Cloud kitchens can significantly lower costs for restaurants, at a time when discounts and commissions are eating into their margins
On-demand food delivery, clearly, has a very large market in Bangladesh and globally. Personally, I was a late user of on-demand apps. However, over time, the stickiness of such apps has persisted and grown. At present, I use FoodPanda, Pathao and Shohoz foods far more regularly than even last year. And as the user experience of these apps improve, and their services at large become more efficient, I will probably use them even more frequently. And it's not just me, and it's not just Bangladeshis.
For Bangladeshi startups, demand for food delivery is expected to grow 7-10 times in the next five years. Global projections are also rosy. DoorDash, the US-based on-demand food delivery startup has a valuation of $13B, and according to the latest reports, is eyeing an IPO. According to Restaurant Hospitality, on-demand food delivery business is expected to grow 10X in the next decade.
Closer to home, Amazon India has launched on-demand food to select areas in Bangalore, at a time when rivals Swiggy and Zomato are cutting discounts and tightening cost structures, and Uber Foods has already exited the market (in the name). Given its robust delivery supply chain, it makes sense for Amazon to provide holistic product portfolios to its users – from electronics to groceries to meals.
In general, on-demand food delivery is a capital-intensive business. This is because conquering market share from rivals requires serious investments in tech, publicity, and not to mention, discounts, all of which require investor cash. Therefore, mergers and acquisitions are likely to continue in this space, as has already happened close-to-home with Zomato acquiring Uber Foods and the ride-hailing giant taking a 10% stake in Zomato. Why compete for market share and continue to bleed, when you could consolidate and get more bang for your buck? Of course, it's easier said than done, as egos and fanciful valuations get in the way.
Another interesting trend in this space is that of the cloud kitchen. Cloud kitchens, or ghost kitchens, are special kitchens shared by several restaurants, set up to handle deliveries. They have become a sub-industry in the US and are attracting investor dollars. For instance, Kitopi, which runs a global business of cloud kitchens, has raised $60M, to provide kitchen support to restaurants working with Uber Eats, DoorDash and GrubHub.
Cloud kitchens can significantly lower costs for restaurants, at a time when discounts and commissions are eating into their margins. In the US, cloud kitchens are often located in industrial districts, where no parking is required, which further lowers costs. Of course, it may sometimes make sense for a food delivery platform to own its cloud kitchen, given it has access to confidential data on delivery trends for different restaurants.
Meanwhile, to speak of the Black Swan event of 2020, as coronavirus cases rack up all over the world, restaurant visits continue to go down, and food delivery startups are starting to enjoy more business. There is some early-stage evidence that this is already happening in American and Chinese markets, with noticeable growth in spending on food deliveries in January and February 2020. Bangladeshi startups may experience a similar uptick.
But this poses new problems. As CNN has noted, riders and food delivery personnel could be on the frontlines of the outbreak as people avoid public transportation and rely on food deliveries. To mitigate such risks, Uber and Lyft are equipping drivers with hand sanitizers and encouraging that their vehicles be disinfected regularly. They are also sharing the latest guidance with their contracted drivers and delivery personnel. Interestingly, COVID-19 has intensified the debate on the importance of treating drivers, riders and delivery persons, as employees and not contractors.
Proponents suggest that by avoiding health insurance costs, ridesharing platforms, globally, have put customers at risk. For instance, it has been reported that in Mexico, two Uber drivers drove inflected passengers and by the time it was detected that they had contracted COVID-19, they had interacted with large numbers of people, prompting Uber to suspend 240 passengers!
Every new problem can also be met with innovation, so ridesharing startups have now piloted a feature called "contactless delivery," which allows users the option to have orders be delivered to the doorstep to avoid human interaction. In China, a food delivery app called Meituan had 80% of all orders placed using their contactless feature. The FT also reports that Meituan food couriers also have their body temperature on display to reassure customers. Instacard and Postmates in the US have also introduced features that allow food to be left at the doorstep.
In Bangladesh, now is a good time for ridesharing startups to step up regarding their social commitments. Particularly, if the demand for food delivery increasers because of a decline in restaurant visits – it is even more important to maintain a healthy workforce. Beyond new features, gimmicky or useful, it is essential that local startups educate riders and delivery personnel on correct hand washing techniques, and in general, provide reliable guidance on symptoms, basic health, and hygiene.
There are several NGOs who could be useful allies for such training and behavioral change communication, or startups could, of course, learn and do it themselves, as they tend to.
In sum, the on-demand food delivery business is a market with enormous growth potential, but it is at these moments of crisis and change, that the outperformers can distinguish themselves and carve a place in the customer's mind and heart while keeping riders and customers safe, and perhaps even gaining coveted market share.
Sajid Amit is Associate Professor, ULAB, and Director, ULAB EMBA Program. He is a Richard Hofstadter Faculty Fellow at Columbia University, 2005-2007. He can be reached via LinkedIn, Facebook and Twitter at @sajidamit75