Why food delivery business is a bad bet for investors?

In this article, we have discussed some key challenges that food delivery businesses face today. The entry of many food delivery startups and businesses is making the marketplace competitive and challenging for firms to capture.

The pandemic has contributed significantly to the proliferation of platforms and apps offering food delivery through courier services in recent years, especially in big cities. The tech start-ups behind the delivery platforms are optimistic about making money thanks to rising demand and lower operating costs. Still, some studies suggest their business models may be unsustainable.

Taking a closer look at different food delivery companies, the researchers estimate that at least 8,000 orders a day would be required for this type of platform to start earning money.

Initially, mandates and closures made physical shopping difficult, but as time went on, customers became more used to shopping online for everything from toilet paper to rotisserie chicken. As of 2021, 60% of U.S. consumers said they were shopping online for groceries, up from 36.8% in 2019. But, as we know nothing is perfect and the delivery business does have its drawbacks and challenges too.

Food Delivery Apps see a decline in Sale

Now, people's obsession with pandemic-era food delivery appears to be over — and the stocks of the companies are taking a hit. Now, it will be interesting to see if consumers treat food-delivery apps like a necessity or as a luxury during what could be the first recession the industry has ever experienced.

In early 2022, DoorDash shares took a plunge of 62 percent since hitting a high of $246 in November. Shares of Uber have dropped 29 percent over the same period, from $45 to about $31.

Analysts say that while the apps enjoyed explosive growth during the pandemic's early stages, such growth wasn't sustainable. However, the downturn for these companies has been quite sharp, as Americans have become increasingly budget-conscious as inflation and fuel prices rise. The restaurant industry has also rebounded.

In the first quarter of 2022, the share of meals consumed in-person at restaurants reached a post-pandemic high, while the percentage of meals delivered through food apps fell to its lowest level since the fourth quarter of 2020.

Some customers are turning away from apps because of fees, tips, and higher food prices, contributing to the decline in app usage.

GrubHub is the biggest casualty among the apps. Its Netherlands-based parent company Just Eat announced in April 2022 that it was exploring a sale of the longtime delivery service. U.S. orders on Just Eat platforms declined sharply in the first quarter due to fee caps imposed by jurisdictions such as New York, as well as a slowdown in orders from returning workers.

In addition, many workers are still working from home - and finding alternative ways to get lunch compared with pre-pandemic deliveries.

Profitability has long been a challenge for delivery app companies. As a result, many companies are looking for ways to balance cutting costs with expanding into other areas of business, like grocery delivery and package delivery. However, you still can't be sure if these strategies will work.

In light of these trends, larger restaurants are likely to become more dominant than smaller restaurants, which will not be able to afford the fees delivery apps will continue to charge - and could fall off the platforms altogether.

Also, there are a few surveys that indicate many delivery customers are fickle. It is estimated that over 90% of people who used online delivery services during the pandemic are likely to return to their original methods of shopping afterwards.

The unprofitability of the food delivery business

Food-delivery companies have a lot on their plate. But, they are now going through their slowest growth in years while facing high inflation and a potential economic downturn. The companies have been offering new ads and deals to attract customers at a time when their shares are tumbling and expansion cooling. Restaurants are making food delivery more expensive and raising prices as inflation has also risen to a four-decade high.

Therefore, food delivery apps and restaurants are in a no-win situation. There is a very thin margin of profit for most restaurants. Delivery companies often charge them a percentage of the order value plus advertising fees, which they cannot afford. Furthermore, food delivery companies charge their customers for delivery and service fees.

So, this is the time when the investors are asking if the food delivery business is a good option and what happens if we enter the recession at the same time. It's becoming increasingly evident that this is a tough place, and there are multiple reasons to be concerned.

Regulations Also Impose Threat to the Sector

The employment status of food delivery workers is also coming under increasing pressure from European authorities. Also, the EU has started a consultation process to address issues related to worker status in the gig economy. UberEats, Deliveroo Italy, and FoodhinoGlovo were ordered to hire 60,000 delivery riders in a landmark ruling in Italy in 2021, which was considered a huge victory for workers' rights. In a move that regulates gig-economy workers' rights, food delivery companies based in Spain were also given a deadline to classify their couriers as staff.

Challenges Faced by Food Delivery Services

Now, let's take a look at some of the critical and conventional challenges always faced by the food delivery industry:

Customer Preferences

The ultimate goal of food delivery services is to expand and grow their market by offering the best offer at the lowest price possible. As competition grows in the food delivery market, customers are spoilt for choice. Customers are becoming unstable because of this, which is affecting brand loyalty. Food delivery businesses are employing marketing strategies and tactics to increase engagement to control customer attrition.

Unstable Market Prices

Food costs are also volatile at a time when the customer base makes a shift every day. It's necessary to keep a tab on competitive prices or find the right price strategy. It's a need of the hour for the delivery services to adopt offensive or defensive pricing models to survive the competition. Consequently, margins are further squeezed and profitability suffers.

Adhering to the Food Quality Standards

It's one of the biggest challenges for the delivery partners to maintain the utmost quality of the food. While delivering food far from restaurants to customers' places it's difficult to live up to the standards of the industry. The food companies need to strive hard to overcome the gap in the quality of foods served at a restaurant or deliver to your doorstep. No matter, how hard you try but the presentation or quality of the food served at the restaurant will remain unmatched. The customer will be furious if a traffic jam delays delivery for ten minutes; the cold food and delayed delivery will make him angry, and yet you cannot fix it.

Matching Customers' Expectations

The size of markets captured by businesses doesn't matter if you can't satisfy the expectations of the customers. However, the delivery partners are not solely responsible for customer satisfaction as its the collective responsibility of the restaurant staff. Thus, delivery partners and restaurant owners need to work together to meet customer expectations proactively. While the customer is seated in your restaurant, you have the opportunity to address their concerns and ensure they are satisfied. You have one chance to get delivery right - and if you outsource delivery, you can't control the customer's experience.

Food Safety

The risk of the COVID-19 virus has made people vary in ordering foods from restaurants. It has drawn the special attention of the consumers toward the safety and hygiene of food. Although there is no such evidence of the virus being transmitted through food still the packaging used for storing the food can't be entirely safe. The restaurants can ensure safety at their end but it's quite difficult to keep a tab on the delivery partners. The drivers are not even fully trained to avoid the mishandling of the food. The restaurants should even suggest their customers disinfect food containers thoroughly to maintain hygiene before use.

Delivery Driver Issues

This is one of the major challenges faced by the food delivery businesses and there can be an entire article on this topic itself. But, we are trying to break it down for you. Any business that uses hired drivers for delivery is required to maintain commercial auto liability. In a hurry to complete their deliveries, drivers are always at risk of accidents and vehicular crashes. Furthermore, these risks persist even after drivers stop operating their vehicles. It is essential for food delivery services to carry commercial auto liability insurance. An insurance policy such as this covers drivers who are injured by slips and falls while they are away from their vehicles.

Can Food Delivery Businesses be Profitable?

They can also turn the tables in their favour by playing the game in a different way just like Domino's Pizza which is one of the first technology-driven food delivery companies. While the company struggled in the late 2000's, it was eventually able to turn the ship around, building technological capabilities with a business model that enabled it to outpace Google, Apple, and Amazon in price growth.

Despite all the challenges and obstacles faced by the food delivery businesses, we can't deny the fact that the market has grown multiple times during the pandemic. Dining out with your friends and families may be a favourite pastime for anyone. It can be a highlight of someone's week to spend time around the table conversing, eating, and drinking wine. Yet, much has changed in the last few decades because people simply enjoy staying home now and this adds to the profit of the industry.

Why?

People are becoming more and more comfortable staying indoors while enjoying streaming services, and thus, they want their food delivered to their doorstep. Technology has made life more convenient, and nothing is more convenient than a home-delivered meal. Delivery booms in the 90s led to the rise of pizzas, curries, Chinese and Indian takeaway meals. In-house dining services allowed restaurants to provide first-class dining because of their exclusivity. However, times have changed over the years. Although independent restaurant owners may value face-to-face interactions with customers, building a sense of community, and fostering a sense of rapport yet home delivery has become a popular option among restaurants and even fast food outlets.

The Future

There is, of course, no replacement for the traditional dining experience, but home delivery is finding its place in the changing times for established restaurants as well as the original takeaway joints. The companies believe that the pandemic made people habitual to ordering everything at the touch of a button and this shift in habits is going to stay. They feel that inflation hadn't significantly crimped demand during the first quarter that ended in March and as a result, they are still growing.

Keeping the interests of the customers in mind is the need of the hour with respect to online ordering and doorstep food delivery in the long run!