Friend or Foe? - The Food-Service Dilemma

This piece is Part 1 of a study that will seek to gauge an inside look at the workings of modern delivery kitchens and the problems faced by them. 

Food is not meant to be a pricey affair, but it seems to be the norm nowadays. Why is there a difference between eating out and ordering in? Has food really gotten expensive, or has the industry been forced to adapt to uncontrollable changes? 

Let us delve a little into the workings behind the Mobile Food Delivery Aggregator platforms and reflect on its journey from emergence to where we stand now. Over the years, as food and beverage establishments look towards improving their reach to consumers and growing from a conventional delivery channel to a platform-oriented one, the methods with which they can do so have been merged by Food Aggregator platforms. 

Significant growth is predicted for food aggregators on a global scale; being an industry, powered by the gig economy which has swept North America, Europe and Asia in the past decade. China’s food delivery apps have the largest userbase and market penetration, reaching over 650 million people, the US is the second-largest market and the most well funded.

For anyone vaguely familiar with the workings of a food and beverage outlet, the term “food-costing” is well-understood. For those that aren’t, here’s a brief: the ratio of the cost of procuring the food to the income generated from its sale.

To better understand what this means, here’s an example:

To make a pizza, you need basic ingredients to make the base and sauce (flour, water, tomatoes, seasonings etc.) and toppings (cheese, veggies, meats). Rather than using the cost per kg for flour and tomatoes and the cost per gram of cheese or meat, each unit is divided into individual portions and priced using a predetermined formula. 

With that in mind, the cost of making one pizza (pepperoni, extra-cheese, while we’re being hypothetical) is 25*. Now an average profit-making restaurant will sell this from anywhere between 100-125, if not more. With other operational expenses, the kitchen needs to sell at least 4,000 pizzas a month to make a profit, many a time not more than a 10-15%# margin during a fair month.  This ensures that all salaries, rentals, and operational expenses are met, and the owner may get to take the spare change home. 

With the rise of food aggregators over the years — UberEats, Zomato, FoodPanda, DoorDash, Meituan, Delivery Hero and other similar regional variants — there is now an added expense to cater to. In the quest to attain a larger customer base, food outlets have thronged towards such aggregators with open arms, but the reality is slightly grimmer. What many failed to realize was that the initial lure of a small revenue share was just the bait. Years onward, the revenue share percentages have shot upwards of 20-30%1 (local taxes not included), and outlets have had to comply or risk losing income. 

Speaking of which, an outlet doing the same number of sales — 4000 x $100 = $4,00,000, with operational expenses at $3,15,000 to $3,50,000 (not counting fixed capital) — leaves a return of $50,000 - $75,000 per month. With the current pricing scenario of an average restaurant paying a commission of 28% of total revenue, the same sales on the delivery platform would mean a commission of roughly $96,000, which is more than the outlet can now afford financially, even though an additional $3,000 - $7,000 of expense is saved on delivery drivers.  

What happens when the aggregator is at fault? 

Let’s say you received an order. The order is prepared, but you notice your rider is still a long way from the location. As the consumer, to avoid delays and receive your order on time, you request to cancel the order, which the aggregator does. All this while, the restaurant has prepared the items as per the order and is now informed of the cancellation. There is no alternate rider, there is simply an order cancellation notification, the cost of which the outlet has already borne, and which will not be repatriated.

Another point to consider is the basic psychology behind the consumer, which shapes their decisions.

Presumption: A vast majority of consumers surveyed, upon being asked about their thoughts on the increasingly ridiculous discounts being offered to them with regards to the establishment, simply seem to presume the establishment has the funds to cope with them. This is not the case for most — a large chunk of food establishments are proprietorships or small chains, who end up taking a large hit on their operating incomes mainly due to the discounts they must offer to keep their customer base. 

The cheapest is the best. A common mentality across many consumer segments is the notion that the cheaper, the better. For most establishments, simply increasing their prices is not the solution. This would mean they start losing out on their consumer base. 

Instead, they have to offer discounts and promos to ensure that customers keep ordering from them and not go to their competitor, all of this while maintaining the quality of food that won them the consumer, to begin with. While consumer preferences are out of the control of the establishment, heavy discounts are an effective way to capture this market segment, no matter the cost. This is also the main reason a vast majority of food and beverage joints shut down fast because they are simply unable to cope with the rising costs and cross the threshold of their finances. 

The additional rise in competition and multiple new options available every day are gonna make it harder for smaller outlets with lighter pockets. While competition is synchronous with development, this is exploitation by the larger firms, who can afford to buy their way in, and more importantly, out of a sticky situation. The smaller retailers and proprietors are left to deal with the fallout. 

A consumer from the upcoming generations seems to be comfortable with the idea of paying extra for avoiding communication. A restaurant friendly food aggregator model is ever essential and is viewed as a need, one that makes it more affordable for food outlets to thrive and continue delivering a high-quality product while promoting market competitiveness. 

Watch out for part 2 for solutions to problems highlighted in this article.

NOTES:

1. Inscope areas include food aggregator (Delivery Hero or Zomato) and not restaurant delivery (Domino’s); establishments covered under this include small and medium scale cloud kitchens and restaurants operating on food aggregator and not any separate delivery or takeaway service(s) offered.
2. Revenue figures are gross merchandise value (GMV)

*25 % is an average taken for the purposes of this article. The industry average globally is between 18%-32%, even peaking to 45% in some cases. 

# An average restaurant can expect a monthly profit margin of 3-6% whereas cloud kitchens can expect anywhere between 12-18%. This varies significantly with various factors including, but not limited to rental, cost of raw material, market trends etc. 

1. 10-20% is what most mid-level aggregators offer initially, while the major players charge anywhere between 25-33% All inclusive in many regions and areas.

Sources & References: 

1. Primary market research; 

2. MDPI; 

3. Statista; 

4. Business of apps; 

5. Berkshire Hathaway

6. CB Insights  

7. Experience