Instant retail and grocery delivery apps have raised billions in funding from Silicon Valley over the last few years. Catalyzed by the COVID-19 pandemic, these apps allow customers to order everything from meals and groceries to household goods and pet supplies at the touch of a button and without having to venture off to the supermarket.
The pandemic led to the proliferation of delivery apps. Where we once had Grubhub, Doordash
The proliferation of might make you question, why are there so many? And what is each new one offering that the previous 2 or 3 aren't? For starters, the home delivery market is projected to reach $466 billion by 2027, according to Statista. Logically, everyone wants a slice of the pie in such a large TAM (total addressable market). This also means VC's and growth equity firms have been pouring capital into the foodtech space to capitalize on the pandemic-induced boom.
Delivery apps build, or at least try to, brand loyalty via deep discounts, memberships / subscriptions, rewards programs, and large restaurant or grocery selections. These companies are operating at a huge loss in order to grab up market share. Their target: busy young (high-earning) professionals, working parents, and the occasional one-off online shopper.
So how does a delivery app actually make money? Delivery apps make money on the business & consumer end. They charge restaurants and grocers a commission rate on orders placed through the app. They also charge customers a service and delivery fee for these orders. Delivery apps are essentially a marketplace that match suppliers and buyers of a good or product. They might market themselves as SaaS apps but they are really marketplaces which means that profit margins will never reach those coveted 70-80% levels.
The biggest expense for delivery apps is 1) driver salaries and 2) advertisement / marketing. Deutsche Bank
For long term viability it's important for delivery apps to finetune their business model because they can only raise VC money so many times before having to show actual profitability. We see this trend very clearly - most if not all of these delivery apps would not be able to sustain without continued fundraising from VCs eager to get in on the delivery app craze. VC's invested over $25 billion in online grocery startups in 2021. Few barriers to entry also mean large barriers to creating a profitable business.
Some delivery apps compete on pricing, and this is a losing battle since there is only so low they can go before the order is not even worth delivering. Others, compete on speed. FoodRocket, for instance, promises 15-minute grocery delivery however this is also a losing battle because there is only so fast that grocery packers and drivers can go before making order mistakes, getting into accidents, and ultimately servicing every customer around the city within 15 minutes. It's a nice promise but not one that they should bet their business on. This is why B2B business models are stickier and have better profit margins - businesses are more loyal than individual consumers. A third group competes on variety and breadth of choice. This is also a losing battle because the more options a delivery app orders the more logistics problems it will face.
Delivery apps are also at the whim of federally enforced labor laws and regulations. Uber, Lyft
While delivery apps were flying high during the peak of the pandemic, they are now being faced with a bleak reality. Can they sustain, and if so, which will fare and which will fade? That is the one silver lining of a recessionary environment - the strong businesses survive and make it to the other side, while the weak get absorbed or dissolved. It's a true test of their business model.