On the back of soaring sales during COVID lockdowns, Deliveroo has this week confirmed that it plans a £7.5 billion IPO on the London Stock Exchange, a sign of the importance of digital delivery platforms in daily life today.
It’s a nice boost for Brexit Britain as a place to grow a business, credit for which was rapaciously snatched by Chancellor of the Exchequer Rishi Sunak, fresh from bumping up Corporation Tax to make it less appealing in his annual Budget statement and mulling over a possible tax on deliveries to make them inevitably more expensive for consumers to receive.
But leaving political opportunism to one side, Deliveroo’s success at getting to this stage is another reminder of the importance of ‘the other D’ that sits alongside digital transformation - delivery! This is a bi-lateral relationship/mutual dependency that diginomica has highlighted on many occasions across recent years.
The pandemic has brought this to the fore, of course, with retailers, particularly supermarket chains, finding their own delivery channels tested to breaking point as online grocery orders shot up, supply-chains buckled under the strain and delivery slots were like gold dust. In the US, in particular, COVID has accelerated grocery firms efforts to build out home delivery options as a key part of an overall expanded portfolio of fulfillment channels.
Food for thought
But the importance of digitally-enabled delivery has also been seen in the takeaway meals industry. This was already a competitive trend that was well underway pre-COVID, with McDonald’s taking a lead as part of its wider digital transformation efforts. While I was initially sceptical of the need for such a service from a low-price burger joint, that’s evidently been a success - there is even a diginomica team member who orders delivery of his breakfast from McDonald’s from the comfort of his bed on a weekday, I’m told.
Some of this delivery is done by the retailers/food outlets themselves, but mostly it goes via digital platforms, such as Deliveroo, Just Eat, Uber Eats and others. In the past, we’ve looked at some of the tensions building up as a result of this dependency on third parties, with Rich Allison, CEO of Domino’s summing up the issues involved:
It’s just not clear to me why I would want to…give up the data in our business to some third party who will ultimately use it against us.
Nonetheless for most of the QSR (Quick Service Restaurant, aka fast food) brands and much of the rest of the food and drink industry, those third party delivery providers have been a lifeline during the long lockdown and shelter-at-home months, when even today, with vaccine programs ramping up, indoor dining and drinking is still a way off in many parts of the world.
COVID’s ‘silver lining’
Little wonder then that the digitally-powered delivery aggregators have had the proverbial ‘good war’ to date during the pandemic. At DoorDash, where the firm’s revenues are up 225% year-on-year, co-founder and CEO Tony Xu argues:
If you can think of any silver linings of this pandemic, I think it is that every brick-and-mortar store, whether they are a restaurant or a retailer, is participating in e-commerce, sometimes exclusively in e-commerce given some of the restrictions that we saw during the past year.
And that means good opportunities for the likes of DoorDash on two fronts, he adds, as both a marketplace and as a platform:
On the marketplace front, we launched our second category of convenience item deliveries about a year ago when we announced partnerships with 7-Eleven, CVS, Walgreens and many others. Already, that has picked up quite a lot of momentum in the early progress...You're seeing some of the extensibility of starting with the highest frequency category of restaurants, building the biggest audience there and covering the most number of stores there, just given the nature of how many restaurants there are relative to how many other types of stores there are.
This entry into convenience goods delivery saw a hefty spike of 95% growth in consumer demand for them towards the end of last year. This is where the marketplace offering comes into its own, says Xu:
The job of our marketplace is to grow merchant sales, and we aspire to bring all of your city to you in minutes, not hours or days. Today, most of our business is in the restaurants category where we still see massive runway. We are investing to extend our category-leading position in the US, while doubling down on the momentum we are seeing overseas in Canada and in Australia. Outside of restaurants, we're excited about the early progress we're making after launching into the convenience and grocery categories. According to third-party data, DoorDash became the largest online convenience delivery platform in the US in less than a year, demonstrating the extensibility of our platform.
As for that platform, Xu defines its role thus:
The job of our platform is to empower a brick-and-mortar merchant to build their own digital channel, a task necessary to have adapted to evolving consumer preferences before the pandemic and a task certainly necessary to have survived COVID-19. This business is even more critical as we come out of the pandemic as consumers have only become more habituated to a convenience economy, aided by a possible longer-term trend toward working from home. Today, merchants can use DoorDash Drive to offer on demand and same-day delivery from their own digital channels.
In cases where merchants don't have an online ordering solution, they can use DoorDash Storefront, which enables them to participate in e-commerce and gives them a product that's seamlessly tied to their back-of-house systems. Over time, we will have to build even more products and services to enable merchants to run their digital business as effectively as we operate our marketplace.
This uptick in the importance of delivery is something that Xu expects will run over into the Vaccine Economy, even once restaurants et al open up their physical doors again:
What you're seeing is every business recognizes that omni-channel is a great thing. Every business is trying to figure out how to re-do their supply chains to really meet a post-pandemic omni-channel presence, which they expect to grow.
That’s a sentiment that Uber CEO Dara Khosrowshahi could doubtless get behind. Talking about Uber Eats at this week’s Morgan Stanley TMT Conference, he said:
The trends that we see in the delivery business are constructive and we're very confident that we can get to profitability with that business. There are certain elements of the business, for example grocery, that we're leaning into…because the opportunity is big enough.
The advantage Uber Eats has, he argued, stems from its ‘super-app’ status, whereby it can leverage its Rides business effectively and cross-sell into other spaces:
I think as a company we have, kind of, solved the code as to getting a certain percentage of our monthly active platform consumers to engage not just in one vertical, but in multiple verticals, without cannibalization of the vertical that had the original engagement. I would posit - and we're very, very confident - that if we, as a company, have figured out Rides to Eats, we can absolutely figure out Eats to grocery, to pharmacy, to alcohol, etc.
He added that this expansion will be driven by data:
We're going to test and learn. For us, what's really encouraging is that, over the past six months, we've actually seen a 60-plus percent increase in monthly active eaters who are also ordering from one of our new verticals. And when these eaters order from new verticals, eaters who order from new verticals are 2.5 times more engaged with our platform, generally back to food. So not only is it a new opportunity, but it essentially drives a deeper relationship with the Eats brand, with the Uber brand and drives greater stickiness and greater lifetime value as well.
So from that standpoint, it's a great opportunity for us as a platform. Some of these verticals though are highly idiosyncratic. It may seem that ordering food might be a close cousin to groceries. And [it is] for a consumer, a consumer who might want it to be absolutely kind of clean and easy, 'I want to go to one place, you've got my identity; you've got my payments, etc'.
The potency of the Uber brand also gives its delivery arm a competitive advantage in what has become an increasingly febrile market, said Khosrowshahi:
As it relates to the competitive environment in Eats, I think what's important to understand is, first of all, we've improved our own competitive position by exiting markets where we didn't think that we could win, exiting markets where we didn't think that we could be number one or number two. The business has scaled very significantly and has gotten much more efficient and has all of kind of the benefits of scale that you see. As a result, we're a leaner, meaner competitor out there.
When I look at the competitive environment you've got certain players who are more focused, let's say, on share than profitability, because they've been losing a bunch of share. When we look at our competitive landscape, we’ve got really strong competitors in the US, we’ve got really strong competitors in Europe and in pretty much every market out there. What none of these competitors have is the global scope that we have and the platform that we've got in both mobility and delivery being on one platform.
For example, nearly 15% of new customers are coming from our mobility business totally free, no cannibalization. These are structural advantages that we have over other players…we’ve got very deep cohorts of loyal customers. And as a result of that, the promotional spend that you have to spend sometimes in order to attract new customers or in order to take down your competition, that promotional spend as a percentage of gross bookings comes down.
I know from personal experience that lockdown in my household has been characterised by an ever-increasing number of deliveries to the door on a daily basis of items that I'd never usually have bought online. Curiously the one category of business that hasn’t been involved is that of takeaway food and drink, but I’m unusual in that respect I imagine and certainly the revenue growth numbers coming out of third party delivery platforms over the past year tell their own stories.
That said, it is a hugely competitive market and one in which the views espoused by Domino’s CEO are likely to become more widespread as source brands try to lessen their dependency on third party platforms. In addition, consumer loyalty is fickle and will trend towards platforms with the lowest price-point in terms of delivery charge, making margin pressure an ongoing challenge for many providers.
Soon-to-float Deliveroo actually made an operating profit towards the end of 2020, just months after warning the UK Competition and Markets Authority that it could go bankrupt, but Uber Eats hasn’t managed to hit breakeven point yet as a business, although this, insists Khosrowshahi, is only a matter of time:
All of it, we believe, is sustainable. It's structural and sustainable. When you look over quarters and years, the vast majority of our markets are headed in the right direction. Where you get peaks and valleys depends on competitive environment. Sometimes competitors push. You got to push back. Then there are some markets where you're leaning in. Japan is a market where, I think, well less than 10% of Japanese restaurants are in our service. We're very confident of delivery hitting breakeven. These are not casual statements.
Other delivery platforms - you have been warned.