Imagine a reality in which the majority of the meals we consume are being delivered on-demand. A world in which cooking is considered a crafty artsy activity instead of a basic human survival skill. Food is ordered in a matter of seconds, customized for the eater and is delivered by a robot at your door within 20 minutes still steaming.
That reality is not as far as you might think.
I remember my grandma telling us stories of her growing chickens in the back yard to get eggs. Somewhere along the way though, buying eggs from the grocery store became a better buck-for-your-bank over doing it yourself. In the same way in which buying eggs from the supermarket became a better solution than raising chickens, in a long enough time frame, cooking food will be extinct in the exact same fashion
But how might we get there..?
Primarily two approaches: getting a bigger piece of the food delivery pie and increase the size of the pie itself. The former refers to winning over the competition in the existing feed delivery space; capturing more of the market. The later refers to expanding to adjacent verticals to food delivery in the pursuit of enriching the income sources.
Goal A: A bigger piece of the pie
Monopoly. What every player in a competitive environment dreams of. Increase how much of the market you control until the competition gives up and you get to squeeze every piece of value that market has to offer.
Reaching -legal- monopoly though, is hard. It is a survival game. In a market as competitive as food delivery, players engage in a price war in which, in order to survive, they push prices lower and lower to match competitions. So much so that they become loss making (Bertrand paradox in game theory).
This race to the bottom can be observed everywhere: SE Asia-GRAB vs GoJek vs FoodPanda, Europe- Deliveroo vs JustEAT, USA- UBER Eats vs Doordash vs Grubhub etc.
There are three strategies to perturb this equilibrium and hence get a bigger piece of the food-pie:
- Vertical Integration: Drill down the supply chain
- Brand & Product Differentiation
Strategy 1| Vertical Integration: Drill down the supply chain
Before we dive in, let's zoom out and understand the e2e journey of a burger. From produce to your plate. This is the supply chain of a burger.
Every arrow here is an opportunity to capture more of the supply chain. It is a chance to increase margins ever so slightly.
Margins: Cows are raised in a farm and beef is produced as a result. This beef then goes from that supplier to a beef patty provider. In order to turn out a profit, the beef has to be sold above cost. That is called the margin of the product. If 1kg of beef, is sold for 25$ and it cost 15$ to produce then the farmer will have a profit of 5$ per kg of beef sold. In the exact same manner, the beef patty supplier will use that 1kg of beef to make 1 pack of beef patties to a burger restaurant for say 40$ while their costs for producing them were 30$ so they will have a profit of 10$ per pack. The burger restaurant will use the beef patty to make burgers and sell them for 15$ when their costs were 10$ and make a profit of 5$ and so on.
Now imagine if the burger restaurant owned a farm of cows. This means that all those margins that were lost to intermediaries (the farmer and the beef patty producer) -assuming they would have the same costs- are now captured by the burger restaurant themselves. They don't have to pay that'extra' so somebody else, so they get to keep it. So the cost of producing a burger goes down and hence the margin of selling burgers goes up. A chain reaction.
Players up high in the supply chain have rather strong incentives to replace their supply. Aggregators like GRAB or UBER Eats are at the top of the food supply chain. And that brings us to the bitter truth:
Every marketplace eventually ends up canibalising its own supply in the pursuit of capturing more of that supply chain in order to achieve bigger margins and hence more profits.
In other words, marketplaces will end up straight up competing with their own supply: primarily restaurants. But also even lower than that: kitchen level --> ingredient level --> produce level.
Logistics: Every link in the supply chain is connected via some sort of logistical operation. The good has to go form point A to point B. That is an additional cost. A cost that could be captured but food delivery companies that already have huge flexible fleets. Why not transport ingredients from suppliers to restaurants or items from factories to central kitchens? Why only handle the last part of the deliery of the cooked food?
Private label food items from cloud kitchens. Otherwise known as ghost kitchens or virtual kitchens. Cloud Kitchens are cooked food factories. There is no front-of-the-house; no servers, no tables, no theater, no nice deco, not even a logo outside the door. They are optimised solely for producing and packaging food for delivery.
- Data Driven Food Production: The 'Amazon Basics' tactic. Amazon has been utilising purchasing data to identify top selling items and creating alternative Amazon Basics items and pricing at perfect price point at which the consumer would be willing to go for Amazon instead of a named 'brand'. Some theorised that Amazon was/is actually pushing those items up the search results and suggesting them to users more, making them more discoverable. In the same way, food marketplace players have access to infinitely more data than individual brands which they can leverage in order to identify what items to sell, at which location , at what price point and optimize for max profits.
- Bulk Sales: Mass produce a meal in one of those facilities and distribute at a low price. Use the app to promote such 'flash sales' or campaigns.
- Virtual Restaurants: Utilising cloud kitchens to create delivery-only restaurant concepts. This has happened already in Canada where Uber Eats collaborated with celebrity chefs to create unique restaurant concepts carrying signature recipies, only available on the platform. Deliveroo, said in a previous post that they were 'on track to launch 2000 virtual brands by mid-2019'.
- Ingredient Level Intelligence: Having control of the production of the items enables another level of curation and customisation based on a consumers' preferences and dietary requirements. Low-calorie, gluten-free, dishes that do not include corriender and so on.
Kitchen as a Service - Provide a physical place for food providers to setup their food delivery operations. This implies getting the Cloud Kitchens model and expanding it by leasing space out to food labels in order to produce their items. The operator of the facility is then responsible for distributing everything that comes out of that kitchen from any of the sellers. Here's how Virtual Kitchen, Kalanick's pitches this:
Virtual Kitchen Co empowers restaurants, chefs, and food entrepreneurs to take advantage of the delivery boom without enduring the challenges of building out additional locations themselves. Virtual Kitchen Co offers a turnkey solution, not just renting out kitchen space or solving some smaller part of the stack – but providing a fully integrated technological solution to help businesses grow their sales.
This offering could only include the space as a minimum and on top of that add-ons like: pre-equipped kitchen, fixed staff, packaging material, stock management software, cooking staff etc.
Another variation of this concept of the cloud kitchen is this:
Can you figure out what that is..? Yep, a 'Cloud Kitchen' on wheels. Complete with its own cook, serving up dishes for up to 6 different brands. Everything from tacos to burgers, from a single truck with a single employee all available for order for pickup or delivery.
These 'cloud-trucks' are setup by Reef Technology (soon Virtual Kitchens Co) and 'outsourced' to delivery giants like Postmates, Doordash and UBER Eats or an alternative model is them being operated by the delivery company itself; in this case, UBER Eats.
Strategy 2| Automation
There’s no doubt that automation will transform every step of the supply chain, from manufacturing to fulfillment to shipping and logistics. The only question is how long such a revolution will take. – Arman Tabatabai & Brian Heater for Techcrunch
Every step along the supply chain of F&B involves a logistics cost. Today human fleets handle such tasks but that is only until machines take over. Having robots take over part of the journey enables food delivery companies to save huge amounts on logistics costs and thus increase margins while often increasing efficiency as well.
Going back to the burger journey, imagine if there could be an autonomous vehicle, delivering fresh produce and ingredients to the burger kitchen daily. Imagine a robot preparing the burger in the most efficient and consistent manner and then handing it over to a drone that is able to delivery within minutes to one's balcony. This future is not far. And it is a highly cost efficient one since instead of paying a human a delivery fee to do these transactions, you are paying nothin other than initial investment and some maintenance.
Autonomous vehicles are vehicles that do not require a human to control them. Autonomous vehicles are able to navigate to the provided drop-off point with a click of a button. They are equipped with visual systems that enable them to avoid obstacles and follow traffic rules. Such vehicles can be primarily of two types:
- Aerial: Often referred to as drones or UAVs(unmanned aerial vehicles). In the case of food delivery we are particularly interested in are quad-copters and above. Such aerial vehicles can hover and move smoothly in the vertical plane. They are also extremely stable along the x-y plane which ensure that food stays upright.
When it comes to aerial autonomous vehicles, both the navigation and the flight capabilitues exist. The biggest barrier to aerial delivery is 1. regulation and 2. common infrastructure between the UAVs.
- Land: Both Starship and Postmates are already testing such robots. And Cruise, experiments with self-driving trucks.
Robotics could be used for preparing food, packing and distributing to the robotic or human fleet. Amazon Warehouses are infamous of an incredible degree of automation. They handle everything from finding the item, packaging it and placing it in the right delivery van.
The replacement of human labour with other AI agents won't happen from one day to the other. The intermediate step is amplification of humans (delivery drivers, cooks etc.) with tech. An app interface is low level amplification. We can do so much more given today's tech. Wearable tech can be used to gather up -even more reliable- signals and streamline the experience. AR will be another big one to help with navigation and instructions.
Strategy 3| Differentiation
It is not enough to be a vanilla brand. In this new brave world where food as a service gets commoditized; brand becomes doubly as important. In fact as markets mature, it is not enough to only offer a good product at a good price but the differentiation happens in the values level. In other words: What does this company stand for? Which -truthfully- essentially is: What will using this brand say about me?
Some consumer trends that are closely related with strong personal values:
- Healthy Lifestyle: Not only make available healthy options to eaters, nutritional info but actually help them pick the ones that are good for them.
- Green: As environmental issues become more and more critical, consumers will become more and more sensitive to them. Companies need to rethink their approach in regards to fuel emissions, food waste and food packaging.
- Don't-be-evil: Ethics-centered operations. Operational transparency, Privacy, calm tech all fall under this bucket.
The continuous cycle of product development in order to add more and more value to the core product with services such as:
- Table Bookings
- Events/company/school catering & big Orders
- Custom meal plan subscriptions
Goal B: Increase the size of the pie
Strategy 4 | Economies of scale
As time goes by, we outsource more and more of our lives. Everything is now a Service. Cleaning, plumbing, taxi, financial advice, deliveries, gardening, clothes, camera equipment. We no longer need to own everything or do everything.
Given this momentum, it is not hard to imagine a future in which food delivery is the default option.
"One of history’s few iron laws is that luxuries tend to become necessities and to spawn new obligations. Once people get used to a certain luxury, they take it for granted. Then they begin to count on it. Finally they reach a point where they can’t live without it.” - Yval Harrari
Right now, food delivery is more of an occasional luxury.
The question is; how do we make door-to-door food delivery become the status quo instead of what it is currently, an occasional luxury. How do we go to above 50% adoption of food delivery for every meal?
It is not really a question of convenience, speed nor a question of quality. In fact food delivery is more convenient, often faster than cooking and can often be tastier than your average home cooked meal.
The main obstacle, I would argue, is price.
Right now delivery is too expensive compared to the alternatives: cooking & street food. Delivery is too expensive to become the default at this point in time. The only way to push adoption above 50% is to make it cheaper for the eater.
“When we look at growth, it's always one of three things: Selection, Delivery quality, and Affordability. All supply-oriented." — Doordash
It is paramount to emphasize here that the Vertical Integration and Automation strategies discussed in A are key levers in reducing this average price of delivery food.
This is because if those strategies enable us to increasing margins --> charge lower prices --> unlock more of the market that finds it expensive today --> increase demand --> further drive down costs --> repeat.
Economies of scale effects at work.
Strategy 5 | Horizontal Integration
If supercharging demand via economics of scale is the equivalent of baking a bigger apple pie, then horizontal integration is the equivalent of baking a cherry pie in addition to the apple pie.
Horizontal integration is jumping in adjacent spaces. Those are usually spaces in which a company will have an advantage in, simply because of having a footing in their main space. If one knows how to bake a good pie crust, it is not hard to extend that skillset from apple pie to cherry pie.
While usually the first -and easier- step in horizontal integration are partnerships (Google Maps, Payment providers, it is often in the best interest of the platform to be handling these 'adjacent' services e2e in the pursuit of reducing costs and/or enriching income streams. Some examples of adjacent spaces worth exploring:
- Financial products like digital wallets in order to enable payments (ex. GRAB Pay)
- Amplify Restaurants: Sell services to restaurant such as data insights, POS systems, stock management systems, booking platforms, reservation feedback, tailored contextual ads through the platform etc.
Virtual Kitchen Co utilizes data to figure out where to best locate their network of kitchens, what cuisines are lacking in underserved neighborhoods, and even what ingredients should go into which dishes. By sharing and collaborating with restaurant partners, it will make the ecosystem even better.
- 2D & 3D map and navigation services using proprietary data
- Main Food Supply Chain Logistics: For every handover of physical goods, there needs to be a means of transferring those goods. A delivery cost. The beef from the farm to the factory, the patties from the factory/centralised kitchen to the burger place and the burger from the restaurant to the consumer. Sometimes the supplier has their own delivery fleet but often times they rely on third party logistics providers (3PLs) in order to transfer the goods. Food delivery players can utilize their existing food delivery fleet to facilitate with more deliveries along the supply chain.
- Supplementary Food Supply Chain Logistics: Enabling delivery of more items such as groceries, fruit baskets or ingredients to restaurants.
- Non-F&B B2B & B2C logistics