Food delivery apps are getting lost in transit

Grubhub’s new chief executive had “tough” news on Monday for its 2,800 employees. Though the food delivery app had boomed during the pandemic, 15 per cent of workers will now lose their jobs.

“We operate in a highly competitive and constantly evolving industry, and we need to continually look at whether we are set up in the right way,” Howard Migdal wrote in a company-wide email.

The US app, which is owned by Amsterdam-based Just Eat, is not alone. Zomato recently closed down operations in 225 Indian cities, Deliveroo pulled out of Australia and DoorDash cut 1,250 workers, or 6 per cent of its corporate workforce.

Meal delivery was overdue for a reckoning. While Domino’s has been bringing food to customers for decades, today’s apps inserted themselves into what was already a relatively tight-margin business by tapping into excess capacity. They linked stay-at-home diners with drivers and restaurants with the ability to serve more customers than they could attract to dine in or pick up.

Estimates of the global meal-delivery market range from $167bn to $300bn. But revenue leapt up in recent years due to two factors that have since disappeared. Expansion was funded by cheap capital that covered the gap between the true cost of delivery and what customers actually paid. And pandemic lockdowns supercharged growth by limiting competition from dine-in restaurants and other entertainment.

The boom was so extraordinary that existing food service brands, such as US burger chain Wendy’s and UK Indian group Dishoom, tried to capitalise by not only listing their restaurants on the delivery apps but also opening delivery-only “ghost kitchens”.

Now those tailwinds are gone, and the available profits from eat-at-home meals have been eroded by higher food and other costs and squeezed diner budgets. “The whole delivery space is problematic. It’s getting difficult to make money,” says Peter Backman, an independent food sector analyst.

Restaurants have on-site customers again and pandemic-era caps on app charges are expiring. They are now less enthusiastic about partners who siphon off 15 to 30 per cent.

Several restaurants in my New York suburb have shifted to proprietary online ordering systems. One local pizza place even included a note with my recent DoorDash order reminding me that I could save nearly 30 per cent if I contacted them directly. US brands Wendy’s and Applebee’s have also scaled back their ghost kitchen plans.

Jefferies analyst Giles Thorne remains convinced that food delivery apps can create sustainable earnings, particularly as comparisons with the extraordinary pandemic period fade away. “There are large sectors of society that are willing to pay $4 to buy back 45 minutes of their time,” he argues.

But it is going to be a struggle to keep that delivery charge down now investors are demanding profits rather than just growth. Lay-offs will help reduce overheads but they aren’t sufficient. Food delivery apps need to find other ways to cut costs, particularly if they want to expand to new areas without relying on big subsidies.

Some have turned towards “batching” orders, with one courier making multiple stops. This can work in densely populated urban areas filled with busy restaurants. It also explains why DoorDash and Uber Eats routinely offer to make a second stop for diners who have already ordered. But batching done badly alienates app customers who watch in real time as their burgers take a circuitous route and their fries get soggy.

It can be a fool’s errand to promise to deliver everything to everybody. Well-known local restaurants can strengthen their bottom line and preserve their reputation for good food by focusing on dine-in and takeaway.

Realistically, many communities will end up with the latest version of ghost kitchens, which cook multiple cuisines under virtual brands. That makes it easier to attract enough nearby customers to keep delivery affordable. ClusterTruck, an Indianapolis pioneer, aims for entrées to go from stove to front door in less than seven minutes, allowing drivers to make at least four trips an hour.

Foodies may sneer at the idea of ordering pad Thai, pizza and a burrito from the same kitchen. But the current situation isn’t much better: a single Manhattan deli tries to maximise orders by listing itself on Grubhub and the other apps as 27 different restaurants including a taco bar, a bagel store and several burger joints.

The pipe dream of cheap gourmet food on every doorstep is giving way to today’s leaner reality.

brooke.masters@ft.com

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