Venture Bytes #62 - Delivery Companies Hit the Sweet Spot

Delivery Companies Hit The Sweet Spot

With surging demand, increasing proliferation of delivery providers and food aggregators, and growing investor interest and involvement, the sector has practically been basking in the sun.

Online food delivery growth is expected to outpace restaurant sales, hitting a 5-year CAGR of 18% from 2018 to 2025. Restaurant sales in the U.S. were roughly $350 billion in 2019 and expected to grow at a 5-year CAGR of 5% to $470 billion by 2025. More importantly, while demand is rising, with two thirds of Americans ordering food online, the penetration of suburban and rural areas is still quite low, where pizza and Chinese food are often the only delivery options available.

Restaurants have adopted smart technologies to offer more points of accesses for their customers to reach them. Accordingly, they have benefited from increased margins on the back of higher transactions and average check sizes by up to 50% for delivery orders. According to Jack Hartung, CFO of Chipotle, “higher number of guest transactions, higher average check sizes in the booming digital sales channel…if we didn’t have delivery, we would not have delivered the 21 percent margin,” McDonald’s has also highlighted similar benefits arising from delivery sales with the delivery business growing from $1 billion in FY16 to $4 billion in FY19.

Against that backdrop, 2020 started on a promising note with DoorDash and Postmates showing eagerness to debut on the public markets. However, the COVID-19 pandemic and the consequent “Great Lockdown” has severely impacted the markets and the economy. Capital Economics data shows that while hotel occupancy rates have dropped and have reportedly, in some cases, fallen to single digits, in-person visits to restaurants have virtually stopped. As fears around the virus swell, the hit to confidence could very likely become more pronounced.

The impact of COVID-19 on the on-demand delivery sector has been mixed. Social distancing and lock downs around the world have increased the reliance on home delivery services for stockpiling groceries and other essential supplies leading to record downloads of grocery delivery apps. As per mobile app download data from Apptopia, the average daily downloads for grocery apps including Instacart, Walmart Grocery, Shipt (owned by Target), and Target have surged by 218%, 160%, 124%, and 98% respectively in March 2020 compared to February 2020.

Conversely, downloads of food delivery apps have witnessed a sharp downward trend despite food delivery companies announcing non-contact delivery initiatives. Given the lingering fears of the pandemic, and the resulting preference to minimise the exposure to restaurant and third party food carriers, the food delivery business could face some headwinds.

In India, for instance, online food ordering has witnessed a 20% decline. Swiggy, a leading food aggregator and delivery services provider, had moved into household essentials, groceries, as well as delivering parcels in 2019. Its rival Zomato is also looking to diversify into groceries. While panic buying due to COVID-19 is the primary reason for the current surge in groceries deliveries (by upto 80-100% in India), the fact that grocery shopping is a recurring weekly or monthly necessity allows for high repeat customers.

DoorDash, Postmates, and Uber already provide grocery delivery services for retailers including Walmart. DoorDash, being well-funded and with a strong suburban presence, could further look to capitalize on the growth in the online delivery market. Focusing on both food and grocery deliveries will help (1) make revenues more predictable, (2) diversify the revenue stream (3) increase the scope of delivery dashers and hence, increase margins, and (4) and most importantly, mitigate the risk of regulatory hurdles that are increasingly coming to the fore in the food delivery market. Accordingly, DoorDash and Postmates have expanded their respective essential offerings and are delivering products for convenience stores and pharmacies during the pandemic.

Additionally, the aggregators and delivery providers are coming up with initiatives to support the restaurants in at least keeping the delivery sales going. DoorDash is bringing more than 100,000 independent restaurants to its subscription program without any fee. The new restaurants that signup for DoorDash or Caviar will be exempt from paying commission fees for 30 days starting Mar 17, 2020. Existing restaurants will also not have to pay commission fees on pickup orders and partner restaurants will be paying reduced commission fees on deliveries as well. Grubhub also announced commission fees exemptions of up to $100 million for impacted independent restaurants. In April, DoorDash and Caviar decided to reduce the fee by 50% for all restaurants till end of May 2020.

According to data from Second Measure, through the end of March, meal delivery services saw year-over-year growth of 24%, collectively. The potential benefits of this trend are many, including (1) surge in the number of restaurants on the delivery platforms, (2) spread of delivery providers to suburbs and rural areas (2) better scale for the delivery services (3) lower commission and delivery fees, and accordingly higher margins for the participating restaurants, and most importantly (4) a virtuous network effect leading to a bigger and a widespread network of restaurants on delivery platforms and better value creation for restaurants, platforms, and the customers. **

The Uber-ification of Freight Brokerage Business is Optimizing Efficiency

Digitization is reshaping the traditional freight service business. The business is generally opaque, slow and inefficient. Deadhead miles, or empty return trips, account for 30% to 40% of all trips made by commercial trips, globally. This has major consequences both for the bottom line and for the environment

Empty back hauls are due to the difficulty in finding the next load. It typically takes an average of 20 calls and four labor hours to book a single load. On average, logistics companies waste roughly 4,000 to 6,000 hours on manual bookings.

The cost of empty or dead miles gets passed down through the entire value chain – from the shippers to the end consumer - and of course the environment bears a heavy cost in the form of excess carbon emissions. Empty miles account for up to 1.5% of the U.S. greenhouse gas emissions.

“Uberification” of Freight Brokerage

A new class of companies is transforming the freight business. Freight brokerage companies such as Uber Freight and Convoy enable drivers to find nearby hauls with upfront rates, provide automated calculation of the fuel cost to reach the load, and also help in choosing the best shippers in terms of promptness for loading with feedback ratings.

Increased truck efficiency from on-demand trucking also helps to overcome other major issues faced by the trucking industry including (1) long accounts receivable days ranging, from 60 to 90 days, (2) high driver turnover rates, and (3) unpaid detention and layover time.

“Partnering with Uber Freight has been a good move. The ability to tender a load quickly, ensure that it’s going to be picked up, and track it all the way to the destination point — that’s the level of transparency and efficiency that Uber Freight offers that I haven’t been able to get with any other freight partner. It’s great to be able to look at a two-week window and decide whether or not it makes sense to ship something on a Monday, Wednesday, or the following Monday — and that visibility is something I haven’t seen anybody else do” - Bill Heslam, VP of Operations, Narragansett

Additionally, increased backhauls also result in environmental benefits with Convoy’s automated reloads program reportedly leading to a 45% decrease in CO2 emissions.

Market Opportunity is Large and Growing

The freight brokerage market is expected to grow at around 4.3% a year in the Americas region through 2023. In 2018 U.S., the non asset-based domestic transportation management segment (DTM), witnessed high growth with gross revenue reaching $86.5 billion, a Y/Y increase of 20.6%. Freight brokerage services are part of the DTM segment.

Key tailwinds driving the growth include a strong domestic economy, heavy port-to-warehouse and warehouse-to-warehouse moves, rising carrier rates, increased fuel surcharge revenue, and continued outsourcing.

AI and ML Technologies Driving Efficiencies

Companies including Transfix, Convoy, Uber Freight, and Loadsmart are causing significant disruption in the freight industry by using AI and ML, thus making the sector more streamlined and efficient. Traditional players have also been investing heavily in incorporating technology in their operations. J.B. Hunt has its Carrier 360 platform and C.H. Robinson has Navisphere.

While companies have been using transportation management systems to automate managed transportation, digital freight brokers have been digitalizing DTM operations including manual carrier sales and procurement and back-office processes. Research shows that automated freight billing takes 40% to 60% less time than its manual counterpart. Additionally, freight brokerage automation solutions have shown improved fleet productivity in general and lower carbon footprint. In terms of numbers, optimized routes as a result of automation could lead to 40% shorter delivery lead times and 47% lower logistics costs for standardized transport (PWC).

Accordingly, investment in the freight tech sector has surged with $1.6 billion of investment in Q1 2019. This was more than half of $2.9 billion invested in 2018 and greater than the $1.3 billion invested in 2017. Some of the key trending companies in the sector include NEXT Trucking, Convoy, and Flexport. While the competition is fierce among freight brokerage firms, the demand for lightweight new age, digitally equipped digital brokers is equally strong with roughly 600,000 for-hire motor carrier firms (FMSCA, AAR, ATA) looking for automated freight solutions.**