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All Aboard: The Drive Behind Online Food Delivery

If the magnitude of a trend is measured by the amount of capital pouring in to start-ups, food delivery would be off the charts.

The Trend

Investment analysts, Crunchbase, are quoted as estimating that food delivery start-ups raised a combined total of $15 billion in over 800 rounds of venture capital funding (productmint).

It was a rising global trend before the pandemic, and has accelerated since. By 2023, the worldwide market for online food delivery is projected to hit $137 billion (statista).

Online food delivery is estimated to represent up to 1% of the global food market or 4% of food sold through restaurants. Many markets are mature and saturated, but overall demand for food delivery is still increasing at an annual rate of 3.5% (productmint).

Beyond the pandemic restricting people to their homes, Global Index identified four factors behind this growth in its Future of Food Report (2020):

Universal smartphone ownership and internet access.
Increased urbanisation.
A surge in the number of food delivery platforms.
The rise of the gig economy (independent contracting for short-term engagements).

Your Business Application

According to Similarweb, SA’s top five food and beverage delivery apps on the Google Play store are:

Mr D Food
Zomato
Uber Eats
McDonald’s
KFC South Africa

This ranking is based on usage scores, a SimilarWeb algorithm that factors in ‘current installs’ and ‘active users’ for the country and category over the last 28 days (accessed 03/02/21).

This leader board includes ‘platform to consumer’ models - Mr D, Zomato and Uber Eats; and ‘restaurant to consumer’ models - KFC and McDonald’s.

There are not any ‘full stack’ online food delivery services on SA’s leader board yet. In this model, ordering, preparation and delivery are undertaken at one venue, known as ghost, cloud, or dark kitchens. Exclusively operated for online delivery, there is no on-site dining, or pick up.

What is the best online food business model for operators?

It depends, based on location, value, volume, consumer characteristics and behaviour.

The platform to consumer model

Platform to consumer models are a double-edged sword for operators. Business is lost if the restaurant is not listed, but, by listing, access to the purchaser is handed over to the delivery platform. This is the dominant business model, with 63% share of the $122 billion food delivery annual sales (productmint). Third-party apps list available restaurants close to the customer’s proximity, normally through a website or a mobile app. Consumers order from these partner restaurants and have the food delivered. For this service, the platform takes a 20 – 30% cut from the order value on top of any potential delivery cost that may arise.

Local entrepreneurs fill the gap

Typically, there is a unique South African angle to third-party online food delivery. In May 2020, Business Insider established that none of the mainstream apps delivered fast food in many of South Africa’s bigger townships.

Young entrepreneurs who saw big demand in this market, (at least one motivated by his personal need), and subsequently launched their own apps.

KasiMenu is an app-based food delivery service started in 2018 delivers for seven restaurants across the biggest township in Pretoria, Soshanguve, and has over 2 000 active customers daily in Soweto, parts of Mabopane and Ga-Rankuwa.

White Fox, operates in Soweto and the Vaal; and Order Kasi started in Khayelitsha and has since expanded into Langa, Gugulethu, Nyanga, Mitchells Plain, Kuils River, Mfuleni and Paarl (Business Insider, 2020).

Consequences of the platform to consumer model are not all in the operators’ favour (productmint). These include:

Product ‘stickiness’ keeps consumers on a single app. Once customers get used to a platform, they rarely switch to a new app. Research by McKinsey showed that 77% of customers rarely switch platforms.
A few big players survive due to the network effect. The network’s value lies in its scale. Only networks with sufficient scale can compete. Networks are hard to build and harder to replicate.
A pricing monopoly develops. With only a few large networks, food delivery businesses can set prices and commission once they hit sufficient scale. There are numerous examples of companies raising their rates after acquiring their last competitors. When restaurants depend on those apps for orders, they have no choice but to comply with any change.
The platform communicates with the consumer. As the customer interface, the apps decide which restaurants and suppliers to promote and generally push products with higher margins and good customer ratings.
The platform owns the data. Customers’ ordering patterns and behaviour data accumulates to the platform, leaving the operator in the dark.

The restaurant to consumer model

In this model, restaurants, for example KFC, McDonald’s, Domino’s, serve food via their own locations. To modernise, these companies went on to offer food deliveries via their websites, app or join a delivery platform.

For instance, McDonald’s operates its own food delivery network in selected countries via its own app. But they also partner with the likes of DoorDash for deliveries in areas where they don’t deliver themselves. Domino’s invested heavily in delivery services, experimenting with drone delivery, for example.

Smaller chains, or individual outlets can also buy ‘white label’ apps such as TableDuck, or Yumbi, and create a customised online service relatively quickly and cheaply.

The major hurdle for the ‘restaurant to customer’ model is that it’s easier to download one app for a range of restaurants, than to download an app for a single one. The advantage for consumer is that it provides a communication channel with consumers who can be engaged with for loyalty rewards and promotions.

Final Thoughts

Strong market forces are accelerating the growth of food delivery services. Technology is enabling new distribution networks, revenue models and disrupting established fundamental processes in the industry. Although there are many reasons for operators to get on board, they need to hold on to their value proposition and customer and supplier relationships in the longer-term.