The convenience and efficiency of meal ordering applications (“apps”) has led to a rapid development in food delivery services. However, despite the ever-growing popularity of online takeout, the increase in food-delivery companies and the decrease in restaurants offering food delivery service is slowing the growth of what could be a lucrative market.
Consumers of this market are notoriously fickle in their loyalty. Rather than order through a specific app, consumers are more likely to order through apps which offer a wide variety of restaurant options and cheaper fees. Recent media attention has highlighted the conflict between delivery companies struggling to establish loyalty in an over-saturated market, and restaurants who are finding that sending food to customers is not worth the hassle. Restaurants are reporting that the fees imposed on them make deliveries an unprofitable venture. In order to compete, delivery services are offering increasingly subsidized pricing. The amount of competition has emboldened some restaurants to negotiate for lowered fees, accelerating the “race to the bottom” for these delivery services. In addition, restaurant operations are unable to address the growing demand for delivered food in addition to traditional service. Some have built separate entrances and systems specifically for delivery orders, but lack the digital capability to handle the requests.
Where to go from here?
With restaurants making the push for lower fees, delivery companies must adapt. Technology platforms and start-ups have emerged to help bridge the gap between delivery services and restaurants by integrating the ordering process into the restaurant’s existing systems. Several delivery companies have already carried out acquisitions of digital start-up companies to help place orders more seamlessly into a restaurant’s kitchen. Delivery services who have successfully involved digital systems to integrate into kitchens have seen an increase in orders. News articles report that of the restaurants who partner with various apps, half have now integrated delivery-based technology services. In 2015, no restaurants had integrated this service.
On the flip side, some of the largest start-ups in the delivery service industry are reportedly considering mergers with competitors rather than going public. The disappointing performances of similar companies following initial public offerings has raised concerns about the prospects of going public, and has pushed major players in the industry to look towards mergers with others. These acquisitions could either help lower the fees that delivery companies charge clients, or increase them due to decreased market competition.
After considering marketing and administrative costs, it is clear that companies that have already gone public have not yet been profitable. The integration of digital platforms into delivery services and the potential for mergers paints an exciting future for the industry. We look forward to seeing how the trend develops.
The author would like to thank Roohie Sharma, summer student, for her assistance in preparing this legal update.
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