Food Delivery — VietEcon

On Friday, I wrote a little about Scommerce and their recent investment from Temasek. They are getting involved in food delivery on demand, which is a hot category. GrubHub and UberEats are big players globally, while in Vietnam there are Grab and Go-Viet.

These companies are growing like mad. “[Grab, which bought UberEats in SE Asia] says its gross merchandise volume for the food business grew 900% on-year in June 2019 from a relatively small base.” Go-Viet had handled nearly 6 million orders as of April 2019 in HCMC alone.

But what are the fundamental economics of this food delivery? Well, as far as I can tell (and each company does it a little differently), there are two main ways the companies make money:

Fees from the customers - these are delivery fees added to the cost of the food.
Fees from the restaurant - The restaurant pays to be placed highly in the search results. Usually, the fee is a percentage of the order.

UberEats, in the Uber S-1 (or the document the company filed when doing its IPO), provided a breakdown of costs (chart to the right). It’s pretty eye-opening:

Delivery fees are pretty high, or about 22% of the cost. That doesn’t include any tip. If we add another $1 as a tip, that gets to close to 30% in additional payments.
The restaurant pays about 25% to UberEats. Given the low margins of restaurant businesses, that’s probably a very sizable portion of profits. It could be worth it to the restaurants if a) they get more business (in excess of what they would get anyway - don’t forget to take into account cannibalization) and b) this means they can get rid of their own delivery people.
The driver is getting $6 in this example. To get to a $15 minimum wage in the US, he would have to do 2.5 trips an hour, but that doesn’t take into account the cost of the car/bike. It probably is more like 3.5 trips to make that $15 after expenses. Here is an interesting article on driver economics from an FT writer.
The net revenue to UberEats is $2.5 or 11% of gross bookings. That’s actually been falling for both Uber Eats and Grub Hub (see below, although 2Q19 figures are better for Grub Hub). Probably due to a) more competition, b) lower fees from restaurants c) greater driver incentives.

Let’s do my favorite exercise; backing into a reasonable revenue figure. We are going to use GrubHub for this, because it is a bit cleaner (UberEats is a part of the bigger Uber, and disclosure sucks at Uber).

Let’s assume two things; 1) GrubHub turned every $100 of gross bookings into $20 of net revenues - we assume this continues. 2) Average bookings are $18.

A few other items: GrubHub will spend around $650m in operations and support and another $110m or so in technology in 2019. It has another $100m in admin costs. And interest is around $20m. Add that up, you get to $880m in overhead expenses. That’s before sales and marketing (S&M). [No, not that kind! Get your mind out of the gutter.]

So they need $880m to cover costs before S&M. Or $4.4bn in gross bookings. Then it costs them about 5% of gross bookings in S&M. That means another $220m at least, which means gross bookings need to be more like $5bn. This goes round and round until we get to: the company needs $5.88bn in gross bookings to break even, or about 325m orders at $18 an order.

Of course really are not interested in just breaking even. They want high margins - they’re a tech company! We need those 20% net margins! Then you need a lot more like $8.25bn in gross bookings, or 460m orders.

Right now Uber has gross bookings not too far from that, but it definitely doesn’t seem like they are making money. So maybe that is being generous.

Uber says the total addressable market is about $800bn worldwide. That includes current delivery, takeaway and drive-through. And that it doesn’t include eat-in spending (when you actually go to a restaurant). Points: 1) people pick up food because they are on their way somewhere or don’t want to pay more, so this number needs to go down 2) that might be worldwide, but neither Uber nor GrubHub compete in every country. I would assume that the actual market is much less than $800bn.

Problems ahead

Interestingly, GrubHub recently reported positive earnings, but guidance was very bad. As it adds bigger fast food chains to their restaurant network, its ability to take fees from those restaurants falls. It lose bargaining power because these big chains need Grub Hub less than Grub Hub needs them. That means they will need greater bookings, greater marketing spending, potentially greater driver incentives, all for less money.

UberEats is likely facing the same issues, meaning that more and more bookings will be needed to fund overall costs. But if fees from restaurants fall, net revenues could potentially turn negative. As we saw, Uber needs both the delivery fees and the restaurant commissions. There is an upper limit to the commissions restaurants will pay. And these companies can try to cut driver pay, but at some point, drivers will opt out if they aren’t making money. And without drivers, there are no deliveries.

What will likely happen

I sound very negative (which may not be completely fair), but it does seem like companies could just focus on the high commission restaurants, sell themselves as the food delivery of independent shops, and then produce solid profits. But 1) that wouldn’t be exciting for investors and 2) competition for these high-paying restaurants will be extremely competitive. Uber, or any other competitor, has every incentive to steal these customers and drive Grub Hub under. Whoever has the ability to lose the most could be the winner. But they might end up winning a non-so-attractive market at the end of the day.

For Vietnam in particular, it will be interesting to see how Grab and Go-Viet do. They are going to face many of the same problems that Uber has. But they may benefit from the large number of migrant workers moving to big cities. These workers likely will work for peanuts, helping boost margins for the corporates.

Here’s a good rant on Uber.