The food delivery industry is currently worth $10 billion, according to Morgan Stanley. It already has a significant place in the American marketplace. And it has so much more room to grow. The total addressable market (TAM) of food eaten off-premis is $210 billion, and analysts are expecting that as the industry matures (as food becomes better prepared for delivery, as costs go down, and as synergies are found) food delivery becomes a much more significant portion of that. Let’s talk about some movement in the industry and project what that might mean for the future of eating.
Amazon is a logistics behemoth, with the infrastructure to send items anywhere in the US within a day. Their Prime members already know the levels of consistency that they perform with on their guaranteed 2-day shipping.
But the grocery industry is different entirely. Amazon announced their entrance into the space in 2007 when they first launched Amazon Fresh in Seattle. But they quickly ran into problems with employees seeped in tech experience and without grocery experience. Fruits spoiling and meats going bad were costing Amazon 2x the cost of regular grocery stores. These costs were primarily associated with having to throw away all food that was not the ideal color and not close to expired; online grocery shoppers expect the best produce and meats every time. In order to stop the bleeding after years of effort, Amazon decided they needed public facing storefronts to complement their central grocery warehouses.
Amazon Acquires Whole Foods to Grow Business
Enter the late-2017 acquisition of Whole Foods. As reported in their most recent quarterly earnings, they acquired Whole Foods for $4B worth of assets and $9B worth of goodwill, goodwill being the premium you pay for a companies’ brand, relationships, and opportunities beyond their balance sheet value. This indicates that Amazon anticipates the local storefronts of Whole Foods being an integral part of their grocery service going forward. There’s no other explanation to them tripling the terms of the on-paper deal without expectations to make that money back and some very quickly.
To me, this likely means Amazon will shift into a more efficient version of InstaCart, a grocery delivery service that has their deliverers go into stores to pick up products to then deliver. By using those stores to wholesale browning fruits to smoothie shops and discounting expiring meats for consumers, Amazon will be able to significantly cut back on the costs they currently incur with their food waste and also quickly expand the reach of where they can offer delivery by having ready-made distribution centers (read: Whole Foods stores) across the US. It’s a slam dunk acquisition on paper for Amazon, it will just come down to whether Amazon can effectively operationalize Whole Foods to expand efficiently and cut down on waste. Already Amazon owns 18% of the total grocery delivery market but with delivery accounting for only 4% of all grocery purchases, this market is ripe for disruption and who better to do that than the 1000lb gorilla with enough money to iterate until they get it right?
Blue Apron Struggles in the Face of Amazon
It is also worth mentioning secondary grocery delivery player Blue Apron. It’s a boxed dinner delivery kit for people who want to make food at home but don’t want to spend the time finding recipe. They have the second largest market cap (behind Amazon) of everyone in the grocery delivery space. The issue for Blue Apron is their potential market: because they only send pre-packaged premium priced dinners, they can’t capitalize on breakfast and lunch foods the way that other grocery providers can. In addition, their only advantage is customer awareness, hardly an inimitable competitive advantage to ward off Amazon’s burgeoning presence.
With decreasing revenues quarter over quarter and a just-announce-layoff of 6% of their workforce, they’re struggling to stay competitive in a space that seems like it’s Amazon’s to lose.
The Prepared Food Delivery Market is Already Consolidating with Acquisitions
We’ve already talked about how the Amazon/Whole Foods purchase will shape the way people prepare their own food but what happens for people who just want their food delivered to wherever they are?
With a 2-sided market pioneered by Uber, many companies have all emerged to vie for the title of “the Uber of food delivery.” Most interestingly in this market is its growing maturity, indicated by the consolidation of many companies into a few monster players. For more information, Katie listed many other options to present a more full industry picture, although here I’ll focus on the two major players in the space.
Of note for this industry is the required manual city by city expansion. The theory behind that is that people won’t use your app to purchase food unless they have enough of their favorite restaurants available on it to use it once and keep coming back. So, in order to launch a new city location for these services, companies have two options. One, they can sign up a minimum number of restaurants and look to expand their presence once they launch; the logistic issue with this option is that you have positions where salespeople go door to door signing restaurants initially, which takes a significant amount of time to launch and even more time to cultivate other restaurants to sign on. The other option is to purchase a delivery company with experience in a city already and adopt their customer base as their own.
Grubhub Expands Through Acquisitions
GrubHub is the top food delivery marketplace in terms of deliveries done per year and is the only marketplace currently listed on the NYSE. After adopting popular NYC delivery service Seamless to great success, GrubHub set their expansion trajectory on moving through acquisitions. To date, they’ve bought popular Boston delivery (and BC-founded!) Foodler, Yelp’s food delivery offering Eat24, and Groupon’s subsidiary OrderUp. Look no further when you wonder who owns the US market for food delivery on a volume basis. Especially pay attention as GrubHub seems to make announcement acquisitions often as they consolidate the thinning competitive crowd of food delivery.
UberEATS Expands Through Partnerships
UberEATS is the other big player in the space and they’ve been aggressive with innovation through technology and partnerships. They just acquired New York startup Ando, a restaurant that only does delivery, started by acclaimed chef David Chang that focuses on making high quality food specifically to be delivered. No doubt Uber intends to leverage insights from that company to share dynamics with their more lucrative exclusive partners.
Before I discuss partnerships, a note on food delivery: the market dynamic for food delivery has typically been that one city generally adopts a single food delivery service and that becomes the de facto service for the city. This is what made GrubHub’s expansion through Foodler in Boston and Seamless in NYC such good deals, because they instantly became the go-to food delivery service in major cities.
To combat this dynamic, UberEATS’ expansion plans seem to revolve around exclusive partnerships with high popularity brands. To date, they’re the only delivery platform that works with McDonald’s, which works internationally as well as domestically. With over 100 cities in their portfolio after only three full years of activity, UberEATS is an upstart in the space. With the large investment SoftBank just made in their company, they have the money to keep funding expansion and the brand image to get into meetings with food brands others can only dream of.
The Future of Food On Demand
Delivery is a tough space to be in. Because these companies typically don’t have deliverers as employees, rather they have them as independent contractors, they can’t dictate what these deliverers do, which makes each customer order experience unique in its own right for better and for worse. Going forward, it will be interesting to see how the evolution of self driving cars and delivery-only restaurants like Ando impact the space, especially as those two facets start to integrate with each other more and create a seamless experience. It will also be interesting to see how Amazon leverages Whole Foods’ premade food options and takeaway stations in-store as they look to expand past grocery. While I can’t predict where we’re going to go in 10 years, I can say this is a market being shaken up every day and because of the ubiquitous necessity of food is definitely worth paying for.