Last year most of the world has been locked down because of covid-19 containment measures and while most businesses inevitably suffered from reduced mobility, some prospered in the “stay at home” economy. Food delivery is one of those sectors that saw an incredible surge in demand, as millions of people still wanted to order from their favorite restaurants. However, the best food delivery market conditions in history were not enough for most delivery companies to turn a profit, which is an indicator of a much bigger problem in current markets.
The numbers
Uber’s “Uber Eats” division, DoorDash and Grubhub are all perfect examples of major businesses in the food delivery industry that lost money in 2020 despite the US Food Delivery app revenue growing from US$ 22 billion in 2019 to US$ 26 billion in 2020 (Data: Statista, McKinsey, Morgan Stanley). These three companies combined, currently have 85% of the US Food Delivery market share, while the total number of users grew from 95 million to 111 million in just a year. But the sharp rise in new customers and sales still couldn’t make food delivery profitable, as its low-margin model and more than proportional cost structure are making analysts question whether these businesses will ever turn a profit, also considering that going back to normal will cause worse market conditions. To put things into perspective, last year Doordash posted a net loss of US$ 461 million, Grubhub a net loss of US$ 156 million, and Uber Eats lost US$ 1.36 for every delivered meal (the entire company “Uber” lost 6.8 billion dollars), while the three companies are currently worth approximately 156.85 billion dollars combined.
The causes
The main causes for food delivery companies being unprofitable are rising costs and low margins. In 2020 and, also in previous years, costs have been going up because of aggressive competition in the market, which led to increased marketing expenses and a price war in order to gain more market share, which is the main goal for every unprofitable “tech” company that desperately needs something to show to its investors. Grubhub spent $27 million in advertising in the U.S. between Feb. 2 and April 27, up 40% from the previous year's period, while DoorDash boosted advertising spending by 35% and Postmates increased ad spending by 82% (Data: Wall Street Journal). The goal of this war is not just the customer, it’s also about attracting the best restaurants, and since most of them saw a decrease in revenues, they asked for a reduction in commissions, which in some cases make up for 30% of the price paid by the customer. All of this led to a decrease in commissions and, some states in the US even imposing limits on how much delivery apps could charge restaurants for their service. Therefore, some business owners decided to turn their back on delivery services and started doing the job themselves, in order to keep a more direct connection with the customer and higher margins. Another problem of the food delivery business model is that every company is interchangeable, everybody provides the exact same simple service and the only leverage left to the individual enterprise is the price, as it doesn’t really matter how fancy the app looks like or the color of the rider’s backpack, as long as meals are delivered on time and the customer gets to choose from his favorite restaurants. However, since these companies are using an app instead of a phone call they are considered “tech”, with tech valuations but no prospect of being profitable.
More threats to the industry
Delivery companies have always tried to sell themselves as intermediaries between restaurants and the delivery person, but this narrative is far from reality. Apps usually use algorithms to organize work, shifts, or even sanctions against the “independent workers” if they make a mistake, which is starting to catch the attention of governments all around the world. Many countries in the EU, for example, see the way delivery guys are treated as unfair and are starting to impose sanctions or forcing companies to formally hire their employees. In Italy, Uber Eats, Glovo-Foodinho, Just Eat and Deliveroo have been sentenced to pay a 733 million euro fine for lack of safety standards for their workers and will need to hire 60 000 to guarantee health insurance and a sustainable work schedule (Source: Milano Finanza). This all represents more costs and even lower margins for a future that looks “uncertain” at best.
A bigger problem
Food delivery companies are just one of many examples of businesses that do not (and probably never will) serve the central goal of any functioning business: turning a profit. In the world of close to zero interest rates and unlimited quantitative easing, it seems like stocks are just numbers and zombie companies can outperform solid firms with strong fundamentals. In our next article, we will talk about how current monetary policies have led to this controversial situation and why it might cause one of the worst stock market crashes of the century. Stay tuned and SUBSCRIBE to become a MarketsTalk member and get free access to discussions!
