By Preetika Rana and Heather Haddon
Food-delivery companies did record-breaking business during the
pandemic, as millions of homebound Americans embraced the idea of
ordering dinner via smartphone apps. Their valuations skyrocketed.
They acquired reams of data that helped increase their efficiency.
There was just one problem: Even at the height of their success,
they weren't making any money.
Now, as the pandemic wanes, companies like DoorDash Inc., Uber
Technologies Inc. and Grubhub Inc. are trying to address what could
be a life-or-death question: How can they make the math work?
"You really need to optimize things to the cent," said
Pierre-Dimitri Gore-Coty, the global chief of Uber's delivery
business, which includes Uber Eats.
Delivering food is an expensive logistical undertaking. Apps
earn money by charging restaurants a percentage of the order, as
well as by charging consumers a service fee. They then dip into
those earnings to pay drivers, their biggest expense.
After accounting for advertising costs and refunds to customers,
among other operational expenses, DoorDash on average is left with
2.5% of a customer's overall bill, according to a Deutsche Bank
analysis. That means DoorDash ended up with 90 cents on the average
order during the height of the pandemic, worth around $36.
The math isn't pretty, but it's the best in the industry. While
DoorDash hasn't posted an annual profit in its eight years of
operation, it slipped out of the red for one quarter last year,
becoming the only food-delivery company in the U.S. to do so during
the health crisis.
Analysts don't expect the companies to turn profitable for at
least a few more years. For now, they say, they're looking for the
industry to prove that it can continue to grow and improve profit
margins, even as diners return to restaurants.
"This is a cost-intensive business that is low-margin and scale
driven -- that is absolutely correct," said DoorDash Chief
Operating Officer Christopher Payne.
Executives at DoorDash and Uber have spent the past year testing
what they hope will be the secret sauce. They want to raise
customers' average order size by expanding into more lucrative
offerings like groceries and alcohol; bundle nonperishable goods
with food to drive down delivery costs; and use technology to
reduce errors by restaurants and drivers, translating into fewer
refunds.
Some rivals doubt that diversifying into new categories and
slashing operating costs is the key to profits. Grubhub, which
pioneered online ordering for restaurants for pickup or delivery by
the food business's employees and reluctantly embraced delivery to
ward off competition from DoorDash and others, is set to be
acquired by European giant Just Eat Takeaway.com NV next month. It
says it intends to go back to its roots as an online marketing
service for restaurants.
Food delivery "is and always will be a crummy business," Grubhub
Chief Executive Matt Maloney said. As restaurants recover, Mr.
Maloney believes more orders will shift away from app delivery, but
online ordering will remain popular, whether for pickup or for
transportation by the restaurants' own personnel. Grubhub's
advertising service, he said, will hold the key to its future
profitability.
Grubhub is skeptical about its competitors' varying bets.
"Everyone else in the industry is doubling down on their logistics
plays and talking about how smart they are and what a great
technology company they are," Mr. Maloney, the CEO, said. "I think
the right choice is to be a better restaurant company."
A game of seconds and cents
Shaving seconds off a transaction can mean the difference
between an order that adds to or subtracts from the bottom line.
The companies have used lessons learned over the past year to
improve efficiency and reduce some operational costs.
DoorDash driver Mark Ferguson says the app now makes more
efficient use of his time -- something he noticed when he started
delivering food again in March after a yearlong hiatus. The app
matches him with restaurants closer to the time orders are ready,
cutting his waiting time.
The 47-year-old, who has logged more than 6,000 DoorDash
deliveries since 2015, also saves time en route to deliveries
because the company has integrated Google Maps into its app
interface for drivers. Previously, if he wanted to use Google Maps
he had to toggle between the two. Deliveries have become smoother,
too: So-called Dashers are asked to upload photos, which customers
can see, showing where they leave the food, reducing reports of
missed orders.
"The way that I spend my time as a Dasher changed," said Mr.
Ferguson.
Deutsche Bank says that DoorDash drivers made 44% more
deliveries in an hour at the height of last year's pandemic
lockdowns compared with three years earlier.
There are still plenty of roadblocks along the apps' route to
profitability.
While early data show that consumers who embraced the apps
during the pandemic may stick around as the health crisis fades,
growth is expected to slow from the breakneck pace of 2020.
More than 70 U.S. municipalities or states, seeking to help
local businesses, temporarily capped what apps could charge
restaurants last year during the pandemic, according to the Protect
Our Restaurants advocacy group. Major cities are considering making
those changes permanent, a move that would squeeze apps' already
slim margins.
As road traffic increases and restaurant kitchens run at
capacity again, operational efficiency may decline despite the
measures app companies have taken. Some big chains are reducing
their reliance on delivery already, raising menu prices on apps and
investing in high-tech pickup services to drive more direct
orders.
At Chipotle Mexican Grill Inc., online orders accounted for
nearly half of the chain's $6 billion in sales last year, up from
11% in 2019. Delivery accounted for about half of those online
sales, but emerged as the least profitable category.
Chief Technology Officer Curt Garner said Chipotle's prices on
delivery apps now average 17% higher than those in stores after
company data scientists did market research on how much they could
raise costs.
The company also found that more customers opted for
online-order drive-throughs when they were available, Mr. Garner
said. Chipotle is now building dozens of "Chipotlanes" across the
country.
Food-delivery apps, mindful of restaurants' pullback, have
started altering their terms. Late last month, DoorDash said it
would allow restaurants to choose from three commission rates,
offering varying degrees of marketing and product support based on
the selection. Uber is experimenting with something similar.
Previously, restaurants didn't have a choice. Some bigger chains
used their scale to negotiate commissions as low as 15%. Many small
restaurants paid apps as much as 30% of every order. Grubhub this
month joined its rivals in saying it would build individual
websites for independent restaurants for a monthly fixed fee,
instead of extracting commissions on each order. The move is
designed to give restaurants more access to consumer data, the
company said.
Apps are also appealing to regulators. Uber and DoorDash
representatives met in April with members of the New York City
Council who were considering making 20% commission caps permanent.
Uber argued that it is a smaller and better actor in the city
compared with its competitors, according to a person briefed on the
discussions. DoorDash told the lawmakers that it had discontinued
certain practices, such as listing restaurants on its app without
their permission, this person said. The Council is still
considering extending the cap or making it permanent.
Bigger orders, fewer errors
DoorDash and Uber have spent the past few months positioning
themselves to offer more than just food. Executives say the move
gives customers reasons to keep coming back -- and they believe the
habit will stick. Together, the companies control over 85% of
food-delivery sales in the U.S., according to market-research firm
Edison Trends.
In the middle of last year, the two companies expanded to
delivering groceries, alcohol and household supplies like toilet
paper. Part of the pitch: the ease of ordering everything on one
app.
Uber says that starting next month it will allow consumers to
combine their food order with a convenience run from a nearby
store. DoorDash is testing a similar feature.
A grocery or alcohol order is typically more lucrative than
food, so apps can drive up people's basket sizes and, in turn,
their revenue. They can also get "better and better about
upselling," said Mr. Payne, the DoorDash COO. Now, he said, apps
can ask: "Do you want fries with that? Do you want a Cabernet
Sauvignon with that?"
Non-restaurant orders accounted for 7% of DoorDash's orders in
the first quarter of 2021, and grew at a blistering pace of 40%
compared with the fourth quarter of 2020. Earlier this month, the
company raised its full-year outlook on the total value of orders
placed on its platform.
The strategy is also helping apps drive down their biggest
expense: the cost of the delivery itself. Food-delivery apps
couldn't always wait to combine a tiny order with a more lucrative
one because hot meals needed to be delivered quickly. Executives
say expanding into nonperishable items is letting them bundle
deliveries in a way they couldn't with food alone.
Analysts say food-delivery penetration is still low despite last
year's rapid adoption -- only 6% of the U.S. population uses
DoorDash, the nation's biggest food-delivery service by market
share -- so "outside of a city like New York, it's still very early
days," Deutsche Bank analyst Lloyd Walmsley said.
DoorDash leapfrogged its rivals to command more than half of the
U.S. food-delivery market in January, up from one-third a year ago,
thanks to a strong footprint in the suburbs that drove large,
family-style orders, a wider selection of restaurants and better
operational efficiency that helped it win business from
consumers.
An open question is whether its suburban footprint will continue
to serve as an advantage. Drivers have more ground to cover, but
deliveries can be faster because of less traffic and shorter wait
times, such as less time spent trying to find parking or taking
elevators to restaurants or customers' apartments. Labor is cheaper
too.
Another way the companies burn money is by refunding consumers.
Sometimes, small product changes can make a big difference.
Uber's Mr. Gore-Coty was struck at how many consumers complained
about missing combo meals during the early months of the pandemic.
When he dug into the problem, he found that in fact, major parts of
the combos generally arrived, but often missed items like a side
salad or dessert.
The app didn't allow consumers to say that one of the items
within the combo was missing, leaving Uber to refund the cost of
the entire meal. Last summer the company began allowing consumers
to break down items missing from a combo.
To minimize errors, apps are tweaking the technology they
provide restaurants, too. Before the pandemic, the item most
commonly missing from Cheesecake Factory Inc. delivery orders was
cheesecake itself. Restaurant staff would pack hot food but leave
cold cheesecakes to be packed later. That increased the likelihood
that staffers would forget about the cheesecake.
DoorDash's solution was to integrate reminders into the
restaurant's delivery tablets so orders with cheesecakes displayed
notes in big, bold letters. The change reduced missing desserts as
staffers were less likely to overlook them when they handed orders
to Dashers. DoorDash says cheesecake is no longer its
most-forgotten item.
DoorDash used what it learned from the Cheesecake Factory to
minimize errors at other restaurants as orders surged. It began
placing instructions from customers, such as no cucumbers on a
salad, in a larger font above the order so kitchens saw it before
preparing meals.
"A lot of it has to do with tech placement -- bold versus red
versus other things," said Toby Espinosa, a DoorDash vice president
who previously worked with restaurants on the technology. "A small
little thing like this can drive a crazy amount of operational
output."
Grubhub is developing a customer guarantee for its orders. If a
delivery is late, for example, Grubhub will cover the cost and
offer customer credits, even if it's the restaurant's fault, Mr.
Maloney said. Mr. Maloney said he expects his business to make
money once restaurants are operating at full capacity and
profitable again, allowing them to spend more on advertising
services such as Grubhub.
Seeking new customers and clients
Apps are seeking ways to attract new users without overspending
on advertising dollars -- another drag on their bottom lines.
Uber's Mr. Gore-Coty is relying on its ride-sharing app to
attract new Eats users. Last month, Uber introduced new features
that further entwined its ride app with its delivery business so it
could drive up Eats orders as people begin moving around again.
One feature enables passengers to book and pick up meals while
en route somewhere in an Uber. The company began pinging passengers
requesting trips from airports, asking whether they would like food
delivered to their destination through the Eats app.
Some 13% of Uber Eats' new users in the fourth quarter navigated
to it from the rides app, making executives confident that the
number would accelerate after the latest changes.
Apps are also trying to find ways to convert more users into
monthly subscribers. Subscribers pay the apps a fixed monthly fee
in exchange for reduced fees on orders. They tend to order more
frequently and have bigger basket sizes compared with
nonsubscribers.
Both Uber and DoorDash are offering free trial subscriptions,
hoping consumers stick around once they buy into the convenience.
Deutsche Bank estimated in January that if DoorDash doubled its
monthly subscribers this year, it would post yearly growth, even if
order sizes and frequency fell to pre-Covid levels.
DoorDash's shares are up nearly 50% from its IPO listing price
in December. Uber's shares crashed in mid-March of last year, when
widespread lockdowns crushed its core ride-sharing business, but
have more than doubled since then. Grubhub's stock lept after the
Just Eat acquisition announcement last year and continued to grow
last year, but has cooled since.
One strategy that is helping Uber and DoorDash drive more
profitable deliveries is handling the logistics for businesses
beyond restaurants. While the companies struck some partnerships
before the pandemic, they doubled down on the offering as many
kinds of businesses grew more reliant on delivery during the
pandemic. Customers order directly on those businesses' websites,
which then turn to apps like Uber and DoorDash to fulfill them.
DoorDash now provides delivery services for Walmart Inc., Macy's
Inc. and Petco Health and Wellness Co., among others.
These orders are more profitable because apps don't need to
refund consumers for errors, nor do they need to spend money on
marketing. Clients like Walmart bring big business, meaning drivers
typically carry more than one order at the same time, lowering
apps' delivery cost.
Deutsche Bank's Mr. Walmsley estimates that DoorDash makes a
profit of $2 on such a delivery, as opposed to the 90 cents it made
on the average food order in the middle of last year.
In such setting, even minor gains in efficiency can mean the
difference between losing and making money: "It's a game of seconds
and inches," Mr. Walmsley said.
Write to Preetika Rana at preetika.rana@wsj.com and Heather
Haddon at heather.haddon@wsj.com
(END) Dow Jones Newswires
May 28, 2021 05:44 ET (09:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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