End of lockdowns is eating food delivery apps lunches

Glovo, Jumia Food, Yum Delivery, Take Eat Easy and UberEats have something in common; they are obviously food delivery apps with a local presence.

But possibly, they could also be sharing one more trait; the colour red. In other words, they are “bleeding” money. Just taking the two top food delivery apps with the biggest pull in revenues, Uber Eats and DoorDash, while posting staggering revenue numbers for the past two years, they’ve hardly minted money on the profit side.

Uber Eats clocked Sh937 billion in revenue in 2021, a 72 percent increase over 2020. DoorDash's revenue jumped 268 percent from 2019 to 2020 and generated Sh552 billion in 2021 - a 69 percent jump from the previous year.

It’s still so shocking why neither of these companies has ever turned a profit. Plenty of sceptical guys are now questioning the viability of the food delivery business model.

Will they ever make money now that the pandemic is (hopefully) behind us and restaurants are fully open in the cities? Today’s article is my pedestrian reflection on these business models.

Sometimes scale is overrated. The push to establish a dominant market position, at which point businesses can raise prices to a level where they will be profitable is not always the silver bullet it’s deemed to be.

The notion that “losing money on every transaction but making it up on volume,” may not be applicable to all businesses. In this case, food delivery apps seem to fall under this category. Margins are typically tight because you can only charge a certain commission and riders are expensive.

Advertising takes out quite a big chunk too and almost all give discounts to fight-off competition. But for the ones operating in developing countries, there's an added layer of challenges; not so big client base, logistical issues and an unclear customer segmentation.

All these make achieving positive unit economics a really high task. It then boils down to this; if unit economics still remain negative in two or three cities, then further growth is unnecessary.

In fact, a “shrinking” should happen. A brutal restructuring or revising of strategies may be necessary. In an ideal world, you wouldn’t want to expand to multiple places until you're sure that the first two or three towns are contribution positive.

But I realise competitive pressure is a real thing. The vain pursuit to be number one is a real blind spot.

Anyway, the pandemic has changed how many of us order stuff (especially food). For restaurants, the popularity and convenience of food delivery apps provided a much-needed revenue source to keep the lights on until the lockdown orders were lifted.

The trend will likely go on post-pandemic. For workers who lost jobs during the shutdown, and many unemployed youths, a part-time job as a food delivery driver was (and is still) seen as a flexible way to earn some extra cash.

Unfortunately, for delivery apps, whilst providing a much-needed boost in efficiency, they may need to halt (and perhaps shrink back) to think through sustainability. The current models just do not make any money sense.

Mwanyasi, MD at Canaan Capital