Third-party Food Delivery on a Bear trend

4 Industry Characteristics that Food Delivery Providers cannot complete in a long term

The Peer-to-Peer economy system has disrupted mature industries, for instance, restaurants, automobiles, hotel, money lending, etc. Along with the competitive advantage as charging an unbeatable price and personalized features against traditional businesses. It also assured consumer trust by protecting consumers privacy. Here’s a list of companies which had succeeded and became industry leaders of the respective industry:

Accommodation: Airbnb
Transportation: Uber, Lyft
Food Delivery: DoorDash, Skip the Dishes, Deliverywoo
Groceries: Instacart
Share Bikes: Bike Share, Mobike
Share Boats: Boatbound
Office Space: Impact Hub, Rogus
Money Lending: Kickstarter

Speaking in terms of delivery, delivery is revolutionized with the gigantic presence of E-Commerce, spending habits have changed for millennials which lead to industry verticals between everything you can imagine and delivery. Besides, the share economy system has also been introduced to enable the sharing, borrowing of underutilized assets in exchange for goods, services or money.

Applications such as UberEat, Skip the Dishes based on the combination of both ideas.

There are 4 key success factors that third-party food delivery service business are constantly competing with:

Complete for Revenue Drivers

Act as the third-party food delivery provider, the demand for drivers is just as much as rideshare service. The driver market is limited as most drivers would only work for one third-party service, therefore acquiring drivers to meet the demand is crucially important for food delivery companies

The nature of being a provider in a shared economy would be the high freedom of responsibilities where you get to choose when to start and finish work and there’s limited tax regulation as well. The flip side of these jobs would be certain instabilities and absolutely no growth opportunity, which might desensitize drivers to continue working.

A common phenomenon within the Uber ecosystem is that most drivers do have an international background, and they do have another job other than the driver. Providing these services require no educational background (language proficiency) and it encourages a lot of people who are seeking for jobs, in school to drive as to supplement their livings.

For a provider to win this competition, we would need to compensate drivers with a wage that is greater than our competitors because compensation is their primarily concern of the job. In the meantime, it becomes really difficult for the provider to compensate a satisfactory wage to the middleman without charging the end-consumers a premium.

Under the three-parties business ecosystem, the provider would have to distribute limited funds from a highly sensitized competition between both drivers and consumers who value money as their primarily concern.

Complete for the cheapest price

Just like any other businesses, this rationale amplified when it comes to monopolistic competitions like food. Consumers value convenience, quality, and most importantly price when it comes to a decision about food, it is really interesting that quality of the food is out of our operation and our competitors provide similar to identical service (responsiveness and delivery speed). Therefore, rational consumers will seek for the best price to follow with.

One of the major disadvantages of completing food delivery services is the lack of customer loyalty. Within monopolistic competitions, unlike commercial banks where over 70% of Canadian citizens have never changed banks, people move in and out because of temporary promotion deals and software updates. Therefore, these providers cannot build sustainable competitive advantage by market themselves in a unique position.

The operation of food delivery consists of numerous problems regarding its operational efficiency. Fundamentally, those food delivery providers run a business model as ‘many-to-many’ — carry multiple meals from various restaurants to different homes in a fast-paced environment. Mileage inefficiency and miscommunication have become major problems of the companies where the problem amplifies when it takes place in suburb areas (or even rural area if available). Instacart has a similar model as food delivery but its model focuses on one-to-many, also the urges of groceries delivery is not as demanding as food delivery, therefore they are able to succeed within the delivery industry

Access/Deals from restaurants

The availability of food choices is also one of the main competition between the provider, yet getting access to unrecognized restaurants and expanding geographically to suburb areas are what most providers are completing within.

Moreover, these providers begin to negotiate for exclusive deals with the restaurant since through food delivery service the providers are able to convey marketing strategy to households. Depending on the size and maturity of the restaurants, these providers would negotiate for benefits and exclusive deals, in order to gain an upper hand against their competitors.

The problem associated with this would definitely be the restaurant’s consent. Let think at the restaurant’s owners’ shoe, for midsize restaurants that have enough resource to provide delivery service, they would rather provide it themselves than relying on third-party providers. At this situation, the only benefit midsize restaurants could get is promotion through the application channels.

Therefore the value provider can give to restaurants diminishes according to the size of the restaurant.

Technology Advancement

Ultimately, technology competition is the biggest competition within the industry landscape. Two of the biggest yet avoidable expenses are (1) Fraud control and (2) Inefficiencies. Through strengthening the security system and the communication platform between the three parties, frauds are able to diminish. Instead of issuing a full refund, the system can identify different kinds of incidents and issue coupons, partial refunds, etc. Secondly, to decrease the vacancy rates within the rides from home to another restaurant.

Technology advancement is identified as the only way where a delivery provider can gain a sustainable competitive over its competitors, however, it requires an enormous amount of research and capital expenditure. Therefore, most food delivery providers have started their businesses with extreme capital fundings — a capital structure of technology companies.

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Takeaways

This complicated business model is being appreciated by the general public because it utilizes the concept of mutual economy and the changing of consumer habits. Billions of capital are funded towards these corporate providers, where they have mainly spent it in three ways: Capital Expenditure (Such as software development and market research), Expansion in geographics and Subsidiarization, which they allocated most money into.

Nowadays, every food delivery cost about $5 to $8 above the market price of the food order, the driver is earning a wage of $15–25 (includes gas compensation) depending on the amount of delivery he made. Over 60% of the net sales of each order has gone into the driver’s wage (averaged 4 orders per hour), then there are advertising expenses, uncollectible funds, fraud losses, research & development, wages for tech development. It wouldn’t be feasible without the subsidization by equity investors, therefore the price will adjust accordingly to equilibrium and consumer habit will eventually change as well.

Companies are oversubsidized as being ‘Prosperous”

just articles about technology strategy