They say those who don’t learn from history are doomed to repeat it. But in food delivery,
and Uber Eats are trying to avoid repetition.
called food delivery a “crummy business” in an interview with The Wall Street Journal, something he has been quoted as saying in cruder terms years earlier. Grubhub was founded as an online marketplace, and its then marketing-only business was generating margins of 35% before interest, taxes, depreciation and amortization, Forbes reported. Restaurants were once responsible for handling delivery on their own, and the app mainly connected them with diners. The economics of the delivery business, Mr. Maloney said at the time, were break-even at best.
Grubhub ended up investing in delivery in the face of increasing competition beginning in 2015, hoping to drive more eaters and higher ordering frequency. As of just a few years ago, Grubhub had a dominant lead in the U.S. food delivery market and figured it could use the advantage of scale to make the overall economics work. But in 2018, Grubhub lost money for the first time as a public company. It hasn’t generated annual net income since. In 2020, Grubhub agreed to combine with Dutch food delivery company
Just Eat Takeaway.com
in a deal that is set to close this month.
Now, the competition thinks it can sustainably do what Grubhub couldn’t: turn profits in the delivery business. They aren’t there yet. An analysis by Deutsche Bank found DoorDash pocketed an industry best of just 2.5% of a customer’s bill at the height of the pandemic, the Journal reported. DoorDash, now the U.S. food-delivery market leader by a wide margin, has posted four consecutive quarters of profits on the basis of adjusted Ebitda, but has yet to post a year of net income.
’ food-delivery business, Uber Eats, isn’t even profitable on the basis of adjusted Ebitda, though the company is projecting profitability on that measure by the end of the year.
To improve their economics, DoorDash and Uber are focused on leveraging their growing scale to create a version of delivery “super apps.” Having baited consumers during the pandemic with restaurant orders, they now hope to retain them by adding delivery of higher-margin verticals such as alcohol, convenience and pharmacy products.
DoorDash said in its first-quarter shareholder letter that nonrestaurant orders grew 40% from the fourth quarter of last year. While the company now offers a marketing-only pricing tier for restaurants, it has said the majority of restaurants are opting for higher pricing that includes delivery because they need a full suite of services. Grubhub said that as of the fourth quarter, nearly 85% of its orders are from independent and small chain restaurants. Those restaurants need discovery services first and foremost, but many of them also need delivery, Grubhub said.
If restaurants need delivery services, doubling down on more delivery needs may be the only solution. Food-delivery growth may well have peaked with the pandemic, and some regulators are considering permanent laws to make the fees platforms charge restaurants more manageable. So to improve the unit economics of delivery, these companies need ancillary verticals.
Adding them won’t be seamless, though. Drivers in some instances already seem overloaded. One DoorDash delivery driver reported being asked to hunt for 10 items at an unfamiliar pharmacy while a food order waited in the car, the Journal recently reported. She ended up abandoning the pharmacy order, wasting time but not getting paid for it, and just delivering the food before it got too cold.
DoorDash says its drivers’ base pay is a function of time, distance and desirability of the delivery, implying drivers will be appropriately compensated for more time-consuming jobs and that they are free to decline undesirable deliveries. Investing in more delivery drivers to handle the uptick in business would make logistical sense, but it would add costs.
Meanwhile, it is still an open question whether consumers will want to combine their delivery needs. Do you want your dinner getting cold while you wait for a driver to find parking and pick up your medicine? Delivery platforms want the answer to be yes, but with so many of them now out there, consumers don’t have to say yes to any one of them.
In the end, it was competition that prevented Grubhub from making money in the delivery business. That hasn’t gone away.
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