Will online food ordering sidetrack retail e-commerce?

Due to convenience, online food ordering and delivery comes as a natural, organic step to retail e-commerce

by Zainab Mansoor

February 1, 2020

Online food ordering and delivery came as a natural, organic step to retail e-commerce as customers who became accustomed to online shopping via websites and mobile apps increasingly expected the same convenience when it came to ordering meals.

According to a 2016 McKinsey study, The changing market for food delivery, two types of online platforms – “aggregators” and “new delivery” players – emerged to strengthen the online food space.

The aggregator enabled consumers to compare menus, post reviews and place orders via an app or a website, and then routed the orders to restaurants who managed the delivery themselves. Such operators collect a fixed margin of the order paid by the restaurant.

Aggregators were seen to post EBITDA (earnings before interest, taxes, depreciation, and amortisation) margins of 40 to 50 per cent based on their asset-light model.

Alternatively, new-delivery players also enabled customers to compare menus and order meals from restaurants through a website or app, but additionally provided logistics for the restaurant too.

Such operators posted EBITDA margins of more than 30 per cent, compensated by the restaurant – with a fixed margin of the order – and the customer with a small flat fee, the McKinsey report noted.

“The MENA region has the world’s highest growth rate in home delivery services in the world, which signals to us that food delivery is still in its nascent phase and there is huge room for growth. As a subset of that, in the UAE, three out of every five people are using an application to have their meals delivered,” explains Tomaso Rodriguez, chief executive officer at Talabat.

With time, new-delivery players expanded the scope of the entire food delivery market giving lower-end, delivery-enabled restaurants the option to migrate to such platforms by outsourcing logistics for greater cost efficiency.

“Our comprehensive fleet gives our partners access to a wider network of riders, without the costs associated with a fleet. With over 15 years of operations in the region, our partners know they can count on us to safely get their food from pick-up to delivery. We provide the fleet, which allows our partners to focus on what they love, cooking great food and taking care of their customers,” adds Rodriguez.

According to Alpen Capital’s GCC Food Industry report, the annual amount per person spent on restaurant deliveries in the GCC is as high as in developed countries like the Netherlands, the UK and the US.

Online food ordering has effectively altered the dynamics of the region’s food retailers and service providers.

What’s more: the trend is only growing, as in the UAE, nearly 87 per cent of food operators are listed on food delivery apps, and 60 per cent of consumers in the UAE use an app to order food in comparison to 18 per cent of US consumers.

“The sector is booming, and we are in hyper-growth mode,” states Rodriguez. “One major reason is that there is so much room for development in the market. Talabat is expanding into new verticals inside the food industry. Secondly, consumers want instant convenience. They expect things now, and rightfully so, as our lives get busier and every moment counts. That’s why we continue to make big investments in product, tech and operations to reduce delivery times for customers.”

So, is there room for further growth in the online food space?

In 2018, the online food delivery industry – according to research firm Frost & Sullivan – stood at $82bn, and is expected to grow to a whopping $200bn by 2025. Growth will primarily be driven by growing global penetration, M&As (mergers and acquisitions), and adoption of new technologies.

Foremost among developing technologies is cloud kitchen – a virtual restaurant where food is prepared and delivered to the consumer’s doorstep by ordering via phone calls or online portals. Simply put, a cloud kitchen is a restaurant with no physical space and no dine-in or takeaway facility, dependent on a strong online presence, synergies of third-party applications for digital menus, digital payment gateways and delivery apps.

A cloud kitchen follows the methodology of taking a food order, and processing and delivering it using a food delivery service while the recipient remains unaware of the restaurant’s physical location.

Different cloud kitchen models exist – a single kitchen with one or more brands, a single kitchen with multiple cuisines and brands, and more. The global cloud kitchen market was valued at $650m in 2018 and is expected to reach $2.63bn by the year 2026, at a CAGR of 17.2 per cent, as per the analysis of research and consulting firm, Reports and Data.

Rodriguez concurs on the growth prospects. “Looking from a food industry perspective, there are definitely key areas of growth. We foresee the growth not only in brick-and-mortar but also online, such as cloud kitchens and cloud stores. The two biggest costs facing restaurants are rental and labour cost. Talabat is playing into this by offering cloud kitchen built to serve the online food ordering markets. Cloud kitchens are shared spaces where restaurants can launch in as little as two weeks.”

Furthermore, Rodriguez stands clear on key elements that would chart out the company’s future course. “You cannot talk about future plans in the region, without talking about the world’s most valuable commodity – data. Our data positions us uniquely to help restaurant partners and governments in the region. By using our data insights, we can help restaurants understand the trends in their own specific neighbourhood or give them insights into new areas, if they plan to expand their business.”

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