The $27 billion business of food delivery

February 10, 2020 10:38 AM

Now that the Little Caesars pizza chain offers home delivery — after decades of making its customers come to them — it's clear that the rise in food delivery options is affecting restaurants of all kinds.

It's a trend driven by consumers' strong appetite for mobile ordering and payments.

Online food delivery is worth billions and is growing at an astronomical rate. According to the research consultancy NPD Group, restaurant digital orders (defined as meals or snacks ordered via mobile app, internet, or text message) have grown by 23% over the past four years and now represent 3.1 billion visits and $26.8 billion in spending. NPD is forecasting that digital orders will continue to grow by double-digits through 2020.

While the business of delivering food to hungry customers may be a multi-billion-dollar opportunity, success won't come easy. Grubhub has lost money in the last five quarters and, based on Nasdaq’s consensus of analysts that tracks the stock, that isn’t about to change anytime soon. In fairness to Grubhub executives, the company has shown revenue growth, likely due to rising demand.

The story of rival Uber is no different, as its Uber Eats segment lost $461 million in EBITDA in the fourth quarter ending December 31, 2019, a negative change of 66% from the same quarter one year earlier. Uber reports earnings for its different segments only on an EBITDA basis. Just to show how powerful the growth of the delivery business is, Uber’s fourth quarter has a total of $4.37 billion in gross bookings for the Eats segment, which means consumers bought about $4.4 billion in food globally through Uber in that quarter.

Uber sold its Uber Eats India operations in January to rival Zomato for a 9.99% ownership in Zomato. Square exited the food delivery business by selling its Caviar delivery unit for a $410 million mix of cash and stock to market leader DoorDash in 2019.

Tipping is a cultural expectation in the U.S. for many services, and food delivery is no exception. According to a recent study by U.S. Foods of 1,518 U.S. adults who have used a food delivery service, 95% of consumers report that they regularly tip drivers. Fifty percent said that they determine the tip on a case-by-case basis while the rest do so on preset standards.

For those who use a preset standard, the survey was split evenly between those choosing a set dollar amount and those choosing a set percentage of the total paid.

More than half (57%) of consumers tipping paid $4 or more to their driver for each delivery. Factors that could influence the tip amount include wait time and weather, as 41% of consumers decide on the actual tip when the food gets delivered. In contrast, 59% of consumers decide the tip amount when ordering the food, easing the friction of the payments experience.

One factor some consumers may consider is whether or not the driver has eaten part of the order during the drive to the consumer’s house. The study found that 21% of consumers have suspected their deliverer of taking food from their order. Interestingly enough, the survey also found that 28% of drivers admitted to having taken food from an order they had delivered over the course of their job.

Millennials, who are known for using their smartphones for buying almost anything, are clearly part of this food delivery movement.

“Millennials, in particular, are also used to acquiring everything they need or want through their smartphone. This generation has indicated they are willing to pay a premium in exchange for convenience, so delivery companies have a viable business based on the fees they collect,” said Hetal Pandya, co-founder of Edison Trends.

While no app covers every restaurant, and some have exclusive relationships (such as DoorDash and Little Caesars), all of the leading food delivery apps have been aggressively signing new restaurants. According to a study of the leading food delivery apps by Edison Trends, DoorDash has been almost four times as busy as its nearest competitor Postmates in signing new restaurants.

Edison Trends reports that the overall leader in total restaurants covered is Uber Eats. Nearly tied for second place are DoorDash and Grubhub.

The saying that yesterday’s leaders can become tomorrow’s followers certainly rings true in the food delivery app business, with share positions dramatically changing over the last two years. Based on data from Edison Trends, the leader in share of consumer spending on food deliveries as of January 2020 is DoorDash — a position it's held for about a year.

Looking back to March 2018 ,Grubhub was in first place with over 36% market share and DoorDash sat in third with just 15%. Meanwhile, Uber Eats has struggled to stay in second place despite having such a large number of restaurants signed.

“Reportedly, Grubhub has a market value of roughly $5 billion," Pandya said. "That is down from its peak of more than $13 billion just over a year ago, before competition from other delivery startups heated up and eroded the company’s market-share lead and results."

Caviar's market share over this same period of time has wavered between 1% and 3%, which was probably a contributing factor in Square’s decision to sell it to market leader DoorDash.

Despite having the most restaurants on its food delivery app, Uber Eats has the lowest average transaction size, thus limiting its potential market share. Based on September 2019 data from Edison Trends, Uber has the smallest average basket size per purchase — $27 —among the top five competitors in the U.S. food delivery app market. DoorDash, Grubhub and Postmates come in at about $31 to $32 per order.

By far the leader when it comes to enticing its customers to spend is Caviar, with an average transaction size of $42.

Could future consolidation in the industry cause changes in how consumers buy from these apps?

“Consolidation does seem likely, however there is always the possibility that major restaurants that want to compete could invest in their own delivery force and grow into the space directly," Panday said.