Unlocking profitability in the food delivery industry through the optimisation of payment solutions

(part 2 of 2)

As we saw in Part 1 of this two-part article, the food delivery market is booming, and it is projected to hit $1.13 trillion by 2028, and growing at a 12% CAGR over the next 5 years. There are seemingly endless plates of opportunity, but can the industry finally escape the shadows of volatile funding and deliver sustained profitability? Despite projections of robust growth and a pandemic-fuelled surge, funding sputters, leaving investors wondering if this industry feast is real or just a tantalizing amuse-bouche.

This volatility is symptomatic of a lack of trust from investors in the long-term financial performance of the industry. The food delivery industry is hardly profitable as a result of the high upfront investment and operating costs, a cutthroat competition and high volatility of demand. The food delivery industry struggles to transform its substantial revenue into profit.

The food delivery sector has achieved significant global reach. Although nearly half of the global population is financially unable to use these services, about 24% of the rest of the world currently does. Given that a substantial portion of the remaining 29% also lacks resources to access food delivery services, the market is nearing saturation. Consequently, as illustrated in part 1 of this article, companies should prioritize boosting the frequency of orders, leverage order volumes, and increase average basket size.

Payments are crucial to customer satisfaction, retention, and order volume/frequency. Thus, the optimisation of payment solutions is essential to help to achieve profitability. Several solutions can be leveraged for that purpose ranging from payment service providers and payment orchestration platforms to Alternative Payment Methods (such as subscription models, BNPL, bank transfers), and embedded payments, SoftPOS technology and more. Such implementations have been widely successful throughout the industry, leading to revenue increase and retention rates.

Integrating PSPs and orchestrators expands acceptance of payments, and optimises processes

Payment Service Providers (PSPs) allow players to offer multiple payment methods and gain/retain a more diverse customer base and enhancing satisfaction through enhanced flexibility. PSPs are also a solution to streamline processes, make checkout more intuitive and user-friendly, and incorporate additional features such as secure storage of payment details and one-click-checkout options. Additionally, they reinforce a seamless in-app path-to-purchase (avoiding the redirection of users to external webpages or other apps), ultimately enhancing user experience and customer satisfaction.

From food delivery companies’ perspective, PSPs facilitate compliance, real-time transaction processing, and update. Integrating with a PSP gives the company access to customer support and dispute resolution solutions, freeing them from cumbersome yet crucial tasks. Lastly, PSPs are helping food delivery players reinforce their security, adding layers of protection with encryption for example.

The integration of PSPs supports players’ growth and acquisitions of smaller businesses, as we illustrated in Part 1 of this article. Following M&A deals, many companies have inherited payment processing inefficiencies, duplication in functionality, and redundancy in back-office systems. EDC believes the customer journey from order through to delivery needs to be re-mapped to pinpoint bottlenecks, operational inefficiencies, and cost reduction processes. Additionally, companies should identify cloud-based payment solutions that can offer greater agility and automation of processes and smart routing of payment transactions.

Profitability could be further enhanced through payment orchestration. The leading players are left with a plethora of different processes, stakeholders, and incompatibilities of systems. The integration of payment orchestration platforms can streamline processes and harmonise them throughout the business, reducing friction and associated payment processing costs, increase conversion, and thus enhancing profitability. This solution generates similar benefits for players operating internationally, or accepting a wide variety of payment methods, which causes greater complexity for settlement reconciliation.

Integrating innovative payment methods to increase frequency of order

To reinforce weak customer stickiness, it is crucial to eliminate pain points during the checkout process. Payments must be as efficient, seamless, and quick as possible. This does not only limit the share of abandoned carts, but also increases the frequency of orders, due to greater customer satisfaction, and easier repeat purchases. Customer stickiness can also be increased by the creation of targeted and personalised loyalty programs, as well as rewards, and subscription-based models.

Additionally, to expand revenue streams, delivery apps and their payment platforms should develop new use cases. Apps such as TikTok and Instagram have been recognised for influencing customers’ eating habits and have already embedded marketplaces for non-perishable goods. Embedding ordering processes in such platforms would create additional revenue opportunities, and drive volumes up. Beyond social media, payments can be embedded into streaming services. This would allow the reach of more customers, but more importantly increase the frequency of orders of existing users. This would reinforce top-of-mind awareness, especially at strategic times around mealtime for example, when watching cooking shows, or pairing with the right content (e.g. ordering Italian wine when watching a romcom filmed in Rome).

Another technique would be to put QR Codes on certain products recently purchased, and push customers to order customised items. As an example, a QR Code could be integrated to the order confirmation page closing the booking of a vacation to Italy, suggesting ordering an Italian meal to celebrate. Another application could be putting a QR Code on the tag of a newly bought blanket, suggesting ordering a comforting meal and enjoy a relaxing night.

Food delivery services could also partner with different companies to reinforce top-of-mind awareness, trigger repeat purchases, enhance exposure and grow their customer base. For example, a partnership with Microsoft could send a QR Code notification around dinner time, allowing busy professionals, working on Excel, to order a satisfying diner in seconds without having to leave their task in hand.

Increasing the usage of QR Codes could help companies cut through the intense competition on the market. QR codes can boost customer engagement, streamline transactions, and unlock valuable data – all with a simple scan. Food delivery companies can implement campaigns supported by QR Codes for limited popup and cyclical event collections, for example, a Chinese New Year’s week special menu or “Taco Tuesday” package, which would both drive differentiation and customer attraction. Another segment to target could be special dietary requirements, such as vegan, high protein, weight loss diets, or age specific, through partnerships with affiliated companies. As an example, a fitness coach selling training plans could recommend customers to order the “perfect meal to boost gains” through the xyz app which happens to have exactly what they need. Both meal delivery and grocery delivery apps can support their customers with personalised meal plans and tailored recommendations. Additionally, by expanding their reach to other fresh products such as flowers, bakery products, “from farm to fork” ingredients, etc, meal and food delivery companies can innovatively make their product range even wider.

Further differentiation through payment methods has been unlocked by DoorDash, which recently introduced a new feature enabling customers to use their health savings accounts and flexible spending accounts to pay for certain items. Lastly, introducing features such as gifting meals, split the bill, BNPL and credit options may attract more customers, greater volumes of consumption, and more frequent orders.

Payment optimisation must also include cash-on-delivery payments

In some markets, cash-on-delivery remains one of the preferred payment methods. While it only represented 2% of e-commerce global transaction value in 2022, it accounted for 11% of e-commerce transactions in MEA, 18% in Vietnam, and over 5% of transactions in over 15 other countries. Shying away from cash payments thus means neglecting a significant consumer segment in these regions. Therefore, depending on the geographic scope of providers, cash-on-delivery payments may be a significant variable driving revenue.

However, the structure of food delivery services’ business model makes transacting with cash particularly uneasy for all parties: consumers, drivers, and providers. Having all parties handle cash is highly inefficient and time consuming and raises numerous problems. At delivery, the driver needs to have change, customers must have enough cash (and pay full price, without trying to negotiate), and drivers must be able and willing to recognise and refuse counterfeit cash. After delivery, drivers must carry the cash for several hours while biking/driving (inducing high risk of cash shrinkage), providers should then collect the cash, make sure it is legit, deposit it, reconcile the accounts, and lastly redistribute it to all relevant stakeholders. Throughout the system, providers should have fair policies towards drivers, accounting for the natural and unmitigable risks of this process. A dispute with any of the parties is typically a horrendous financial reconciliation to sort out.

One solution found by Just Eat is to allow cash payments for pick-up orders only (ordered through the app but picked up on site by the customer). Another solution used is gift cards: money is loaded at convenience stores, supermarkets etc, paid for in cash and then later used digitally, a method already used by DoorDash. While gift cards already exist, they are hardly used despite having the potential to solve many cash handling issues.

SoftPOS can be another solution to accept payments upon delivery

In-person payments may also need to be digital, due to customer preferences, fears about the safety of transactions, or simply habits. Food delivery services must include more payment methods that are suitable for these challenges with in-person digital payments.

In the same fashion as accepting cash-on-delivery payments, deploying traditional POS devices throughout a network of drivers can bring many complications, overhead costs, and risks. Therefore, leveraging SoftPOS will allow each driver to collect payments from their smartphone or tablet. Integrating SoftPOS capabilities to delivery management app streamlines the payment acceptance processes.

Conclusion

Optimising payments can fuel an increase in volume of users and orders, driving profitability for food delivery players. Several successful solutions are to be considered: PSPs, embedded payments, QR Codes, payment orchestration, alternative payment methods, SoftPOS and more.

The food delivery landscape is fiercely competitive, but the prize of sustained profitability awaits those who optimise their payments-related operations, payment acceptance and payment processing arrangements. By implementing the payment solutions outlined in this article, you can gain a strategic edge and navigate the complexities of this dynamic market. Partnering with EDC and leveraging the 360° Payments Diagnostic methodology will identify data-driven insights and actionable advice tailored to your business. Embrace the future of food delivery payments and watch margins and sales revenues soar.

EDC can help companies reinforce their profitability with greater volumes through payment optimisation thanks to its 360° Payments Diagnostic. This proprietary methodology assesses payment acceptance strategies and is complimented by EDC’s expertise and access to benchmark results against successful models and provides independent advice to optimise processes. EDC will also support clients in payment product innovation, payment strategy development and selection of payments partners and providers.

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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).