Online food delivery is a lucractive business. According to analysts at Technavio, the online food delivery market is expected to grow by $104.45 billion with a CAGR (compound annual growth rate) of 23%. Of course, COVID-19 has accelerated this growth. With people sheltering-in-place, food delivery has soared in popularity.
The food delivery market is an interesting case study. Here lies a market fractured by several companies with very little customer loyalty. Why is the market like this and who will win this intense war for increased profit? I hope to dive into these questions with this post.
Business Models of Uber Eats and Door Dash
UberEats and Door Dash use the same 3-pronged market strategy to make money. Customers order food through the mobile app. Uber/Door Dash facilitates the delivery of the food while restaurants prepare the food.
What value does each stakeholder make in this arrangement and how do they maximize this value?
- Consumers: the value is clear here; they get food
- Restaurants: restaurants get extra business from customers who want to stay at home. This leads to increased revenue.
- Uber Eats/Door Dash: the company takes a cut from each delivery to pay drivers, cover costs and make profit. Furthermore, these companies are able to make money from advertising restaurants on their apps.
Both Uber Eats and DoorDash benefit from a clear network economy. By having a wide network of customers on their platforms, restaurants are more incentived to use the platform as an additional source of business. This is exactly how social networking sites are able to grow so large: with more people on their platform, outsiders are encouraged to join the platform as well. For more information on the unique benefits of network economies, please refer to my notes on 7 Powers.
What are the unique aspects of Uber Eats versus its competitors in the online delivery space? Uber Eats can utilize its massive existing driver network to also deliver food. This scale advantage is not as easily enjoyed by its competitors. To be quite honest, after reading articles online, I don’t see how DoorDash is drastically different than Uber Eats.
Why Neither is Winning
Business strategy is not only about marginal benefits. It’s actually more important to construct barriers to prevent other companies from enjoying the same benefits. Unfortunately, no company has been able to construct effective barriers to prevent the other company from enjoying the benefits of the network economy. I see this as a failure of Uber Eats; with such a massive scale and a front-runner in the online food delivery race in 2019, I would have expected Uber to capitalize on the opportunity to build a barrier. Unfortunately, this allowed DoorDash to overtake Uber Eats in the share of the online food delivery market in late 2019.
This has led to a fragmented market where no company offers unique benefits or a striking business model. A good example of a fragmented market would be the consumer apparel market. No company enjoys a massive benefit because no one has a competitive advantage and barrier.
How to Dominate the Food Delivery Industry
There’s a couple of ways to break the deadlock:
- Merge: This market is all about scale. Whoever has the most number of couriers can get faster delivery times, make more profit, and pull more restaurants into the on-demand market. There are already talks of mergers happening in this space, particularly between Uber Eats and GrubHub, which already has a large existing user base.
- Create new business models: Some of the most successful companies have been able to dominate crowded markets through the use of new business models. For example, ETF companies have recently dominated mutual funds due to a drastic decrease in commission fees in exchange for more average performance from simply tracking key stock sectors; this new business model proved to be uncompetable for many funds. Costco is another example: its revolutionary wholesale business model made it an extremely popular choice among consumers. If one of the companies can create a new business model that the other business cannot compete against, it could unlock a new level of profit. Ideas include paying based on a function of the speed of the delivery and near-instant delivery by keeping popular food items in cars at particular times and locations.
- Pursue exclusive partnerships: Delivery companies have the leverage here. By preventing restaurants from listing on competing apps, companies could really build scale. Right now, Uber is in a slightly weak spot as it has consistently been making huge losses (2020 Q1 loss: $2.1B) and cannot afford a fullout war. DoorDash would be in a unique position. I would suggest DoorDash look into establishing such partnerships for higher-end restaurants first, test, and iterate.
- Build loyalty programs: This market is known for flaky, unloyal customers. Either platform would benefit from building switching costs that would prevent such behaviour. This could take the form of a loyalty program, speedier deliveries based on length of use or exclusive access to higher-end restaurants based on usage (this would pair particularly well with the previous recommendation).