achieve profitability, regardless of the structure of the business.  

For grocery delivery, various business models have been developed to overcome the difficulties inherent to the industry. On average, companies tend to make substantial losses when operating on this market, regardless of the business model used.

While the restaurant/meal-delivery industry structurally holds a healthy profit pool, the grocery sector is renowned for its thin margins. Thus, grocery delivery may serve a different purpose, exclusively being about customer stickiness, and the retention of happy and loyal customers that come in-store, as an extension of their relationship.

Several factors are generating increased complexities, challenging profitability in the food delivery industry

Firstly, the food delivery market is a capital-intensive industry. The business model itself generates large upfront costs due to the infrastructures required, even for minimal viable service. Acquiring warehouses/kitchens, a fleet of vehicles and the stock of goods themselves leads to substantial initial investments. On top of this, operating costs such as staff, fuel and bills must be accounted for.

Secondly, the heavy fluctuation of demand makes predictions difficult, complexifying optimisation capabilities, and thus generating inefficiencies. The unpredictability of demand also drives logistical complexity and an associated increase in costs.

Thirdly, the particularly intense competition with limited differentiation and high customer expectations is eroding customer stickiness, requiring extensive marketing and customer acquisition/retention expenses. Additionally, this cutthroat competition is driving a price-based differentiation, which in turn can be particularly harmful to margins.

Lastly, the legislation has been tightening around the industry as workers’ rights, hygiene standards and logistics regulations for dark stores and kitchens have become stricter around the world, especially in Europe.

Conclusion

The food delivery industry is an attractive segment, generating high revenues and rapid growth. However, due to several factors, profitability is difficult to achieve for the numerous players positioned on this crowded market. Optimising payments can fuel an increase in volume of users and orders, driving profitability for food delivery players.

Yum! Brands Inc., for example, operates over 58,000 restaurants in more than 155 countries and territories under the company’s well-known brands, such as KFC, Taco Bell, Pizza Hut and the Habit Burger Grill. Prior to the pandemic Yum! Brands made a £200m investment in food-delivery service GrubHub. Just after the pandemic it reported that its digital sales account for nearly 40% of its total sales mix, illustrating how important it is to respond to the consumers who want, and expect, to engage with their brands digitally. The big are getting bigger, while independents continue to struggle.

The optimisation of payment infrastructures has proven to be a game-changer for several players of the industry, such as Yum! Brands Inc. Among other successes, EatMe multiplied its revenue by 10, Postmates increased theirs by over $70 million, the meal kit company Base Food registered a 90% YoY growth, and Deliveroo recaptured over $120 million in at-risk revenue.

In the second part of this article, we dive deeper into the payments infrastructures used by food delivery companies, and how new payment acceptance and payment optimisation methodologies are contributing to supporting growth, and the drive towards profitability.

EDC can help companies reinforce their profitability with greater volumes through payment optimisation thanks to its 360° Payments Diagnostic. This proprietary methodology assesses payments strategies and is complimented by EDC’s expertise to benchmark results against successful models and provide independent advice to optimise processes. EDC will also support companies in payment product innovation, payment strategy development and selection of payments solution partners not just for food delivery operators but across the entire retail and consumer services industries.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).