Food Delivery, Grocery Delivery and Winnable Markets

Owning demand is the most important goal for a marketplace. If a company owns demand, it. can have greater pricing power with customers. Pricing power refers to the effect that change in price on customer demand (ie. whether increasing price reduces demand for product). Companies gain and maintain pricing power by offering unique and differentiated products in the market. Greater pricing power leads to greater margins and a path to profitability.

The Challenge Food Delivery Companies Face

The problem for food delivery companies is that they don’t own demand or supply. They also don’t offer a unique or differentiated product. They compete on delivery time and fees. If a company doesn’t own demand, it can’t have significant pricing power.

Therefore, it can’t increase pricing and fees on its customers for fear of reducing retention. Margin can’t be made up by increasing take rate on the supply side (eg. restaurants) because the supply side is able to join every other food delivery service that is promising lead generation opportunities. Since customers don’t have loyalty for particular food delivery, customer acquisition costs are a major concern, hence the need for significant amounts of venture capital raised to reach scale.

Why The Grocery Delivery Market is a Potentially Better Opportunity

The grocery delivery market should be analyzed separately from the overall food delivery given that supply is much more limited and every major player is fearful of Amazon. This is the Instacart bull case. Let me explain further.

There’s about 40,000 grocery stores in the US, split between 5–6 major grocery chains, 50–100 of mid-tiers and 1,000s of independents. There are about 660,000 restaurants in the US across national and regional chains and independents. Grocery delivery has limited number of suppliers, compared to food delivery, making it easier to aggregate the supply side. The easier it is to aggregate the supply side, the more abstracted away it becomes and the customer begins to associate the marketplace experience with the service provider; not the supplier’s goods.

Another important point is that grocery chains tend to sell the same products, especially CPG goods, across their regional and national footprints. This provides Instacart with the ability to provide a consistent customer experience regardless of a customer’s location. Food delivery’s inherent breadth of restaurant selection makes providing consistent quality every time a customer orders from the app a significant challenge.

For Instacart, it helps that the major grocery chains own thousands of stores each and feel compelled to partner with them because of a common threat: Amazon. Smaller chains and indies in major metros will need to offer some sort of grocery delivery service in order to compete with the major chain. Enter Instacart again.

As Instacart signs up partners big and small, the company plugs into the inventory management systems of thousands of stores, giving it access to millions of SKUs and tremendous scale across 4,000 cities in North America. The company also signs exclusive delivery partnerships with these grocery chains, locking down product exclusivity. This narrows the competition to getting grocery delivery services from Instacart, from Amazon or taking a trip to your local grocer.

Instacart can begin owning the demand side of the marketplace because the company can provide a product offering to customers that the competition can’t: on-demand grocery delivery service from any grocer in their area, or approximately 15,000 stores in North America. Instacart’s growing scale, emerging ownership of demand and the threat of Amazon create a powerful incentive for grocery chains to work with the San Francisco-based company.

The grocery delivery market is such a massive and, most importantly, more manageable opportunity that Uber CEO Dara Khosrowshahi confirmed that it is the next on the UberEats’ roadmap:

I think that this product of delivering great quality food to you at home in 30 minutes or less is magical and is going to move into grocery in a way that’s fundamental and a lot more people are going to be eating at home…you can absolutely see grocery as being an adjacency.

Food Delivery Needs Differentiated Products

A few ways for food delivery companies can differentiate their product offerings is to focus on these product areas:

• Vertical-integration: Company can provide exclusive meal options to customers in their app, while taking a significantly larger cut of revenue from restaurant partners because of increased demand being driven to the supply side. Web Smith of 2PM, Inc. has a great analysis of UberEats’s execution of this “virtual restaurant” strategy.
• Increasing jobs to be done: Increase the daily share of meals served per customer that the company provides via product offerings like subscriptions and scheduled meals. This could (1) provide predictable costs and revenue for the company and its restaurant partners, (2) create behaviors that increase stickiness and reduce CAC, and (3) provide more convenience to its customers.

Vertical-integration and Jobs To Be Done are two frameworks that could open new growth opportunities, real pricing power, and a path to better unit economics for food delivery companies. There may be other frameworks to deploy, but these are the most-high impact that come to mind.

For previous posts on the food delivery space, read here.