E
ven thosewho recoil at eating supper out of a soggy box, fear
being mowed down by curry-bearing cyclists or think the death
of home cooking is a cultural abomination should admire Jitse
Groen. The 41-year-old Dutchman, who cooked up the online food-
delivery business by founding Takeaway.com in his university
bedroom in 2000, is not your usual tech billionaire. He keeps a low
profile, views venture capital with distaste, earns a relatively un-
flashy six-figure salary and sometimes hops on the firm’s delivery
bikes to help out. His main extravagance is a sharp Italian suit. So
why did he, on July 29th, propose shelling out £8.2bn ($10.1bn) on
shares for Just Eat, a large but struggling meals-on-wheels firm
based in Britain?
The answer says a lot about the voodoo economics of the food-
delivery industry. It is a hotly competitive business, attracting the
world’s biggest moneybags such as Amazon, Alibaba and Soft-
Bank. Balancing the needs of diners, cooks and couriers is fiend-
ishly complicated. Most startups lose platefuls of money. Yet they
have received more than $30bn from spellbound venture capital-
ists in the past five years. And they are likely to get more.
Mr Groen is a reluctant apostle of black magic. He once said of
his efforts to expand beyond the Netherlands, “It’s horrible. We’ve
spent 100 times more money in Germany than I thought I’d ever be
able to spend.” Takeaway’s deal with Just Eat highlights the convic-
tion that consolidation is the only way to make the sums add up.
The food-delivery business can be split into two camps: mostly
profitable veterans and loss-making newcomers. The veterans,
founded at the start of the century, are led by publicly traded Grub-
hub in America, and Just Eat and Takeaway in Europe. The trio are
collectively worth $18bn or so. They account for the largest share of
the market, offering customers online access to restaurants that
already have their own delivery services, such as pizza joints, sushi
bars and Chinese restaurants. Their relatively simple business
model, in which they take a cut of the bill from the restaurants, has
enabled Grubhub and Just Eat to turn a profit for years. Takeaway
makes money in its home market of the Netherlands.
The newbies, born more recently, have turned a once-tidy busi-
ness into a food fight. They include listed firms such as Meituan of
China and Delivery Hero of Germany, Uber Eats (part of Uber),Ele.me (owned by China’s Alibaba), and privately held DoorDash,
based in San Francisco, and Deliveroo, from London. For most of
them, delivery is their core business, so they share their cut of the
bill with riders as well as restaurants. This substantially broadens
the market to restaurants offering everything from steak to Hawai-
ian poké bowls. But margins suffer. Funded largely by venture cap-
ital, they have thrown subsidies at customers, forcing their veter-
an rivals onto the defensive. To catch up, the veterans are investing
in advertising and delivery networks—at a big cost. This week
Grubhub and Just Eat reported slumping earnings, and Takeaway
mounting losses, as they spent heavily to fend off the upstarts.
The only mouthwatering aspect of the delivery business is its
potential size. According to Bernstein, a brokerage, almost a third
of the global restaurant industry is made up of home delivery, take-
away and drive-throughs, which could be worth $1trn by 2023. In
2018 delivery amounted to $161bn, leaving plenty of room for on-
line firms to expand; the seven largest increased revenues by an
average of 58%. Their businesses support the trend of 20- and 30-
somethings to live alone or in shared accommodation, with less
time and inclination to cook. In China, by far the biggest market
for food delivery, one-third of people told a survey that they would
be prepared to rent a flat without a kitchen because of the conve-
nience of delivery. Delivery also fits neatly with the gig-economy
zeitgeist, alongside ride-hailing firms such as Uber, Lyft and
China’s Didi.
Yet as with ride-hailing, it is by no means clear if anyone can
make money by delivering meals. In fact, the economics may be
even worse. Co-ordination is more complicated. Meal-delivery
firms must handle dishes that take different amounts of time to
cook, while restaurants cope with orders from in-house custom-
ers. Most important, bookings must be split three ways: between
delivery firms, restaurants and riders, rather than just between the
ride-hailing firms and their drivers. The restaurants in particular
are restive, not least because food is already a low-margin busi-
ness. The most popular brands like McDonald’s and Starbucks
wield the power to squeeze the delivery startups in exchange for
access to millions of customers. Uber admits that Uber Eats may be
forced to lower service fees for big restaurant chains.
Moreover, potential growth may be overstated. Subsidies make
true demand hard to gauge. When delivery charges and service
fees eventually rise, which they will have to if profits are to materi-
alise, some customers may flee. In the meantime, cheap money
lets firms undercut rivals but distorts incentives. The war of attri-
tion could get even worse if giants like Amazon muscle in, as it has
tried to do by buying a stake in Deliveroo (the deal is stalled at pre-
sent because of antitrust concerns). Alibaba, Amazon’s Chinese
counterpart, uses Ele.me as a loss leader helping drive traffic to its
profitable e-commerce sites.Just Eat or be eaten
Delivery businesses have ways to cut their losses. One is to diver-
sify further, by delivering groceries, flowers, booze, and even peo-
ple (as Uber does), as well as meals. Another is to provide cheaper
meals by centrally supplying ingredients to restaurants, or build-
ing “ghost kitchens” that prepare food only for delivery. In “winner
takes most” markets, the best way to drive up volumes and share of
the proceeds is through consolidation across countries and cities.
Mr Groen’s attempt to gobble up Just Eat marks the biggest foray so
far. In the unappetising dog-eat-dog world of food delivery, it will
still be a hard deal to digest. 7Schumpeter Foodoo economics
Meal delivery is anything but a tasty business56 Business The EconomistAugust 3rd 2019