Online Food Delivery Is Having A Bright Moment — But Clouds Are Gathering

It was once the (stereotypical) realm of ambitious teenagers and refuse-to-grow-up rockers and stoners who either needed extra bucks or found it too … uh … challenging to land better jobs. These days, however, food delivery means digital technology, entrepreneurship and global acquisition activity — and reasonable questions about how this will all shake out in the coming few years.

Recent acquisition news demonstrates the global appeal of food delivery as consumers across the globe gain the affluence and technology to enable such transactions. India-based online food ordering and delivery platform Swiggy has reportedly spent about $7.3 million to buy Scootsy, another Indian firm that offers online food delivery services.

Just more than a year ago, Swiggy announced an $80 million investment round led by Naspers, the South Africa-based global internet and entertainment company that has invested in several online food ordering and delivery companies worldwide.

Food delivery in India has attracted venture capital in recent years, with some 400 food delivery startups getting off the ground — to say nothing of Uber and Google launching Uber Eats and Areo, respectively, in the country.

A country with such a large population and rising affluence presents obvious opportunity for such businesses, but the risks involved demonstrate that food delivery is hardly a certain proposition. For instance, replacing traditional business models has proven tricky, and even caused some promising delivery companies to shut down.

Food Delivery Moment

That said, online food delivery is having its moment. A recent report from UBS, in fact, estimated that the global online food ordering market will increase 20 percent annually until 2030, reaching $365 billion. Cheaper deliveries and adults who cook less than previous generations are among the main factors behind that growth.

Evidence of that growth comes from the United States, as demonstrated by recent Q2 earnings.

Fast food providers such as KFCWhite CastleChipotleJack in the Box and Wendy’s are also teaming up with DoorDash, Postmates and other third-party delivery providers to bring food to hungry people at home.

For McDonald’s, delivery accounts for as much as 10 percent of sales for restaurants that offer the service, and is “becoming a meaningful contributor to our sales,” CEO Steve Easterbrook said during the chain’s Q2 post-earnings conference call. That’s in large part because tickets for delivery orders tend to run twice as high as in-store receipts.

The China Story

China, too, provides evidence that online food delivery remains a hot proposition. Last week, Starbucks and Alibaba said they would partner on a multi-part effort to enable the delivery of Starbucks products to Chinese consumers as part of a deal that includes such Alibaba properties as Taobao, Alipay, Tmall, HEMA and

Starbucks could use the kick: The chain’s quarterly sales in China declined 2 percent in the period ending on July 1, down from the 7 percent growth in the same period a year earlier. So could McDonald’s: The fast food chain reported U.S. same-store Q2 sales that grew 2.6 percent year over year, below analyst expectations. (Earnings increased 15 percent, though, and beat expectations.)

QSRs and other restaurants are chasing the growing eat-at-home market. Revenue from food deliveries increased 20 percent in the past five years, while the number of deliveries in that time has only increased by 8 percent, according to the NPD Group. Revenue from in-store sales, meanwhile, have remained flat.

Door to Entry

And third-party delivery providers are chasing the restaurants chasing that market — though the door to entry might be getting more narrow. Evidence of that comes from recent reports that, the food delivery platform acquired by Alibaba Group, is looking for $2 billion in new financing to help it take on rival Meituan Dianping — a potential pile of cash unavailable to many rivals.

Both and Meituan reportedly are incurring massive losses as they offer steep discounts to attract customers.

In the United States, Uber Eats has become the fastest-growing meal delivery service in the country, according to Second Measure, a company that analyzes billions of dollars’ worth of anonymized debit and credit card purchases. At the same time, Postmates and DoorDash, two food delivery rivals, have discussed a merger as a way to take on their better-funded rivals, a group that also includes Grubhub and Amazon Restaurants. In fact, Grubhub might be trying to become the Amazon of food delivery.

Smaller Rivals, Other Risks

That leaves smaller competitors in the spot of having to stand out from a crowd of heavyweights. One of those is Chop Chop, an operation based in Richmond, Virginia that enables diners to choose from a menu of 50 to 60 restaurants for delivery. In a recent interview with PYMNTS, company owner Chris Chandler discussed why and how those smaller delivery services use social media and guerilla marketing to help restaurants expand their customer base in hopes of increasing deliveries — and offer other features to attract loyal customers.

Offering food delivery, especially through third parties, is hardly a guarantee that a restaurant will make money. Not only do delivery providers take a cut of the sale, but analysts said customers might be less likely to order such high margin items as soda and booze (assuming alcohol delivery is legal in a particular market) when doing delivery. Chains such as Domino’s and Olive Garden have declined to work with third-party delivery providers for such reasons.

And restaurants that rely too much on delivery also run the risk that too many orders that result in lukewarm food being handed over to consumers — to say nothing of wrong or forgotten items — will result in a backlash on social media and customer review sites. Beyond that, Stifel Analyst Chris O’Cull told a reporter that “restaurants will start to scale back on third-party relationships if they’re cutting into higher-margin dine-in traffic.”

For now, the future looks bright for online food delivery services, though there are early signs of oncoming consolidation, and perhaps even a growing reluctance of restaurants to entrust their reputations and revenue to third-party providers.