Grubhub’s new CEO had “difficult” news for his 2,800 employees on Monday. While the food delivery app boomed during the pandemic, 15 percent of workers will now lose their jobs.
“We operate in a highly competitive and ever-evolving industry, and we need to constantly look to make sure we are set up the right way,” Howard Migdal wrote in a company-wide email.
The American app, which is owned by Amsterdam based Just Eat, is not alone. Zomato recently closed operations in 225 Indian cities, Deliveroo pulled out of Australia and DoorDash laid off 1,250 employees, or 6 percent of the company’s workforce.
Food delivery was too late for a bill. While Domino’s has been bringing food to customers for decades, today’s apps joined what was already a relatively thin-margin business by tapping into excess capacity. They matched stay-at-home drivers and restaurants with the ability to serve more customers than they could attract to dine in or pick up.
Estimates of the global food delivery market range from $167 billion to $300 billion. But turnover has skyrocketed in recent years due to two factors that have since disappeared. Expansion was financed with cheap capital that bridged the gap between the actual cost of delivery and what customers actually paid. And pandemic lockdowns have boosted growth by limiting competition from restaurants and other entertainment.
The boom was so extraordinary that existing foodservice brands, such as American burger chain Wendy’s and British-Indian group Dishoom, tried to capitalize by not only listing their restaurants on the delivery apps, but also opening “ghost kitchens” that only deliver.
Now those tailwinds are gone and the disposable profits of home meals have been eroded by higher food and other costs and tight dinner budgets. “The whole delivery area is problematic. It’s going to be hard to make money,” said Peter Backman, an independent analyst in the food sector.
Restaurants have customers on site again and pandemic-era app cost limits are coming to an end. They are now less enthusiastic about partners who pay 15 to 30 percent.
Several restaurants in my New York suburb have moved to proprietary online ordering systems. A local pizzeria even included a note with my recent DoorDash order reminding me that I could save nearly 30 percent if I contacted them directly. The American brands Wendy’s and Applebee’s have also scaled back their ghost kitchen plans.
Jefferies analyst Giles Thorne remains confident that food delivery apps can generate sustainable revenue, especially as comparisons to the extraordinary pandemic period fade. “There are large segments of society that are willing to pay $4 to buy back 45 minutes of their time,” he argues.
But it will be a battle to keep those delivery costs down as investors demand profit rather than just growth. Layoffs help reduce overhead costs, but they are not enough. Food delivery apps need to find other ways to cut costs, especially if they want to expand into new areas without relying on large subsidies.
Some have moved to “grouping” orders, where one carrier stops several times. This can work in densely populated urban areas filled with busy restaurants. It also explains why DoorDash and Uber Eats routinely offer to make a second stop for guests who have already ordered. But poorly executed batches alienate app customers who watch in real time as their burgers take a circuitous route and their fries get soggy.
It can be a silly message to promise to deliver everything to everyone. Well-known local restaurants can boost their bottom line and maintain their reputation for good food by focusing on dine-in and takeout.
Realistically, many communities will end up with the latest iteration of ghost kitchens, cooking multiple cuisines under virtual brands. That makes it easier to attract enough nearby customers to keep delivery affordable. ClusterTruck, an Indianapolis pioneer, aims to get entrees from the stove to the front door in less than seven minutes, enabling drivers to make at least four trips an hour.
Foodies may grin at the idea of ordering pad Thai, pizza, and a burrito from the same kitchen. But the current situation isn’t much better: a single deli in Manhattan is trying to get as many orders as possible by listing itself on Grubhub and the other apps as 27 different restaurants, including a taco bar, a bagel shop, and several burger joints.
The pipe dream of cheap gourmet food on every doorstep is giving way to today’s leaner reality.
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