The Evolving Food Delivery Landscape
Learn more about the consolidation of third-party aggregators and the emergence of direct models.
Last Updated: December 31, 2020
Published: July 23, 2020
At M13, we spend our days trying to understand changing consumer behavior—that is no easy feat, especially during the age of COVID-19. While the way we live has evolved with the reality of a global pandemic, one thing remains constant: we all still need to eat.
Food is an area that has long been near and dear to our hearts at M13. As early investors in brands like Daily Harvest and Thrive Market, we see the potential for food companies with tech infrastructures to truly revolutionize access, sustainability, and affordability. A major focus area today, understandably, is how we physically get our food—we believe we are at a tipping point for food delivery for both restaurants and grocery stores. Let's explore the increased adoption of delivery models, and what the future holds for food suppliers.
How can consumers obtain their food: discovery or direct?
If software is eating the world, then food is a category ripe for disruption, and technology is driving several already existing—and frankly opposing—trends in how we consume our food. COVID-19 has accelerated these changes. At the center of the shifting food ecosystem is, perhaps unsurprising, delivery. Two-thirds of Americans plan to buy groceries online within the next 12 months, and even before the coronavirus, off premise dining comprised 60% of restaurant occasions (that number is significantly higher now).
Consumers value convenience, and any previously existing friction to adoption has been forced out by the safety concerns caused by the pandemic. Now that it’s clear customer adoption is happening, the key question is who will win in the category?
We believe there are two ways to address this question, and they're directly in tension with each other:
Consolidation and verticalization of the delivery aggregators, which will leave no other choice for grocers and restaurants than to host on their platforms
The emergence of new direct models that will help fragment the market, allowing for multiple winners
Why is consolidation occurring?
Delivery aggregators offer consumers a marketplace to conveniently discover and order food, and in turn, these hungry, high-intent customers serve as demand generation for the participating restaurants. An aggregator then fulfills the order, collects its take rate, and all parties are happy. Well, not quite. Consumer switching costs are essentially zero and many restaurants host on several platforms, so aggregators have to spend considerably on marketing to incentivize customers to return. In addition, last-mile delivery costs are extremely high, typically conducted with couriers.
On the supply side, restaurants are constantly pushing back on the platforms’ take rate (more on this below). This results in a cutthroat, highly competitive delivery market that is largely unprofitable and unsustainable.
As Uber’s intended $2.65 billion acquisition of Postmates and DoorDash’s acquisition of Caviar from Square suggests, consolidation is occurring to buoy the economics by reducing competition and creating local duopolies or monopolies (although antitrust concerns here are legitimate). The magnitude that consolidation has on the aggregators’ bottom lines remains to be seen, however. Furthermore, several of these aggregators are also verticalizing up the supply chain, developing their own ghost kitchens and even their own delivery-native brands.
As the pricing power delivery aggregators have over their restaurant partners increases, there is a rising tension between the parties leading to the emergence of alternative options. We see a similar trend in the grocery space with the rise of Instacart—more on this below.
The unbundling of aggregators
On the other end of the spectrum, food suppliers—from restaurants to grocers to individual chefs—are simultaneously moving away from aggregators. Customers, too, are expressing more interest in supporting small businesses directly.
On the restaurant side—as the mix toward delivery and the aggregators’ take rate increases (sometimes up to 40%!), cutting harshly into margins—the value prop of demand generation, net new sales and order fulfillment begins to diminish for the restaurateur. Suddenly, the concept of managing a direct ordering process might become appealing, especially given the rise of enabling software providers that are now helping restaurants conduct delivery and marketing services. Restaurants are not only able to save on margin, but they're also able to build direct relationships with the customer, something they were strictly prevented from doing by the delivery aggregators.
A similar dynamic is taking shape in the grocery market. Historically an industry with low online penetration (3% in 2017), the $700 billion space is seeing online sales finally cross 10% as the pandemic forces adoption that we believe is here to stay. Instacart is leading the charge with over 50% market share, with Walmart in second. Like Walmart, we believe that large grocers will bring delivery in house as there is a natural hesitation around being too dependent on Instacart.
The last area where we see unbundling is with the individual and the rise of peer-to-peer eating. As layoffs and restaurant closures affect professional and recreational cooks, they are realizing the ability to cook for consumers without going through a restaurant. Recent legislation has made this possible, and our portfolio company Shef is providing the infrastructure and marketplace for cooks to sell to consumers and strengthen their own brands. We are excited to watch this category moving forward.
So what happens next?
While our tone on the third-party delivery space might sound negative, we still believe this space is going to continue to grow (with or without COVID-19). For many restaurants and grocers—especially the long tail—the aggregator appeal is too great to turn away, even at the expense of decreasing already razor thin margins. With municipalities increasingly limiting the take rates of third parties, perhaps there will be some room for mom-and-pop restaurants to push back against the pricing pressure caused by the tide of consolidation.
But for the middle segment of the food supplier market that will always be in tension with third parties, we expect a growing percentage of them to unbundle and leverage the set of third-party tools that allow them to set out on their own. Ultimately, whether it be grocers, restaurants, or individual chefs, the best brands will win—and as investors and consumers, we look forward to what the future of food has in store.