by Utkarsh Sinha
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Challenges in Food Delivery Startups

Chapter 1 of 6

Introduction
Understanding the reasons behind the failure of highly funded food delivery startups in recent times is complicated to say the least. Since not everyone is aware of the ground realities, here is a guide to bring you up to speed with the challenges in food delivery startups. 

Chapter 2 of 6

Online Food Delivery Platform Types
If you're new to the food delivery space, it would help to quickly know what kind of online food delivery businesses exist today. 

These food delivery businesses are usually websites (online platforms) where a customer can select a restaurant from a large list, view its menu and place and order on the platform itself. There are mainly 2 types of platforms and they basically differ in the way the order is handled after payment on the website is made. 

  1. Aggregators:
    Once the order is placed, the order details are directly sent to the restaurant. The restaurant then takes care of delivering the food to the customer. In this case, the website, is merely a listicle (aggregator) of restaurant details (menu) and facilitates the payment process, but does not engage in the actual delivery in any way.

  2. New Delivery:
    Once the order is placed, the platform assigns it to delivery person in its delivery network. The delivery person then picks up the food from the restaurant and delivers it at the customers doorstep. In this case, the website, not only shows the restaurant details (menu), but also facilitates the delivery and payment

'New-Delivery' platforms are able to serve a larger market because customers can even order food from restaurants that don't have their own delivery system. Whereas 'Aggregators' are limited to only those restaurants that can take care of deliveries.

Chapter 3 of 6

The 4 Main Delivery Models

Now  that you have some idea of the two main food ordering websites types, let's get to know about the 4 main delivery models that businesses have developed over the years.

Legacy delivery models:

  1. Milk Run Model:
    Like a milkman, product merchants have a fixed subscriber base for regular delivery of the products. The merchant decides on a fixed delivery route touching all the delivery points at one go. As Benzi Ronen points out in his article -
    "The Milk Run model has a critical weakness: It doesn't work whenever any variability is introduced; for example, if someone requested a different delivery time or wanted to order something different."
    (source)

  2. Hub & Spoke Model:
    The delivery company stores merchant products in a central warehouse from where it makes deliveries to each customer's doorstep when the order is placed.
    The main challenge here is that it is costly to offer delivery of low-margin products without being able to tie multiple deliveries into a common delivery route because at any given the time the orders may be for completely different locations.
    (source)

New Delivery Models:

Some website platforms ("New Delivery" type) have come up with special delivery models to build their delivery networks to full-fill orders.
  1. Point to Point Delivery Network:
    The company uses a network of standby delivery personnel, where the order is sent to the delivery person closest to the restaurant and he then takes the food from this pick-up point to the delivery point. The challenge lies in sustaining a robust delivery network of motivated delivery personnel.
    (source)

  2. Distributed Delivery  Network:
    Merchants (like farmers in case of grocery websites) send there products to the delivery company's (grocery website) central hub where orders are registered. Multiple orders within the same locality are sent together to a local pick-up point from where the customer can pick up the ordered product. The local pick-up points are run by organizers that are willing to share the costs.

    (source)

Chapter 4 of 6

Insights From DoorDash's CEO Tony Xu
Tony Xu, the founder of DoorDash (a food delivery app) appeared on a popular podcast hosted by Jason Calacanis (well-known Silicon Valley investor) and gave his insights on various aspects of the delivery business. His experience and views are quite valuable as he is an insider to the domain.
 
Why Does On-Demand work now versus the past? 
A Part of the 'Supply' side of the business is sorted. 
  • Mobile in today's times has made it really easy to reach out to people who need flexible work opportunities, and such people are in strong 'Supply' to form the delivery network. 
  • Also people are now buying stuff online more than ever, they have started to trust online transactions. In the past, an online grocery shop like like Webvan went bankrupt because of lack of demand; people were not buying stuff online then.

Other interesting insights: 
  1. No Predictability In Staffing
    Most small businesses are facing challenges with making deliveries. Even companies like Dominos often never get it right with number of delivery people they should staff. They always end up having too few or too many members due to fluctuations in demand. 
  2. Need To Keep All Sides Happy
    Delivery business (platform) has to make sense for all 3 audiences (consumers, delivery people & restaurants).
  3. Ensuring Quality of Service
    This becomes difficult for an aggregator platform where the platform looses all visibility of the order after it has been relayed to the restaurant.
If you wish, you can listen to the entire podcast below.

Chapter 5 of 6

What Makes Food Delivery So Hard?
After those insider insights from Tony, things are starting to become a little more clearer. He also mentioned that it is possible to be profitable without necessarily having to scale the business to large order numbers or more cities (at the time of the podcast two of his delivery centres were already profitable). 

Two other major challenges with delivery services are: 
  1. Psychologically customers aren't ready to pay high delivery fees on food. (DoorDash edits the restaurant menu with an additional 20% listing fee for restaurant added to its prices, so that the customers don't fall prey to a 'sticker shock'.)
  2. A big monetary expense is in recruiting delivery driver. These costs keep piling up as the company grows. 

On Recruiting Expenses:

DoorDash spends more than $200 recruiting each delivery driver, and according to the New York Times, those drivers usually only work three to six months for the company. Multiply $200 by 25,000 drivers (a conservative estimate), and that's a $5,000,000 expense, every few months, just to get DoorDashers on the road.
(source)

Side-effect Of Pumping Growth Money:

So when the investors pump more money to help delivery companies scale, overtake their competitor, and establish a monopoly, the companies tend to grow very quickly. But at the same time the losses go up quickly too. You must be thinking where does this investor money go, right? Well, the money goes into giving heavy discounts to allure new customers and recruit new delivery staff. 

This is a general phenomenon observed in the on-demand world, in other businesses as well like on-demand cab services (Uber and Lyft).
Lyft reportedly loses $50M a month, while Uber loses about $700M a quarter.  

Bento, was a food delivery company that also incurred heavy losses after having raised $2 million dollars in funding. You can read their story here

Chapter 6 of 6

The Solution Lies In Tech
Delivery platforms that are practicing the 'New Delivery' model are trying to build their own delivery networks. 
A large part of sustaining the fragile & complicated rhythm of deliveries, is building a smart software system that is able to route the incoming orders precisely to the right delivery drivers in the neighbourhood. 

While the algorithm has to bear losses on some orders (with low margins), it should be smart enough to compensate for it by adjusting rates on other orders, to push the overall profitability for the company in the positive.




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