Deliveroo part 6.a - reply to comment (common pushback)

White label killed the delivery star

I figured to make this a post since many readers might have the same concerns.

Comment from Anonymous on post Deliveroo part 6 - White label killed the delivery star

Very interesting take. A lot of valid points, but maybe also feels a little one-sided. A few that I would challenge:

- % of customers at risk: You argue people will download multiple restaurant apps if they are given discounts. Maybe. But what % of delivery platforms users do you think will do this? You make the argument that a high % of orders are from big chains, this is true but these customers also order from multiple restaurants and value the discovery UX. They have 3-5 brands they like, but are not sure which to order from. So they might order from Nandos, but they also order from 3-5 other stores, and that variety changes over time. The delivery platforms will probably incentivise store variety (trying new stores), which will de-risk their business also. The real risk is probably only those 10-20% of customers who are super brand loyal and order only from 1-2 stores - these customers might now search on Google or download the Nandos app instead of search on the delivery platform (even if delivery platform UX is better)

- B2B logistics e.g. Doordash Drive: B2B couriers will get commoditised. I agree this is probably the case but it will take a long time. You need scale in individual cities to operate couriers efficiently and it is not that easy to get the operations right - hence why players like Stuart, Shargo or Mox have not got a super competitive product. It is a chicken/egg problem - either white label platforms integrate with delivery platforms to give cost effective delivery, or they massively reduce the quality of their delivery service. Hence, why most white label platforms are taking share from Just Eat, not Deliveroo e.g. Order Yoyo, and Flipdish mainly target restaurants with their own logistics

- Delivery plaforms have loyalty programs too: Delivery platforms will not stand still and are increasingly creating switching costs for users and improving their product e.g. loyalty programs. Wouldn't a loyalty program from a delivery platform be more attractive from one from Nandos? e.g. order 10x and get discount from any store, vs. order 10x and get discount from Nando's only

- CAC amortisation: Delivery platforms are developing more multi-category services which allows them to ammortise the CAC over multiple purchase occasions which restaurants can't do in the same way (see the recent Acquired podcast on Meituan)

I think many investors that look at these food delivery platforms come from a tech angle and fail to appreciate what the restaurants are thinking. I guess my background from F&B and Internet analyst background puts me in a good position. Current position as F&B PE associate, of course, helps a lot from an operational POV.

Let me address point #2 first — While it is true that you need scale on a local city level to make it work, this actually puts $TKWY in a much better position than Deliveroo in the near future. Do remember that $TKWY covers the entire UK while Deliveroo only plans to cover ⅔ of the UK by the end of 2021. The fact that not all Nando’s locations are available on Deliveroo, means $TKWY will become the optimal partner to work with in the future (when Nando’s contract expires). Here’s one way to think about it. Nando’s markets its product across the entire UK, naturally with the intention to serve the entire population. It doesn’t make any sense to stay with Deliveroo that only covers ⅔ of the UK (⅓ of its restaurants won’t be able to deliver). That is inefficient marketing. And, hence this is a very strong reason for me to believe that Scoober ($TKWY) could replace Nando’s as the partner to work with. Also, Scoober ($TKWY) hired courier model is superior in this respect as Scoober ($TKWY) can offer much more reliable service to the chains than can Deliveroo. So reliable service + nationwide coverage = sign me up!

Coming back to point #1 - you are right that consumers will stay on the Deliveroo platform. But the right way to look at it is -- order frequency -- which is going to drop. Chipotle ($CMG) is the best precedent for this — 50% of their orders come from their own app and that number is growing. If Nando’s follows what $CMG did and end-up driving 50-60% of their orders from their own app, while the remaining % from the 3 different apps then: 

• We can easily see 50% of Deliveroo’s orders face tremendous take rate pressure in the future

• And deliveroo is really not that important anymore. Nando’s can swap out Deliveroo white label for another provider, if needed. 

Deliveroo might end up only driving a tiny % of total sales (and even smaller % from profit perspective) for Nando’s if the above happens, and the negotiating power will swing heavily to Nando’s side. Nando’s could easily take their inventory off of Deliveroo in that situation and probably lose like less than 1% of contribution profit. Why? Simple, because so much of its demand is from other platforms (a bunch of Deliveroo churned orders will go to the other channels anyway)

As mentioned in the post and some more off the top of my head now. There are many things Nando’s can do to drive people to its own app:

• Marketing: Nando’s could simply put “order from our ad on every marketing ad”. Nando’s UK alone probably spends as much on brand marketing as Deliveroo

• Promotions: Nando’s could match Deliveroo’s promotion at a much lower cost, which means that they can easily offer a lot more. It costs Deliveroo $5 to give a $5 voucher, but it costs Nando’s $1 in COGS for that same voucher

• Unique products: Nando’s could make certain LTOs or unique products exclusive on the own app to make people use the app. Remember how everyone got crazy over the Popeyes chicken sandwich, the Mcdonald’s travis scott burger, the mr beast burger in the US?

Again, it is not like I am making this up. $CMG is already driving 50% of their orders through their own platform, and many other chains are starting to launch their own app to cater for delivery. These chains will definitely work their way to own the customer relationship, it just doesn’t make any sense for them not to. Our own F&B investments are creating an app as well. In fact, before we started creating, we studied Chipotle, Popeyes and many other QSRs. From our POV (restaurant operators), owning the customer relationship is key.

Some snapshots:

Point #3: Again, you are right that Deliveroo can have its own loyalty program but at what cost? It is going to be very very expensive. Going back to my previous point, $5 of free food for Deliveroo costs them $5 but $1 IN COGS for the restaurant. The restaurant loyalty program is definitely cheaper and in almost ALL cases better, because they can give more stuff at lesser cost. For example, if Deliveroo does what $DPZis doing and gives a free pizza for every 6 pizzas you order, Deliveroo is going to bleed to death very quickly as that is effectively a 15% cost as a percentage of GTV(!). If you think that’s actually alright… then as a reminder, the company has a 8% gross profit to GTV (which, by the way is significantly overstated for reasons I will talk about later). 

Point #4: true...but the restaurants can also amortize their marketing budget against their in-store and pick-up business. Delivery is probably at very very best 20% of total orders in the future, Nando’s simply have to put “order from Nando’s and get free delivery” at the end of every ad. To reiterate, Nando’s UK alone = Deliveroo UK marketing budget. Top 10 chains might be 5x Deliveroo marketing budget. Collectively : massive marketing budget + lower food promo cost + unique products = restaurants own the customers

On Meituan, many investors like to use Meituan as a precedent and say that’s the future for $DASH and Deliveroo. The truth is there is a stark difference between both market structures. $DASH and Deliveroo have their order demand concentrated to very few chains that are strongly incentivised to own the customer relationship through their own app. On the flipside, Meituan orders are from a super fragmented base of restaurants.

The conclusion here is that restaurants are strongly incentivised to own the demand with strong precedents of success, and it’s actually cheaper (on basically all fronts) than it is for Deliveroo. $TKWY will also become the optimal partner for white label once they achieve nationwide scale. In short, Deliveroo is in a very bad position.

Also, consider why Deliveroo is only doing this now. Restaurants have been asking for this for years.

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Links to other related parts:

• Deliveroo part 9 - 1Q21 update

• Deliveroo part 8 - The aftermath

• Deliveroo part 7 - Valuation

• Deliveroo part 6.b - Reply to comment

• Deliveroo part 6 - White label killed the delivery star

• Deliveroo part 5 - Top 10 red flags

• Deliveroo part 4 - Hell is coming. Gross profit might decline by more than 50%

• Deliveroo part 3 - How did Deliveroo managed growth in the past

• Deliveroo part 2 - So what about groceries delivery?

• Deliveroo part 1 - $7bn valuation...Really?