Food delivery companies vying for a slice of the pie

SINGAPORE — Like their ride-hailing counterparts, food delivery companies have massively disrupted their respective industries, overtaking traditional food deliveries made by eateries selling pizzas and fast food.

However, just like Uber and Grab, the bigger food delivery players such as Deliveroo and Foodpanda have also recorded losses in millions each year as they remain heavily reliant on venture capital.

Experts and industry players told TODAY that these companies will have to be more efficient and make better use of technology to remain profitable, and the bigger players will be more likely to survive as the industry consolidates.

Economist Jochen Krauss, a managing partner at international pricing consultancy Simon-Kucher and Partners, is one of those who believe the companies will have to improve their efficiency through the scale of their operations.

Foodpanda Singapore, for one, appears to be going in that direction, as its managing director Luc Andreani wants to eventually remove the delivery fee by next year or 2020. For a start, customers using the platform in selected areas of Singapore, such as the central areas, would not have to fork out delivery fees this year. This would entail improving the efficiency of its backend operations such that riders can take on more orders, he said.

While he would not comment on profits and losses because it is a listed company, Mr Andreani added: “We are sustainable as a business for the fact that we have been in the market for five years and we have great restaurant partners with us.”

UberEATS and Deliveroo in Singapore also did not want to comment on their financial health.

UberEATS Singapore's general manager Shri Chakravarthy Gopalakrishnan said that the company is “in this for the long-term”. “What we have seen has been an evolution of the industry. From a place where you used to order pizza on Friday nights… it’s becoming more of an everyday thing,” he added.

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THIN PROFIT MARGINS

The rapid growth of the bigger food delivery companies has been closely watched by investors and stakeholders. In 2016, Berlin-based Foodpanda raised some US$318 million (now about S$511 million) in funding before it was acquired by online food delivery firm Delivery Hero, also based in Berlin, Germany.

That same year, London-based Deliveroo raised US$275 million (S$390 million) in funding and made about 129 million pounds (about S$230 million) in revenue, but it also registered an operating loss of about 141 million pounds due to high costs. Last year, it managed to raise US$385 million in a new round of funding.

In Singapore alone, Deliveroo recorded a net loss of S$16.86 million in 2016, The Business Times reported recently citing BizFile data. Foodpanda Singapore lost some S$3 million in 2014, while data on UberEATS Singapore is not available.

Fastbee.sg, one of the smaller start-ups here, told TODAY that most, if not all, of the food delivery platforms in Singapore are operating at a loss and surviving on venture capital, or unsecured funding provided by specialist firms in return for a proportion of the company’s shares.

Its founder Khoo Kar Kiat, 34, said: “The vision of a winner-takes-all and economies of scale propelled by ever-improving technology (and better delivery algorithms) keeps the industry going. The consolidation will eventually happen and only a model that could truly bring down operational cost and (allow the business to) scale up efficiently could survive.”

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INVESTMENT IN TECHNOLOGY

Associate Professor Boh Wai Fong, from Nanyang Technological University’s Nanyang Business School, said that food delivery companies need to be able to create a platform that attracts a sufficient volume of merchants and customers to succeed. They also need to develop algorithms and programmes to analyse the data and determine the most efficient routes.

When these happen, such developments become entry barriers for the smaller players, especially when they are competing with existing players who may have investors willing to fund their initial expansion, she said.

“In the long run, I do see that there will be a food delivery industry, but it is likely to be dominated by a few companies, rather than many small companies. There are economies of scale in terms of data collection and network externalities that allow successful firms to attract more merchants and customers,” she added.

It remains to be seen whether the main players here will be able to become profitable and sustain their business in the long run. For now, as part of their earnings, Foodpanda, Deliveroo and UberEATS charge Singapore customers a delivery fee of about S$3 to S$3.50, depending on whether buyers meet the minimum order amount and the restaurant partners from which they order. The companies also earn from the commission they charge their restaurant partners, which is believed to be about 30 to 35 per cent of the restaurant’s orders.

Mr Krauss is of the view that the market will not be able to accept higher delivery fees or commission rates.

Fried chicken chain 4Fingers’ chief executive Steen Puggaard said that consumers here have been “spoiled” by the low cost of enjoying the convenience of home deliveries, which is “simply not sustainable in the long term”.

“As long as consumers are only being charged S$3 for delivery, it is largely an unprofitable proposition to do home delivery when you add up the cost of raw material, labour, rent, and commission to the delivery company,” he added.

JOSTLING FOR MARKET SPACE, MANPOWER

Even if the food delivery industry settles into one that is dominated by big players, Mr Krauss said that there would still be room for smaller players to provide niche options, such as the delivery of healthier food.

Typically, consumers would be willing to pay a premium for more unique options, and “a little scale” is still necessary for such start-ups, he explained. “Competing against the big ones with a mainstream offering and having no scale most probably will be a failure.”

Porterfetch, a food delivery start-up that caters to those who want late-night meals. Photo: Raj Nadarajan/TODAY

One of the boutique players that entered the market here recently is Porterfetch, which specialises in delivering food outside the operating hours of the big players, marketing itself as a provider that curates quality supper food and offering a more personalised service.

Regardless of the size of the business, the issue of manpower — in particular those who are making deliveries — is a key consideration.

When Foodpanda entered the Singapore market in 2012, it tried to attract the smaller eateries and restaurants which would welcome the higher volume of online orders. Today, the bigger brands — often those with their own delivery services — are showing interest in the service partly because they are struggling to get their own delivery fleet, Mr Andreani said.

“The biggest challenge isn’t getting enough orders, it’s getting enough riders to fulfil these orders… and we are all fighting for the same pool of riders,” he added.

For instance, Foodpanda has tied up with coffee chain Starbucks, while competitor UberEATS announced its partnership with fast-food chain McDonald’s Singapore last October even though there is a McDelivery service.

IMPACT ON ENVIRONMENT

While the survival of the fittest plays out in the competitive marketplace, the increasing popularity of food delivery companies has prompted concerns about the industry’s impact on the environment, particularly with the use of disposable packaging and cutlery.

Deliveroo Singapore’s general manager Siddharth Shanker said that the firm has started providing an “opt-in” function for plastic cutlery with some of its restaurant partners, and aims to have nearly all of them offer this option by the end of the year.

Last month, TODAY reported that Foodpanda planned to give customers the option to say “no” to disposable cutlery.

Mr Shanker said that Deliveroo’s own “Frank” algorithm, based on predictive technology, has also helped reduce the company’s carbon footprint by distributing orders efficiently and providing the shortest route for riders and cutting down on emissions from their vehicles.

ADDITIONAL REPORTING BY ANGELA TENG