Are food delivery services profitable? A short analysis beyond just numbers.


The effect of the pandemic


During the pandemic, the world has been reshaped, influencing the economy as a whole. Lockdowns, the closure of shops, and restricted transportation have all contributed to the rise of an industry that was never present on the top headlines: food delivery. This business model relies on the convenience it offers, alongside the time and effort that it saves. It is indisputable that food delivery companies like Uber Eats and DoorDash have all benefited from the current public health crisis. No more busy shops, large crowd gatherings, and full restaurants -just plenty of delivery scooters. This is an industry that, based on numbers (graph1), should be extremely profitable in a situation as favorable as ever.



GRAPH 1


This graph by The Economist depicts the expected and actual growth of food-delivery services from 2016 to 2021, clearly showing the unforeseen expansion of the industry.






Because of the fact that the number of customers increased unexpectedly, orders skyrocketed and sales followed along with this trend. However, this is no surprise with the restaurants closing and a large part of the market share being passed on to the online businesses. Nevertheless, the curves can be misleading as this is a very competitive and high-cost industry. Some of the costs include the driver, the platform maintenance costs, advertising, and others that “eat up” most of the revenue generated. According to a 2019 report by Capgemini, despite the expanded online market, retailers could lose up to 26% of their profit if they fail to adapt and upgrade their logistics system to achieve faster delivery.


A rough market with a tight profit margin


GRAPH 2


This graph presents the decline of both Uber Rides -the standard taxi service- and UberEats -the food delivery business that had started all the way from 2019.






The Graph presents the decline in year-over-year growth of Uber back in 2019, a company that not only manages taxi drivers but is also famous for its UberEats business. UberEats acts as the “middleman” between restaurants or stores and the customer, distributing the ordered food. As demonstrated by this graph, even back in 2019 numbers were steadily falling. As of now, the profit margins are small, explained by the fact that someone needs to be paid enough to drive to the restaurant, pick up food, and dispatch it, something that takes a lot of time and effort. Many similar competitors are facing the same exact issue: High revenue with small or even negative profits. For instance, DoorDash, another food delivery service, had never generated profits with the exception of the second quarter of 2020 where it made just 23 million USD. Furthermore, investors also thought that this was an industry projected to grow rapidly which is ambiguous whether it will turn out to be true. As a result, a dozen companies could be overestimated and may start to “deflate” in the post-pandemic era. Continuing with the example of Uber, their revenue fell by almost 2 billion dollars (measured in 2020) compared to 2019. 2020 was still a year of constant lockdowns and restaurant closures, yet it was not enough to keep this number growing.



Final thoughts


As of now, Covid-19 is starting to cool down, and if food delivery services did not manage to thrive (achieve the forecasted potential) under the most prosperous conditions, then maybe this is something to consider when arguing about their success. On the other hand, one cannot help but wonder if delivering food is sufficient to survive in the long run and make a good amount of profit. The response to this question can only be answered by time itself, while solutions such as the delivery of other items like groceries is an option the profit-lurking firms might have to choose.



 

Sources:

“Food On Demand : Business Models of Meal Delivery Startups.” JungleWorks, 24 June 2021, jungleworks.com/food-on-demand-business-models-of-meal-delivery-startups/.

Griswold, Alison. “Analysts Expect Uber Eats to Lose Money on Every Order for at Least the next Five Years.” Quartz, Quartz, qz.com/1693843/uber-eats-will-lose-money-until-at-least-2024-say-cowen-analysts/.

“Why the Food-Delivery Boom May Soon Hit the Skids.” The Economist, 26 May 2021.



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