What does the lifting of lockdown policies mean for the on-demand delivery companies which have thrived over the past eighteen months? As people return to the office, socialize in bars and clubs and – critically – start to eat out once again, will home deliveries continue at the same level as they have been?
To make money, the on-demand delivery business relies on consumers willing to pay a premium for food or groceries to be delivered (over and above the cost and time of picking up these purchases themselves). They also need a high level of volumes in order to leverage the necessary network benefits of their business model and repay their investment in technology as well as maintain a steady stream of work for couriers. During lockdown people were discouraged from going out, restaurants were closed and there was an increase in disposable income (due not least to lack of opportunities to socialize and savings on the daily commute) which provided a fertile economic backdrop for the on-demand sector.
At the same time as this, on-demand also relies on a large pool of delivery drivers willing to work on highly flexible terms for low remuneration, in other words the ‘gig’ economy. During Covid, many ‘mobile’ workers (taxi, minicab drivers, for example) migrated to the on-demand sector for employment. Worker numbers were buoyed by those made redundant or furloughed from sectors such as leisure and retail.
Finally, there needs to a willingness for restaurants or stores to pay a fee to access on-demand platforms and a proportion of the delivery costs. Throughout Covid, restaurants were forbidden to host diners, meaning that home delivery was their only option if they wanted to remain operational.
The problem the on-demand sector faces is that despite soaring revenues experienced throughout the Covid-crisis, few companies have been able to make any profits. With conditions set to become far less benign in the coming years, it is unclear how the sector can remain sustainable – at least in developed economies.
When the economic, societal, technological, legislative and political factors combine favourably, on-demand companies can prosper. The platform attracts customers and as orders increase, more restaurants join. More restaurants means more volumes which is not only good for existing drivers/riders (more revenue) but also attracts new and good quality contractors. The higher levels of service this allows, along with the greater choice of restaurants/stores attracts more customers. All parties benefit from the value created.
However, if external factors turn negative (for example, disposable income falls) the same process works in reverse. Customers start to reduce the frequency they use the service or leave completely meaning orders fall. Decreasing business could mean restaurants decide the fee to appear on the app/website is too high and leave the platform. Volumes decrease with the knock on effect that drivers leave for employment elsewhere as revenues cannot support them full time. Consequently, service levels fall and more customers leave and so on. Without network benefits, companies quickly burn through their capital in effect subsidising each delivery.
On-demand Positive and Negative Feedback Loops
Localization of services will be important to the success, or otherwise, of the business model. Deliveroo writes in its recent IPO prospectus, ‘We are a global Internet company, yet also a neighbourhood business. Deliveroo started in the London neighbourhood of Chelsea in 2013 and since then we have delivered a proven track record of global expansion through a hyperlocal lens. From the very beginning, we recognised that in order to succeed we needed to get our proposition right, neighbourhood by neighbourhood.’
However, it is extremely costly to build an operation on a location-by- location basis where volumes may not be sufficient to support the sunk costs of a national/global organization. On-demand companies talk about the use of AI to improve efficiencies of deliveries, learning about local market characteristics. However, this is where the logistics-fulfilled marketplace model will find it most difficult to compete against restaurant-fulfilled. A local outlet may already know much more about its market and issues related to delivery than an operation working on a regional or even city level. It will also have less overhead and more flexibility.
Overall, it is difficult to see a future for logistics-fulfilled on demand food delivery via apps. Once they stop growing and investors’ money runs out, many companies in the developed world will fail. If there’s a downturn, consumers will rein back on discretionary purchases; investors will pull plug on future funding; someone, somewhere will want to see a return on their investments and delivery companies won’t be able to afford to subsidize drivers. However, exploiting technology (e.g.electric bikes, very smart tech that can optimise the cost base) may create new distributed operating models that can survive.
Source: Transport Intelligence, July 8, 2021
Author: Transport Intelligence
This brief has been taken from a larger paper, ‘The future of on-demand delivery in a post-covid world’ by Ti’s CEO John Manners-Bell, Raghu Ramachandran and Ti Advisory Board member Ken Lyon. This paper is available exclusively to GSCi subscribers. Each week, Ti’s team of senior analysts and industry experts deliver analysis covering the latest logistics and supply chain trends exclusively to users of GSCi.
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