How to Make Money in Food Delivery

Doordash, Uber Eats, Grubhub, Just Eat, Food Panda… the list of food delivery companies goes on and on. During the pandemic Food Delivery has become a hot topic but it has been highly controversial. I have seen allegations restaurants are ‘overcharged’ and gig workers are ‘exploited’.

I worked in the industry and am here to discuss some of the maths. No industry secrets here. What follows is just some basic economics to help you understand how the industry works .

Who Makes Money in Food Delivery?

First, let’s start with some really basic understanding of the industry. There are 3 players in the Marketplace: Customers, Restaurants and Couriers. All of the companies in this space effectively act as a broker to bring these 3 actors together. Platforms provide the information and infrastructure they need to transact quickly and easily. As with any marketplace the aim is to keep all participants happy and make a cut from transactions. So what do our market participants want?

Customers: They are hungry, they want food. They want good food delivered to them in a timely fashion. They are happy to pay for the convenience and time-saving.

Restaurants: They want additional revenue and cash flow through their business. Most are also looking for additional profit. They want to outsource organising the technology for online ordering and the cost and hassle of recruiting and managing couriers. They are happy to pay for the marketing benefits they receive and the courier service they need.

Couriers: They want income. It needs to be well paid versus any other employment they could get. This pay rate needs to take account of the time invested and any direct costs incurred.

There is a 4th Economic Player:

The Company (and its Shareholders): The long-term objective is profitability and ROI for investors and shareholders. However, the objectives here are slightly different per company. VC funding values growth, revenue and market share over Gross Profit. As companies progress through to IPO and public trading profit over growth generally becomes the trajectory. Arguably this is where the big players are today (although this could be debated for many hours)

How to make Profits

Basic economics says Profit = Revenue – Costs. For all Food Delivery companies to survive in the long term this needs to be true at the bottom line. In the short to medium term most focus on Gross Profit or ‘Unit Economics’. The aim to make an individual order profitable in relation to all the costs directly related to the order.

Gross Profit = Order Revenue – Order Costs

I won’t get into the vagaries of how each company builds their financials as they all do it slightly differently. Often it is unclear if this is to confuse their investors, fluff up their numbers or just because they use a different audit firm. The most common components are:

Gross Profit = [Restaurant Commissions + Restaurant Ad Revenue + Customer Delivery Fees + Customer Service Fees – Customer Vouchering Costs] – [Courier Pay + Customer Service Costs]

Note that Customer Vouchering is technically negative revenue rather than a cost per standard accounting rules (more on this later)

Sources of Revenue

Let’s first handle revenue, this is the easier side of the equation.

Food Delivery companies receive money from 2 places: Customers and Restaurants. Often the flow of cash and the flow of revenue are slightly different. Generally customers pay the total bill to the Food Delivery company who remit this to the restaurant minus any direct fees and charge a commission on the remaining balance.

Restaurants generally provide 2 revenue streams: Commission Fees and Ad Revenue.

Commission Rates in the industry vary widely. For independent restaurants they are generally 20 to 30%. Larger restaurant groups with well-known brands get discounted rates of 15-20% but can be as low as 10%. Generally these are charged on Gross Amounts but this varies regionally and commercially. Where there are high tax rates (especially Europe) this distinction can be significant.

Most platforms now allow restaurants to pay for preferential placement on their app or site in return for advertising fees. This varies by platform but can include higher placement in search results or having some kind of banner ad displayed. Alternatively platforms can create discount offers which are advertised by the platform and funded by restaurants.

Customer Fees are an interesting pricing challenge. Most companies have complete control here and to some extent the fees (Delivery and Service) can simply be added together as a ‘customer fee’ since from an accounting perspective they are the same and are simply a total customer charge for the delivery. The psychology here becomes interesting around how the fees are designed and seen by customers.

Delivery fees are generally a fixed rate no matter the size of the order (this makes sense since the cost of delivering one burger is the same as delivering a bag of burgers) however this has traditionally meant that revenue did not grow with average order value. Most of the large companies added a ‘service fee’ which was initially fixed but is now often a % of the order so scales with basket size and enable greater revenue (and therefore margin) from larger orders. The smallest baskets generally bring low revenue since restaurants often have no fixed fee component and the fixed delivery fee is low, therefore some players have added a ‘small order fee’ that ensures a minimum revenue per order preventing loss making (or highly loss making) orders.

The final element worth discussing is vouchering. The way the accounting here works is these are negative revenue, since revenue is only a % of basket size but vouchers apply to total basket it is almost always the case that orders with vouchers have a negative or close to revenue. e.g. A $20 order at a 20% commission and a $3 delivery fee would usually result in $7 revenue, give a $10 voucher and the order provided -$3 of revenue. It is easy to see how vouchering has a major impact on the P&L. It is worth noting most players now do % discounts which are far more efficient here and tend to drive larger baskets.

Costs of Food Delivery

Costs are generally paid to 2 groups – Couriers and Customers. Couriers are paid for their time, customers are paid for mistakes (missing items, quality issues etc)

Couriers can be engaged on an hourly basis or a per-order basis and they can be employees, workers (in the UK) or contractors. Let’s start with the most simple – the per-order basis – here couriers are paid each time they complete an order. While couriers are paid on a piece basis the reality is they are trading off their time against other opportunities – for example couriers could chose to work for the minimum wage in a fast food restaurant, this effectively creates a floor for hourly expected earnings.

This is complicated by the ‘gig’ element of this type of work though, some people will trade off lower pay for flexibility e.g. I might on average earn less for my 3 or 4 hours of work but the choice to just decide to finish work and go home versus having to work a fixed shift has a benefit I may be prepared to pay for.

As self-employed roles couriers have a costs to complete a delivery – the vehicle itself, fuel, insurance, delivery bags, protective clothing etc. When the industry first began most companies wanted couriers to have either a car or a moped / motorbike. This was expensive for couriers in terms of running costs and this therefore had to be covered in the courier pay. Over time there was a move in many dense urban areas to bicycles which do not require a licence, fuel or insurance and are much cheaper to buy – this has in some cases allowed pay per order to fall.

The basic math here is: Pay Per Order = (Expected Pay Per Hour / Expected Orders Per Courier Per Hour) + Running Costs Per Order (Fuel, Vehicle Depreciation etc) + Amortised Startup Costs

The first part here is the key part – the more orders per hour a courier can realistically achieve the lower the pay per order needs to be. The Unit economics relies heavily on this.

Customer compensation is the other cost. This can get very expensive very quickly – in many cases this is covered by the logistics provider and not recharged to the restaurants. Compensation here is the total cost of the items to the customer rather than the commission revenue. Inherently this almost always means the costs swell significantly higher than the revenue e.g. a $20 order where a $10 burger has an issue with a 20% commission results in a negative margin on this order ($4 – $10 = -$6). It is often hard to prove any issue and the industry has generally taken a ‘the customer is always right’ approach here which clearly swells costs significantly.

Optimising for Margin

Food delivery is inherently a very difficult business to make profit right now. There are opportunities though. Lets assume we cannot raise commission rates, this is incredibly challenging in the highly competitive environment right now, if you do chances are restaurants move to your competitors and the main barrier to entry is the network effect of having ‘all’ the restaurants.

First option is to look at customer fees, a lot of work has been done by players here but supply and demand based pricing remains an option. This has been tested by various people at various times, as the market matures I expect this to continue. Uber Eats for example now charge extra for Premium faster delivery times, others will likely follow and progress in this space. Moving fees from fixed ‘Delivery’ fees to percentage-based ‘Service’ fees with fixed minima is already a trend and has the ability to sneakily add costs per order while the customer likely notices it less as it is outside the ‘headline’ rate.

If we also assume we cannot simply pay couriers less (they would do a different job) then we can optimise cost per order by increasing orders per courier per hour or in other words ‘route density’. Mutli-drop orders where a courier goes to a restaurant and collects 2 or more orders have always been a small element of the industry, this is limited in volume as the density of orders from a single restaurant makes having 2 orders to collect at the same time a challenge.

There are multiple solutions here – first, delay all orders a little from the fastest possible delivery time to allow more orders to arrive for potential batching – Uber appear to be starting to play in this area. The second and more complex option is enable couriers to collect orders from multiple restaurants at the same time e.g. Collect from Restaurant A, Collect from restaurant B, then deliver order A and finally deliver order B. This is very difficult with 2 restaurants as hot food does not travel for long and any delay at restaurant B likely results in compensation from order A which removes any margin benefits. However, bring dark grocery stores into the mix where items travel for longer and this becomes a serious reality. This is perhaps a big driver for these companies diversifying beyond just hot food.

The final option is to toughen up compensation rules. Simply pay customers less compensation. Some people are doing this, Uber for example now often shows customers a message simply saying they are not eligible for compensation for their issue. This is a tough line between cost and customer service and one that companies will likely continually adjust over time.

So, how do you make money?

Short answer, it’s tough and it needs all sides of the transaction to be optimised. The margin here is in the margins and small percentages here and there make the difference. This article only scratches the surface and all of the players have their own strategies to optimise these calculations. It is going to be an interesting few quarters ahead as these now public companies look to deliver much-needed margin.

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