Food Delivery Companies are Hungry for Profit
By: Ben Wiseman
The food delivery industry is more complex than it may let on. It is a huge and rapidly growing industry, that experts project to be worth over $200 billion by 2025. For reference, it is currently valued at approximately $82 billion. The demand is there and has been for a while. Food delivery is growing rapidly, at an estimated rate of 14% annually, which is correlated with a widespread trend of staying in. Look at companies like Netflix and Hulu, who have been so successful based around this idea. It is not just an American idea either. UberEats and similar companies are gaining huge consumer bases all across the world. Younger demographics rely on the service for its convenience, but the price may play a factor as well.
Generally speaking, the average delivery price is fairly low through many food delivery services or even the restaurants themselves. They fear losing customers and revenue if they charge too high of a delivery fee. Instead of asking for a $10 delivery fee on an $8 meal, they lower the delivery fee to ensure the customer’s business and revenue for the food itself. It is hard to break out of this pattern, as every food delivery company has adapted this model. when every food delivery company is doing this. It is a highly competitive industry, therefore many companies are operating at a loss right now.
One company, DoorDash, just received a $600 million dollar investment from private investors. The goal behind this sum of money is to fund DoorDash in its efforts to gain a larger market share. Many of the other delivery services such as Postmates, UberEats, and GrubHub simply do not have the same financial backing. This is especially the case for restaurants that provide their own food delivery. It is nearly impossible to stay competitive with the huge investment-backed companies. Right now, DoorDash is able to keep its prices low, because it is not yet imperative to become profitable. They have $600 million dollars to cover their losses for now. But if they are able to knock some of their competitors out of the industry and gain a larger market share, then they can raise their prices and divert their attention to profiting.
UberEats, on the other hand, is in a much different situation. The service is part of the larger company, Uber, which is more known for their ride-sharing services. While it may not have as large of an investment backing as DoorDash, the ride-sharing portion of the company makes up for the trouble that UberEats is having. This quarter, Uber as a whole lost $1 billion and last quarter it managed to lose $5 billion. Both Uber and UberEats have been increasing their revenues. The issue lies within the immense costs, specifically for its food delivery service as expense greatly outweigh the revenue. UberEats reported losses of $189 million last year and $316 million this year. Despite the rising revenues, the costs are too substantial for any profit to be made.
The industry has potential to be extremely profitable. However, it is difficult to make any profit off a $4.00 delivery fee, especially when the costs of transportation are relatively high. It may make sense in extremely densely populated areas, where transportation costs can be mitigated by many delivers in that same route. Yet, in more suburban and rural areas it is much more difficult. This is not to say that it is impossible to be profitable in this industry. Rather, the market is too saturated right now.
Companies are trying to plant their stake in the market now and worry about profits later. Not all companies will have the financial standing to survive this phases of the economy. Their eventual demise from the market will likely yield way to the much desired profits from competitors.
Many are trying to ride it out in hopes of large profits in the long-run. This seems to be the only course of action for large companies. It seems that when the smaller companies inevitably succumb to the overwhelming costs in this industry, it will yield way for profits by the larger companies that are currently trying to gain a larger market share. There is clearly a demand for food delivery, and it will grow substantially in the near future. The issue is the over-saturation of the market, causing financial struggles for nearly all companies in this industry. It will be interesting to see how companies try to counteract the competitiveness of the food delivery market.