Food home delivery companies need up to 8,000 daily services to be profitable, finds study
A host of platforms and apps offering food home delivery services through courier services have proliferated very quickly in recent years, especially in big cities, and much owing to the pandemic. In February 2020, only £7.40 of every £100 spent on groceries in the UK was bought online, according to data from market researcher data Kantar. By February this year this figure had risen to £15.40.
While the tech start-ups behind the delivery platforms are optimistic they can make money thanks to rising demand and lower operating costs, a study suggests their business models may be unsustainable.
After studying different food delivery companies, the researchers estimate that at least 8,000 orders a day are needed for this type of platform to begin to be profitable from its operation.
"It's very difficult for these business models to be profitable by themselves," said Eduard J. Álvarez Palau, a researcher from the SUMA research group of the UOC's Faculty of Economics and Business, and the study’s main author.
"This would be the most benevolent scenario,” he added. “With the alternative scenario, in which we add all those costs related to the expansion of this type of company in other markets, we find that these 8,000 services have to be increased to 19,000 for the operating system to profitable, which is a little surprising.”
These companies do not base their income on just their activity, the study found. They are founded on two pillars: the investors and venture capital funds which allow them to remain in the business and participate in other business models, stressed Palau. "Although their main business is food home delivery, it's difficult for them to be economically profitable and, therefore, they have to begin to choose other complementary business models, such as the delivery of other types of products or complementary services for restaurants, such as ghost kitchens.”
Ghost kitchens are commercial catering spaces that allow food service brands without a traditional bricks-and-mortar location to develop. In a development that supports Palau’s prediction, Unilever Food Solutions (UFS), the arm of Unilever that supplies the catering sector, believes this segment can disrupt traditional foodservice and even retail categories.
Regulation also threatens the sector
Food delivery tech companies are also facing increasing pressure from European authorities over the employment status of their workers. In the UK, Uber’s defeat earlier this year in the Supreme Court -- which ruled that its UK drivers are workers, with rights to the minimum wage, holiday pay and pensions -- paves the way for many of those in the gig economy to claim employee rights.
The European Union has also started a consultation exercise to regulate worker status issues in the gig economy. In a landmark ruling in Italy in February, gig economy firms UberEats, Deliveroo Italy and Foodhino-Glovo were ordered to employ 60,000 delivery riders and pay €733 million in fines in what was seen as a huge victory for workers’ rights. Food delivery companies based in Spain also have until the end of August to class their couriers as staff, in a move that regulates gig-economy workers’ rights.
Eduard J. Alvarez-Palau, Laura Calvet-Liñán, Marta Viu-Roig, Mariem Gandouz, Angel A. Juan, Economic profitability of last-mile food delivery services: Lessons from Barcelona, Research in Transportation Business & Management, 2021, 100659, ISSN 2210-5395, https://doi.org/10.1016/j.rtbm.2021.100659