Food fight! The battle for the food delivery market

WHAT to eat? With that question constantly on the minds of food-obsessed Singaporeans and a hunger for convenience driving demand, it's no wonder the food delivery market here has exploded in recent years. A growing number of startups - each backed by millions in venture capital - are jostling for a slice of the pie.

Consumers in Singapore cheered as first foodpanda, then Deliveroo and honestbee, and Uber took positions in what has become a full-on pitched battle.

Discounting and promotions mean savings and a satisfying experience for customers keen to have food on the table without setting foot out of the house.

But in a volume-driven business where low margins are pressured by competition, rivals are selling almost the exact same product, and labour issues will make or break the service, could it be a matter of time before food delivery players run themselves into the ground?

It's not hard to see why players want in. Revenue in Singapore's online food delivery sector is expected to swell to US$164 million this year, up 27.9 per cent from 2017, with around 1.1 million users, according to Hamburg-based market research firm Statista. By 2022, this number will likely grow at an annual rate of 17.9 per cent to hit US$316 million.

Evidently, delivery operators feel there are spoils there for the taking, despite the brutal environment. A spokesman for Grab, the latest to step into the arena, points to a S$250 million to S$300 million total addressable market in Singapore for food delivery, and an estimated 4,000 restaurants and 12,000 hawker stalls that are not yet served by food delivery apps.

"There's significant opportunity to bring these vendors online to serve an increasing base of digital consumers," he notes. "There is a lot more we want to do in the food delivery scene."

Food delivery service is a classic example of "a network-driven, double-sided business model", says Chandan Joshi, EY Asean and Global Emerging Markets Leader, consumer products and retail, Ernst & Young Solutions. Apps earn by bringing incremental business to vendors such as restaurants and charging them a commission fee for it, ranging from 25 to 35 per cent of sales in Singapore, he explains. At the same time, they charge consumers a delivery fee for the convenience and choice they provide.

"The more consumers join the platform, the more vendors are attracted to it, and vice versa. This creates a powerful network effect," Mr Joshi says. "Since the app makes money from both vendors and consumers, it grows its revenues exponentially as the network expands."

foodpanda was among the first to offer an integrated network that took and delivered orders for multiple restaurants back in 2012. At the time, fast-food chains and tingkat caterers were the only players offering regular food delivery services, along with a handful of restaurants.

Deliveroo followed in 2015, along with honestbee, while Uber rolled out its food delivery arm UberEats a year later.

Ride-hailing company Grab's food delivery arm GrabFood set foot into the market this year, after Grab bought over Uber's South-east Asian operations in March.

The transition from UberEats to GrabFood however was not without hiccups, and perhaps a cautionary lesson for those entering late in the game.

When the app went up in May, Grab was flooded with complaints, despite already being a prime mover in the online space with an ecosystem in place. Customers pointed fingers at difficulties they experienced downloading the app, the paltry number of food vendors on the new Grab platform, and service issues. Grab also drew flak for its decision to link payment for food delivery to its GrabPay mobile wallet, rather than letting users pick a credit card and go.

Grab says that all of the food and beverage (F&B) businesses that were in partnership with UberEats have now migrated to the new GrabFood platform. As recently as August, it was responding to reviews on the App Store saying GrabFood was "in the initial stage" and making "rapid improvements as we move along". It has also said it is looking into tweaking its payment options.

James Ong, head of GrabFood Singapore, says: "We take our customer feedback seriously and are focused on serving our customers' daily essential needs well, to be their everyday app for transport, food, payments and more. All major issues have been fixed and we are in a constant process of improving our product. We will be more customer-obsessed moving forward."

He adds that the platform, which has a presence across six countries in South-east Asia, saw its gross market value - calculated based on total dollar sales - rocket 800 per cent over the last year, while daily deliveries rose five times over the last six months.

Despite the apparent difficulties that have beset even major market movers, a new wave of players has emerged, each aiming to capture a more targeted, niche group of users.

Plum, for instance, offers a curated menu for office-going users and delivers the food to designated meeting points in business districts, while Porterfetch operates from 9pm to 3am, partnering with famous supper joints to cater to late-night hunger pangs.

Meal subscription services are also on the rise. In July, New York-based MealPal launched in Singapore, joining a growing pool of meal subscription apps available here, including names like nomnomby, Grain and AMGD.

Even children can tuck in to healthy, gourmet meals that are delivered straight to their schools. The New Luncher, launched in May last year (2017), delivers customised lunchboxes - think "Beef Bourguignon with French Beans and Mix Rice" - to schools based on a monthly meal subscription model.

Paul Clifford, general manager of International Markets at MealPal, notes that Singapore is an "ideal market" that sits at the centre of the high-growth region that is Asia. It helps that consumers here are adept at using technology too.

"We have seen a burgeoning of foodtech solutions in this market. Unlike all these, MealPal is in a sweet spot where we can provide heavily discounted, convenient and delicious options for lunch and dinner. The combination of those three things is not available on any other platform," he says.

More will enter the market yet. Singapore-based Urge, a new ride-hailing app set to enter the market sometime this month (September), is aiming to differentiate itself from competitors by offering not only private-hire cars, but food delivery, logistics and courier services.

Indonesia's Go-Jek, which has a food delivery subset Go-Food, has also unveiled plans to enter Singapore's ride-sharing market.

Going all out for market share

But for any food delivery service to do well, market share is key. When GrabFood made its opening moves in May with a slew of promotions such as a S$5 discount for three orders, the other players shot back with promotions of their own to defend their turf, from discounts to lower minimum order values to free delivery.

The carrots that food delivery apps dangle for consumers are a constant in the market, even as they change from time to time. Deliveroo, for instance, recently removed its minimum spend (S$12 for lunch and dinner) entirely in some neighbourhoods in a bid to grow its presence in the heartlands, such as Tampines, Sengkang and Punggol. foodpanda will be reducing its delivery fee to S$1.99 some time next week, making it the lowest in the market. The reduction in delivery fee is possible thanks to "a strong infrastructure, efficiency in managing orders, as well as a reliable rider fleet", Jakob Angele, chief executive of foodpanda Asia Pacific, tells BT.

Most food delivery apps also continue to offer a lumpy discount for first-time orders that can be as much as S$12, ad hoc promo codes, and free delivery promotions from a handful of restaurant partners. Grab is also working to capitalise on its "overall ecosystem expansion", as a spokesman puts it. During the recent World Cup for example, consumers who ordered from GrabFood after 9.30pm received a S$5 ride promo so that they can take a JustGrab to work/school the following day.

But price wars are inevitably unsustainable, if the long and bloody battle between Uber and Grab in the ride-hailing arena was anything to go by.

Easy come, easy go

In the cutthroat world of online food delivery, players go as fast as they come.

Besides having to dig into their pockets to dish out discounts, food delivery operators face high delivery and labour costs in Singapore, Euromonitor International research analyst Chayadi Kadim notes. And relatively small purchase volumes across highly variable time periods during the day make it difficult for them to optimise their logistics, he adds.

foodpanda Singapore managing director Luc Andreani told BT in May that foodpanda needs to hit one million orders per month, and a utilisation rate - the average number of orders each rider can deliver per hour - of between 2.5 and three in order to be profit-making. It currently delivers hundreds of thousands of orders per month, and has a utilisation rate of over two, he says.

Deliveroo, Grab and honestbee declined to disclose details on their order volumes.

At the same time, cost pressures are set to grow as more vendors and more orders will also mean more riders are needed. A Euromonitor report says that wages for delivery staff in Singapore surged by an average of 50 per cent from 2014 to 2017. With no sign that the government will relax foreign labour rules in the short term, competition for delivery staff is set to intensify as food delivery apps and firms continue to ramp up offerings - potentially a huge dampener on growth, it adds.

Local startup Fastbee, which allowed consumers to order hawker food and collect them from nearby vending machines, put up the shutters just last month, squeezed by competition and funding difficulties. Fastbee founder Khoo Kar Kiat notes that its business model had been premised on reaching a significant scale before becoming profitable. It did not have the sufficient resources to achieve the growth rate that potential investors were looking for, he says.

Profitability in the food delivery business, it seems, is proving elusive. And smaller players will fall through the cracks.

For all the millions of funding and investments these companies have received, most continue to be in the red.

According to its latest financial statements, British-owned Deliveroo Singapore is perhaps just beginning to emerge from its losses. BizFile data shows Deliveroo Singapore in 2016 recorded a net loss of S$16.86 million. Two weeks ago, it reported that its Singapore revenue hit S$26.4 million last year, more than double its revenue of S$10.9 million in 2016. It added that it is now in a net assets position of S$11.7 million, compared to a net liabilities position last year of S$16.9 million, but did not say if it had reached profitability.

foodpanda Singapore declined to disclose financial details, but according to earlier reports, it was S$3.07 million in the red in 2014. Its German-listed parent Delivery Hero, which acquired foodpanda here in 2016, announced at its latest results that it would not break even this year, but will spend another 80 million euros (S$128 million) to "stimulate growth". The Delivery Hero group also said it is getting out of markets in Australia, Italy, Netherlands and France.

Grab declined to disclose its financials.

honestbee managing director Chris Urban says: "We have steadily been seeing year-on-year growth since we launched our food delivery service in Singapore in February 2017." The company declined to elaborate on revenue and market share.

"A very difficult space"

Justin Hall, principal at venture capital firm Golden Gate Ventures, points out that margins in the food delivery business tend to be "extremely low" - often less than 5 per cent, although this is variable and dependent on the market.

He cites the example of Deliveroo: valued at £1.48 billion (S$2.63 billion) as a global business, its most recent results showed that gross margin stood at just 0.7 per cent.

"It's a very difficult space. The competitive landscape is tough: you have dedicated delivery platforms such as foodpanda or Deliveroo; food delivery services built on centralised logistics platforms like Go-Food and GrabFood; the in-house delivery services of mom-and-pop restaurants; and then the conventional F&B industry, where people eat out. This is why the unit economics (the profit of selling/producing one unit of the service) are so tricky," Mr Hall explains.

"You can say that food delivery startups are well on to profitability if they can scale their business while keeping their unit economics reasonable - this just happens to be insidiously difficult for them."

Euromonitor's Mr Kadim believes that the business models of most food delivery startups are not sustainable, given there is little to differentiate one from another, apart from the restaurants that are on their platforms and the regions they serve.

"Most food delivery companies have yet to figure out what are the key factors in enticing a customer to book on their platform versus another platform. Is it discovery, price, coverage or type of cuisine?"

At this stage in the game, the major players are also investing heavily in the tech aspects of their business, banking on predictive algorithms to serve up better delivery times and improve app efficiency.

Meanwhile, labour issues continue to bedevil them. As foodpanda's Mr Angele says: "Rider supply is the greatest challenge in Singapore as all riders are freelancers, and therefore very liquid. We are currently exploring alternative ways of delivery which could diminish delivery times, such as the use of drones to help assist our rider fleet."

So why are investors so willing to continue throwing money at the market?

"For the same reasons why investors continue to invest in new ride-sharing businesses," Mr Kadim says.

"They're taking a bet that online food delivery would become an integral part of a modern lifestyle, and be readily adopted by the digitally-savvy younger population. In addition, online food delivery is still a fledgling sector, with room to grow and for more players to enter the business."

Says Siddharth Shanker, general manager of Deliveroo Singapore: "Singapore is an ideal market for a variety of reasons. Despite its size, the market is extremely competitive and Singaporeans have access to endless food choices. They are knowledgeable and passionate about food, and more importantly, very open to new trends."

Adding to that, the returns can be solid for the last one standing, says Golden Gate Ventures' Mr Hall. "Most consumers usually only use one food delivery app, and being No. 1 means you can charge the highest commissions and see the greatest volume," he says.

Mr Hall sees consolidation eventually happening in the food delivery space. "Food delivery is ultimately about logistics - about understanding the science of getting from point A to B," he says.

"That service is ultimately going to be commoditised, and companies that can leverage their logistics platform to transport lots of different things - goods, food, people - will be stronger commercially, and will eventually win out."

The answer as to which players will be left standing is not clear as the food delivery landscape continues to shift.

For now, at least, it seems those with the deepest pockets are well placed to stay.