29th April 2020
In the last decade, the food-delivery world has been going through a period of significant growth. Many companies have made space in this industry: from the giant champions of delivery to KaaS (kitchen as a service, the rental of spaces for cooking), passing through delivery-only restaurants (both part of the world of Ghost Kitchens or dark kitchens).
It is possible to compare what happened in recent years in the food-delivery market with what happened in the retail world with the "Amazon cyclone". The Bezos' giant has gone from being an excellent opportunity to expand its online business, to the status of "meat grinder" of small and large retailers.
Today, restaurateurs are not only challenged by the advancement of these new business models. Still, they may be forced to accelerate the digitisation process due to the lock-down imposed by the Coronavirus. The pandemic has also shuffled the cards on the table for all components of the industry, including the more digital and recent food delivery companies such as Glovo, Deliveroo, and Uber Eats.
In a context of strong change, what will be the trends for Food Delivery in Europe? And what could be the answers of individual caterers? What are the impacts that the Covid-19 crisis is having on this sector? What can be expected from the resumption of activities?
The Covid-19 effect: two contrasting trends
The isolation of millions of people around the world due to the Coronavirus should have been the perfect recipe for the thriving food delivery market. The statistics and data analysis platform Statista, in a survey conducted among U.S. citizens, reported that more than 40% of consumers would order food online, with an additional 30% saying it was likely to happen.
Nevertheless, some of the world's biggest players, including Uber Eats and Just Eat, have been hit by a double "setback": restaurants have been ordered to close and people, having more time to cook, seem to have lost their appetite for takeaway.
Indeed, some restaurateurs reacted and switched to offering their service on digital media, pushing many of their customers to download delivery applications. But it's true that the cost of supporting employees in the kitchen, combined with a massive degree of uncertainty about orders number, makes it challenging to keep this temporary business situation sustainable. Some of the world's largest food chains (even those already using apps), such as McDonald's and Wagamama, have closed their restaurants in the U.K. for the time being.
SimilarWeb, an agency that tracks downloads, app use, and websites (on smartphones) in all major European markets, has highlighted and confirmed the extent of the slowdown across Europe. In France, Spain, and the U.K., Just Eat and Uber Eats saw a drop in average daily users from 2% to as much as 23% in March, compared to averages in January and February. In France and Spain, Deliveroo also saw a slowdown (partially offset by a small increase in the U.K., as shown in the chart below).
Figura 1. Covid impact on food delivery business (Source: similar web)
According to SimilarWeb, the drops reflect a sharp reduction in orders from regular customers (around 90% of app activity is repeated orders). The figures also contrast sharply with the percentage (double-digit) increase in food delivery volumes (quarantine has led the population to stockpile food quickly).
Just Eat and Deliveroo refused to comment on the data, although the second one has recently announced significant staff cuts, effectively confirming the negative momentum. While a spokesman for Uber stated that the impact of the virus had varied widely across Europe, but he also said he had seen substantial increases in restaurants and shops that have signed up for the app.
These numbers give an idea of how the virus has rapidly changed people's eating and cooking habits and put a brake on a rapidly growing industry. Food delivery revenues in Europe were up 10% annually with a forecast of a potential $25 billion market by 2023 (according to Deloitte's "Delivering Growth" report).
A snapshot of the European market and its possible future implications
Figura 2. The Sift – The future of food delivery (fonte: The Sifted)
Food delivery on the eve of the crisis
Europe is home to several big players in the world of food delivery: Just Eat, Takeaway.com, Delivery Hero, Deliveroo, Glovo, and Wolt are used every day by millions of users. Today using this services seems obvious to us, but the reality is that many of these companies have only existed for a decade. Deliveroo, based in London, is just six years old; Glovo, based in Barcelona, is just four years old; and the U.S. spin-off Uber Eats only arrived in Europe in 2016. It can be deduced that the market is still very young, with wide margins for growth and evolution. Moreover, it has not yet found an "owner" for the European market, and this will lead the different companies to compete to provide the best possible customer experience in terms of quality, time and cost.
Meanwhile, Venture Capital funds continue to have a healthy appetite for the sector. In 2019 (figure 3), over 1.6 billion euros were invested in European food logistics and delivery activities (4.3% of the total 34.3 billion invested in startups).
Figura 3: Investments in Food Logistics and Delivery in Europe (fonte: Dealroom)
Every food delivery platform tries to solve an extremely complex logistic problem. Moreover, facing this challenge is not easy at local level, but especially at the level of scalability in other regions. The few entities that can provide a fluid and effective service, Deliveroo and Glovo, are obviously planning to grow further, entering the world of "Ghost Kitchen".
In particular, Glovo is expanding into food delivery, while Deliveroo is moving to the supply chain side. But they have to be careful. As these platforms expand across the board, smaller startups are focusing on other verticals: managing kitchen space for rental kitchens, designing food brands for home delivery-only, providing food on demand, building restaurant ordering software, and managing courier services.
The growth of Ghost Kitchens
The catering business can bring considerable satisfaction, but it is difficult and complicated (managing the supply, the rotations of the seats, improving the tastes, and paying attention to opinions from customers). As mentioned above, delivery apps have presented themselves as an opportunity to increase revenue by adding an online sales channel to restaurants. Many restaurants have seen their profits simply shift from offline to online orders, with a limited overall increase in sales.
The idea behind ghost kitchens is to directly cut the offline part of the business in favor of the digital part, eliminating frontline staff and saving on rent. While there is a growing desire to serve customers directly online, there is also an increasing need to create adequate space for this purpose. An opportunity that was immediately seized by delivery platforms, which, by renting the kitchen spaces, would support entrepreneurs in launching their idea in the food world and restaurateurs in increasing the production capacity to serve their customers.
There are currently three main business models in the world of ghost kitchens. First, there is the Kitchn' Box offering, which rents kitchen space to food companies (KaaS, kitchen as a Service). Secondly, there are the "hybrid" delivery platforms like Glovo, which rents kitchen space like Cooccio (a kitchen space in Barcelona), and then sells these brands on its platform. Finally, several "delivery-only" companies are spreading, among which it is worth mentioning the various Taster, Epic, and Honest Food.
What consequences for the spread of Ghost Kitchen
The delivery platforms will not only offer kitchen spaces but will try to integrate even more the Ghost Kitchen model in their offer. Not surprisingly, Deliveroo already launched its first "Editions" in 2016 and Glovo, followed by its "Cook Rooms" in 2018.
This integration may be even more widespread in the future, also considering the implications of the quarantine imposed by the Coronavirus (in particular the closing of restaurants), bringing a strong change in the sector for several reasons. First of all, by becoming "producer" and "seller", synergies are achieved in both worlds. On the delivery side, it is possible to retain all revenues instead of sharing them with the restaurant. On the restaurant side, by exploiting the Ghost Kitchen model, costs can be significantly reduced by saving on staff, rent, insurance, etc. Besides, a restaurant that today uses delivery platforms does not have control over the data and consequently acts and modifies its proposal only based on its monthly sales. At this point, instead, players like Glovo and Deliveroo could take advantage of all the data available to build a perfectly tailored offer for their dark kitchen customers.
Who benefits from the delivery platform/dark kitchen combination?
The winner of this dynamic is undoubtedly the end customer, who will have a better service than the current one, with quality products delivered quickly and in a cheaper way (provided that the various Glovo and Deliveroo decide to share the savings on the margins of the restaurateur with their customers). The other winners are the delivery companies, which will continue to increase their presence in the homes of Europeans, improving services, and rising earnings.
The crisis brought about by Covid-19 has unquestionably shuffled the cards for the future, postponing industry forecasts until normality is restored. One possible scenario is the creation of a real infrastructure that will feed the entire market, making home cooking increasingly uncomfortable and less affordable. The emergence of "Amazon-like" players in food delivery is a potential consequence of customers becoming more loyal and even more connected and the development of a reliable and advantageous production and logistics infrastructure.
But who among the European startups would be the actual Amazon of food delivery? To date, it is difficult to predict, considering the numerous players present and the uncertainty due to the current market situation. Glovo defines itself as "everything delivery" but has strategically chosen not to operate in cities already controlled by larger companies. Deliveroo is focusing on the supply chain but is still experimenting a lot on the business model.
A risky but plausible prediction is that some of these companies may one day merge for market needs (and it makes even more sense given the economic squeeze that different European countries are experiencing), creating macro-entities in food delivery. It's no coincidence that the merger between Just Eat and Takeaway.com, which created a £9 billion giant, has recently taken place.
The possible response of restaurateurs
In an ecosystem on the verge of further upheaval, what role can restaurateurs play? The quarantine blockade has led to a profound reflection on the whole sector. Surely, once a possible reopening is determined, restaurants will try to push more and more towards digital, even if this may not happen in the most obvious way. The advantages of working with a delivery platform like Glovo or Deliveroo (marketing, logistics, customer service, additional revenues) are not so evident. The CEO of one of the main European ghost kitchens stated in an interview on Sifted that not many companies have benefited from working with Glovo, Deliveroo, Just Eats, and so on. Also, Flipdish (3PL specialized in food delivery) claims that 85% of online restaurant customers are still loyal customers, specifying that the marketing and additional revenue support provided by the delivery platforms is marginal.
As a result, the most plausible move seems to be to find a specific vertical, win a customer base, and maintain control of the data. Translated? Restaurateurs, large and small, could go back to "working alone" (by opening their own delivery/ghost kitchen). Several startups in Europe have the mission to support workers in creating their own independent online businesses (the above mentioned Flipdish is an example, but we can also find Runmeal, Weorder, Orderswift and many others).
This phenomenon is not new in the world of the digital economy. It is possible to exploit the usual parallelism with the Amazon case. In recent years the market of D2C (Direct To Consumer) brands has been developing, representing all those companies that decide to interact directly with the customer offline and online. It is possible to identify a segment of the D2C market, called DNVB (Digital Native Verticals Brand), containing all those brands that are born exclusively in the digital world (some relevant examples are Warby Parker, Allbirds, and Dollar Shave Club).
It may seem counterintuitive to challenge the convenience and the overwhelming power of Amazon. Still, these brands, working in niche markets, eliminating middlemen and investing heavily in modern marketing channels, have managed to build multi-million dollar businesses.
In the wake of the growth of the Direct To Consumer model, several global brands have decided to launch their D2C channels. Among them, Nike expects to bill $16 billion by the end of 2020 from direct online sales. It is not difficult to imagine a future in which the large chains, European and non-European, can do the same with the different parameters of the catering world, especially after the Covid-19 emergency has shown how important it is to effectively operate online.
With a new decade just begun and with all the upheavals of recent weeks, there are many changes we can expect in the world of Food Delivery, knowing that in ten years' time, the way we eat lunch and dinner will still be completely disrupted.
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