TL;DR — There’s mass consolidation happening in an oversaturated market. The pandemic means that meal delivery companies like DoorDash can raise more money and enjoy more engagement.

This doesn’t solve the problems of not running a profitable business, though, and the companies will have to hike prices, expand their business model outside meals, or rely on cloud kitchens to turn the corner and sustain profits.

View this pandemic through the lens of what’s been selling out.

Where has the demand gone? First, back in March, every store was out of toilet paper, because...well, I still don’t fully understand that one.

Then everyone bought the Nintendo Switch to pass the time with some Animal Crossing: New Horizons. Home gym resistance bands and free weights followed suit, as gyms were basically right behind bars as the most at-risk place to visit, even if things started to “open up”. Think about it…a designated room for people to breathe and sweat? Transmission heaven.

Right now, it’s hard to get a beard trimmer, as it seems many people realized their quarantine cuts had shifted from charming to being uncomfortable.

The food stores became an indicator for how the public coped with the new reality. Take flour, for example. Inevitably, everyone decided to try baking, and flour was completely out of stock. In Austin, one bakery, Easy Tiger, still had a steady stream of flour coming in.

It transformed overnight from a lovely study and chill spot to the amateur baker’s drive-thru savior. At the peak, there were lines of 30–40 cars in the drive-thru lane.

Source: Time

I’m not saying this saved the business, because they were steadily packed pretty much every day of the week. But the pandemic placed them solely in the target market of many people who might not normally stop by.

The global pandemic is focusing and accelerating trends that were already emerging, and in this case, it probably saved a large chunk of Easy Tiger’s business.

The same shift that is saving bakeries just happened to the meal delivery industry.

However, the truth is in the margins, and this industry has a fundamental business model problem.

At the start of 2020, the meal delivery industry was a huge bubble waiting to burst.

WeWork ruined the fun for everyone. Source: Softbank

2020 was already looking to be a hangover year for those looking to go public, as WeWork’s no-IPO debacle had left the public markets wary of companies riding off of marketing and growth in lieu of margins and profits.

It was hard to justify having four major US players — Postmates, UberEats, Doordash, and GrubHub — running around trying to out-promotion each other. None of them, besides GrubHub (already public) were profitable, and GrubHub barely at that. GrubHub wasn’t even optimistic it could sustainably use meal delivery as its core business.

It seemed impossible to explain why four of these companies needed to carve out their own area of the map when none of them could even make money. Growth and marketing as metrics were out. Profitability was in, and they had nothing to show for it.

I predicted some consolidation and acquisition around what essentially was a luxury business charging insane premiums for food that was 30 seconds away instead of 20 minutes. It seemed time to pay the piper. None of these companies looked terribly attractive. But then…

Around March, for some reason, the value proposition of getting your favorite foods delivered to your place without having to leave the house became very, very valuable.

Customers clamored for the ability to have someone else deliver groceries or tacos to their home, even if it cost a little more. The high price for convenience was worth paying now.

The truth is in the data, too — sales have doubled year-over-year.

Usage is up, and more customers are coming. It’s clear there’s a great value proposition for these services in a pandemic.

Source: Second Measure

Seeing this moment, the companies scrambled.

Remember, in February, the United States had four players crammed in: DoorDash, Postmates, UberEats, and GrubHub. Suddenly, they were all the most sought after investments.

DoorDash just raised another $400m, at a staggering $16b evaluation. They had already confidentially filed to go public. So, raising some more private money before going public. DoorDash, it should be noted, has a commanding lead in the meal delivery wars by market share.

UberEats tried (and failed) to acquire GrubHub. There’s been a mixed success with acquisitions in this industry: DoorDash and Postmates were in talks for a long time to team up and take on UberEats, but egos prevailed, and the deal fell through.

Postmates, too, filed to go public in late-2019, but they were spooked by WeWork’s debacle, and have since moved back into a state of wait. There was most likely a tepid response to their filing as well. Then, this past week, Uber announced it was buying Postmates for $2.65 billion in an all-stock deal.

Then GrubHub emerged as a dark horse, announcing a merger with Europe’s Just Eat Takeaway. There were rumblings of antitrust litigation were GrubHub to merge with a US competitor, but I don’t think that factored in here. Uber in particular has shown they’re perfectly willing to fight legislation.

Now, after fresh funding and acquiring, there are just three major players in the game.

You could somehow chalk this all up to convenient timing, but that’s not the whole picture.

Whichever’s cheapest, please.

Why the acquisitions? Every executive at these companies knows that winter is coming.

The ugly truth is this: The higher engagement and sales numbers don’t mask the still-obvious issues of the industry. The business model was in trouble long before the pandemic, and it still is, even though at surface level everything looks great.

Of the four, only GrubHub has been able to post a profit. The rest burn cash. Their strategies — leftovers from 2018, when growth hacking was still king — leave no way for profits without price hikes or payout reductions to deliverers and restaurants. This comes from a business that already charges pretty insane prices for their services.

Part I

What’s stopping the business model from working?

It’s no secret there isn’t a ton of brand loyalty with these services.

The companies spent years vying and jockeying for each other’s customers, so much so that GrubHub’s CEO called his own customers “promiscuous” in a letter to shareholders.

“We believe online diners are becoming more promiscuous” — GrubHub CEO Matt Maloney

Customers have almost no brand loyalty to food delivery services.

In fact, all four companies have promiscuous customer issues. More than half of their customers tried a competing food service.

Take Uber’s acquisition of Postmates, for example. A good reason for an acquisition is cheaply and effectively locking in new customers. One of the many reasons Facebook bought Instagram was exactly this — it was cheaper to buy Instagram for $1b than try and claw customers away.

In this case, Postmates pretty much commands the southwest, especially LA. Problem is, as mentioned above, there’s a ton of overlap between services.

So, how do they differentiate?

What strategic moats are these companies trying to build?

Strategic moats are what many businesses strive for. Strategic moats are what keep many people on Facebook when they want to delete their account, because the powerful network effect Facebook has makes it tough to leave the conversation. They’re also what keep iPhone users from switching, because all of their friends have iMessage and their MacBook allows for FaceTime calls.

It hasn’t really worked out that way for the meal delivery sector.

Short-lived exclusivity, the Tidal of meal delivery. Source: GeekWire

1. Restaurant partnerships 🍽

Exclusive deals like UberEats’ in 2017 with McDonald’s. That meant if you’ve got that craving for a McSpicy, but don’t want to leave the couch, it had to go through UberEats.

Contracts like these have sprung up, but they tend to be short-lived.

That’s a potential moat companies can build — if they sign exclusive contracts with many restaurants, hopefully more flock to that platform because they can only get a particular restaurant there.

Problem is, major restaurant chains might just say no to lower margins and less data.

It’s at first surprising that some companies have pushed back, given the explosive growth of these apps. Who wouldn’t want to be on the hot new platform? Turns out, quite a few restaurants. McDonald’s renegotiated their contract with UberEats, and then ended the exclusivity they had, in part because of high delivery fees that drove down their profits.

Not only that, but McDonald’s gains none of the data insights that Uber does from UberEats orders. Pushing more orders through UberEats gives McDonald’s less data about their customers.

This is why thriving chains like Domino’s haven’t jumped on the bandwagon, and don’t offer delivery with any of the meal delivery apps. They’re betting that not only is the data they’re missing out on valuable, but the core business models are unsustainable. How has that worked out?

Pretty well.

The two best-performing stocks of the 2010s weren’t Apple or Amazon. They were Netflix, a technology company that delivers digital content, and Domino’s, a technology company that delivers pizza.

The fact that dominos invests so heavily not just in fringe technology like autonomous pizza delivery robots, but in loyalty programs and digital ordering experiences, is trouble for meal delivery apps. Domino’s has shown they can keep their customers data and margins, invest in their own infra, and thrive. They doubled down.

Third-party apps? Who needs ’em. Dominos stuck to their guns. Source: Google

Big technologically-savvy brands like McDonald’s, Chipotle, and Shake Shack might follow suit.

While Dominos can afford to splurge, smaller mom and pop restaurants can’t invest $60m in technology.

They might have to find another way to survive, though. There is a long and documented history of smaller restaurants feeling abused by the delivery services. Take this story, for example, of GrubHub charging restaurants an order fee just because the phone call placed through GrubHub took longer than 45 seconds. Instead of admitting that was a poor way to judge whether or not an order was placed, they doubled down and lashed back.

The companies are also using their platform as a catch-all for takeout when it might not actually be a service the restaurant offers.

The meal delivery is consolidating and concentrating, while the restaurant business remains fragmented.

Consumer trends have long been shifting toward independent. Independent restaurants are unhappy with having to bend over backwards for services that leave them with less money. Profit margins for these independent businesses, already razor-thin, are unrealistic when factoring in the at-times 30% fee the delivery services take.

It’s unrealistic to expect restaurants en masse will perform a massive uprising and overthrow their demons, especially if many are smaller.

However, I’ve firsthand seen some attempts from more well-funded businesses to go independent. In Katy, TX, Katy Asian Town is a sprawling mega-complex of Asian restaurants, offering a wide breadth of food — poke, dim sum, teriyaki, and cream puffs, to name a few — all from different stores within the strip-mall-esque layout.

Katy Asian Town. Drool. Source: Google

Thing is, none of them offer delivery with any of the major apps — DoorDash, Postmates, UberEats, or GrubHub.

Instead, Katy Asian Town runs its own independent delivery service, which allows a customer to order from one app that lists every restaurant’s menu. I can order, in one fell swoop, from four or five different restaurants. Orders are picked up from each individual business, aggregated on site, and then sent off with delivery drivers who only work for Katy Asian Town.

It works, it’s awesome, and I imagine the businesses get a larger cut. Again, though, this is a large mall, likely extremely well-funded, and can probably afford to run this operation.

It’s a weak moat. Partnerships and deals change, and as I mentioned, in a flat playing field of similar pricing, there’s no reason to stick to just one service.

2. Loyalty programs ✅

Each service has their own form of a subscription, which usually means perks like no delivery fee. In a business with little loyalty, these subscription services try to both generate and reward it.

Variations on a pricing theme.

It seems the $10 / month price-point tested well in four separate markets.

As you can see, the theme seems to be charge ten bucks, knock off the delivery fee, and attach some arbitrary value to premium support (which, I can say from experience, is generally pretty frustrating on these apps.) The goal obviously is to promote some stickiness that has you thinking “Well, I pay ten bucks a month for GrubHub, so why would I order from Postmates?”

I see this happening in other industries where profitability is a problem, namely ride-share and micro-mobility. Lyft Pink and LimePass try to do the same things— create loyalty where there is none.

Problem is, it creates stickiness on the customer side for those who can justify it, but it one company offers substantially better perks, it’s not worth it to stay.

Part II

So, where can these companies go next?

Two ways.

Outsourcing the delivery part of meal delivery.

Endgame scenario 1: Expanded delivery models 🚛

FedEx doesn’t function as a profitable business if it delivers one package every 45 minutes. Similarly, food delivery is tough to justify when in one hour, a driver waits around, grabs one order, and delivers it. Nobody wins financially.

So, what else can you deliver?

Well, as Postmates found out, small business packages. As UberEats (and Instacart, and Amazon, and Walmart) found out, groceries.

An incredible opportunity this pandemic has granted these companies is essentially forcing small businesses and restaurants to flesh out takeout infrastructure. It’s already been there, yes, but some places didn’t have it, and others didn’t bring it online. The more businesses figure that out, the easier it is for these companies to traipse around an area of town and pick up a package, a meal, and a grocery trip’s worth of food.

It becomes a whole lot more profitable if the “traveling salesman” graph can be optimized for three or four deliveries an hour instead of one. Think of this period as beta-testing that feature.

As mentioned, Uber bought Postmates, and a lot of people point to Postmates’ growing delivery segment as a great reason for the acquisition. I don’t buy it — they tried with GrubHub first, it failed, and then they focused sights on Postmates. It doesn’t seem like this is the primary reason Postmates would be worth an almost $3b deal. It does, however, give UberEats a robust reason to diversify.

Postmates quietly expands beyond meals. Source: Postmates

Uber might just be positioning itself to become what FedEx, UPS, and Amazon aren’t (yet) — the service of same-day, extremely localized, and extremely nimble delivery.

It’s bold, but it makes sense. True, they’re meal delivery services now, but there isn’t anything particularly specialized about the couriers besides their insulated food bags. In essence, they’re picking up a package and taking it from one place to another. To try and achieve profitability by including groceries and packages in that equation isn’t a huge stretch.

They’ve already partnered with Square, which is huge in the small business space. Again, this isn’t the primary reason that Uber bought Postmates, but it’s a growing sector they can take advantage of.

Endgame scenario 2: Cloud kitchens ☁️

Uber was founded by Travis Kalanick, but he left the company amid a scandal and sexist culture it was revealed he, at best, did nothing to surpress. He still left with about 100 million shares of Uber stock, which turned out to be a ton of cash when Uber went public. Evidently, he saw the trends his business created: a small segment of restaurants emerged where there was no dining room, waitstaff, or physical seating. Significantly lower overhead and operating costs, and more streamlined labor.

Instead of plates, the food goes directly out the door. Source: YourStory

Cloud kitchens. Starting a restaurant is risky business, but it’s less risky when you don’t have to maintain a dining room, pay waiters, or rent nearly as much square footage.

Skillsets can be slimmed to focus on food quality and volume. Money can be redirected towards higher wages or more space, for more kitchen, with more back of house staff. Even, in some cases, delivery cars. It’s also easy to replicate elsewhere.

Financially, it makes a ton of sense. The idea lacked the infrastructure — until now.

This is the endgame for food delivery companies.

Food delivery makes little sense for any side — restaurant, consumer, or facilitating company — if the traditional restaurant model is the only model.

Habits have been built. People won’t stop ordering food delivery once this pandemic is over, but there’s a recession on the other end; they WILL, en masse, stop paying for $25 burritos.

It’s worth noting that food trucks are (sort of) a good example of an attempt at this. High upfront for the owner, but little maintenance beyond that if the truck is stationary, and lower overhead. However, the kitchen is hard to scale up or down, given it’s in a tiny food truck.

TSO Chinese Delivery in Austin, Texas, has adopted this model — they offer no in-person dining, and only run their own kitchen and delivery operation. When ordering, it’s delivery or curbside. This is how it always operated, even before the pandemic.

Skip the dining room, and invest in their own delivery infra. Source: HappyCow

It works. Their business is booming. And they’ve been able to give a ton back to the community.

Of course, this is what the meal delivery titans are trying to avoid — they’re seeing none of the profits here. But if a restauranteur decides they don’t want to deal with the hassle of delivery, and also say no to dining rooms, it’s a win for both parties.

Restaurant groups like Kitchen United Mix will follow the example I showed earlier from Katy Asian Town, but this time they won’t bother with maintaining a separate dining room. They’ll rent out a big warehouse and set up ten different kitchens, all offering delivery and takeout.

If companies like Uber and DoorDash want to thrive in the cloud kitchen atmosphere, they will either strike exclusive agreements with this new breed of restaurant group, or encourage small businesses to pivot to cloud kitchens.

It’s most likely a combination of these two things that will bring them back into the black.

These companies are in luck, for now.

The industry is granted an adrenaline shot to stave off starvation. It’s not going to save them or the glaring problems of their business model. Pivoting, both in restaurants and in business model, is critical to surviving the upcoming winter