Food Delivery Apps Getting Lost in Transit

Grubhub’s new chief executive had “tough” news for its 2,800 employees on Monday. Although food delivery apps boomed during the pandemic, 15 percent of the workforce will now lose their jobs.

“We operate in a highly competitive and constantly evolving industry, and we constantly need to see if we are set up correctly,” Howard Migdal wrote in a company-wide email.

The American app, owned by Amsterdam-based Just Eat, is not alone. Zomato recently shut down operations in 225 Indian cities, Deliveroo pulled out of Australia and DoorDash cut 1,250 employees, or 6 per cent of its corporate workforce.

The food distribution was overdue for calculation. While Domino’s has been bringing food to customers for decades, today’s apps tapped into the excess capacity to inject themselves into an already relatively tight-margin business. They connected stay-at-home diners with drivers and restaurants to serve more customers than they could attract for dine-in or pick-up.

Estimates of the global food-delivery market range from $167bn to $300bn. But revenue boomed in recent years due to two factors that have since disappeared. The expansion was financed by cheap capital that covered the difference between the actual cost of distribution and the amount customers actually paid. And the pandemic lockdown supercharged growth by limiting competition from dine-in restaurants and other entertainment.

The boom was so extraordinary that existing food service brands, such as US burger chain Wendy’s and UK Indian group Dishoom, sought to take advantage by not only listing their restaurants on delivery apps, but also by opening delivery-only “ghost kitchens”.

Now those winds are gone, and the benefits available from eating at home have been reduced by higher food and other costs and a squeezed dinner budget. “The whole distribution space is problematic. It’s getting harder and harder to make money,” says Peter Backmann, an independent food sector analyst.

Restaurants have on-site customers again and pandemic-era limits on app fees are coming to an end. They are now less enthusiastic about partners who pocket 15 to 30 percent.

Several restaurants in my New York suburb have moved to proprietary online ordering systems. A local pizza place included a note with my recent DoorDash order reminding me that I could save about 30 percent if I contacted them directly. American brands Wendy’s and Applebee’s have also cut down on the Ghost Kitchen scheme.

Jefferies analyst Giles Thorne believes that food delivery apps can generate sustainable earnings, especially as the comparison fades with the extraordinary pandemic period. “There are large sectors of society that are willing to pay $4 to buy back 45 minutes of their time,” he argues.

But keeping delivery charges down is going to be a struggle now that investors are seeking profits rather than just growth. Lay-offs will help reduce overheads but they are not sufficient. Food delivery apps need to find other ways to cut costs, especially if they want to expand into new areas without relying on huge subsidies.

Some have turned to “batching” orders, in which a courier makes multiple stops. This can work in densely populated urban areas full of busy restaurants. It also explains why DoorDash and Uber Eats routinely offer to make a second stop for people who’ve already ordered. But batching badly alienates app customers who watch in real time as their burgers take a circuitous route and their fries turn soggy.

Promising everything to everyone can be an act of folly. Well-known local restaurants focusing on dine-in and takeout can strengthen their bottom line and maintain their reputation for good food.

Realistically, many communities will end up with the latest version of Ghost Kitchens, which cook multiple cuisines under virtual brands. This makes it easy to attract enough customers nearby that keep delivery affordable. ClusterTruck, an Indianapolis pioneer, aims for entrants to go from stove to front door in less than seven minutes, allowing drivers to make as few as four trips an hour.

Foodies may scoff at the idea of ​​ordering pad thai, pizza, and burritos from the same kitchen. But the current situation isn’t much better: A single Manhattan deli tries to maximize orders by listing itself on Grubhub and other apps as 27 different restaurants, including a taco bar, a bagel store and several burger joints.

The pipe dream of cheap delicious food at the doorstep is giving way to the flimsy reality of today.

brooke.masters@ft.com

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