Food Delivery: Looking Back

This will be the first of a two part series: this post focused on reflecting on 6 years spent in food delivery & the next focused on predicting the future. Stay tuned!

I got into food delivery in 2013 - the same year that DoorDash was founded, UberEats debuted, and the concept of third-party delivery was extremely novel.

Since that time, I’ve worn all of the hats - a few of my adventures included:

• Leading market expansion at OrderUp via a unique delivery franchise model

• Founding OrderUp’s first Enterprise Partnerships team leading up to our acquisition by Groupon

• Leading go-to-market strategy for Groupon To Go, Groupon’s brief foray into delivery and pickup

• Leading Midwest market expansion at Ritual

• Founding Ritual’s first Enterprise Partnerships team (this opportunity seems to find me wherever I go)

• Managing integration partnerships at Ritual (with folks like Checkmate, Olo, Square, etc.)

It was an absolute pleasure to meet so many smart people along the way - both on the operator side and the tech side. I was also fortunate enough to be featured in a few industry panels, publications, etc. All in all, it was a memorable ride.

HOWEVER, I’m not the first person to call myself a “veteran” of the food delivery industry - a term usually reserved for people who fought a war. In many ways, I feel like I did. In just 6 years, the food delivery industry exploded. Living through that kind of hyper-growth and seeing the good, the bad, and the ugly was an experience that shaped my career. Now that I’ve stepped away, it’s something I’ve spent a good bit of time reflecting on, so I’ve decided to spill all of this tea while it’s fresh in my mind:

Chapter One: Getting in the game (2013-2014)

Note: Most people put the start of modern food delivery in the 60s when big pizza chains started really leaning into it. Beyond that, Grubhub and others were facilitating online ordering and marketplace discovery for restaurants that did their own “first-party” delivery dating back to 2004. The starting point that I’ve picked here refers to when “third-party delivery” came on the scene .

Note #2: third-party delivery has a ton of letters. 18 to be exact. We’ll call it “3PD” here.

I know this is difficult to believe now, but there was once a time when every restaurant didn’t have a dozen 3PD stickers in their front window and a prep table that housed enough tablets to stock a Best Buy. The early days of food delivery were all about convincing restaurants to get in the game. You didn’t sell against competitors back then; you simply had to convince restaurants to offer delivery in the first place.

The pitch went something like this: “Customers are craving convenience more than ever. In order to satisfy that consumer expectation, you should partner with us. We’ll transport your food to customers and take a 30% cut of each order in order to pay for our logistics and marketing. But don’t worry, we’re going to bring you new customers and these orders will be entirely incremental, so even with that 30% cut they will be profitable. Oh and by the way, let’s put an order delivery button on your website so that your existing customers can place incremental orders too!”

Objections commonly fell into a few categories:

Food quality

Anyone who has sold restaurants on delivery knows the phrase “my food doesn’t travel well” intimately. This is sort of a ridiculous argument for a restaurant that also offers takeout orders, which leave the restaurant with far fewer quality controls than 3PD, but I’ll give restaurants a break here. 3PD was new and scary. There is nothing wrong with being a champion for food quality.

ROI

Getting restaurants to drink the incrementality kool-aid was a fine art. I used to coach OrderUp franchisees on the “napkin exercise” - a simple math exercise that illustrated the difference between fixed and variable costs. Because restaurants were generally not adding more staff, paying more rent or utilities, etc. in order to engage in 3PD, only variable costs applied to 3PD economics, making them highly incremental. This is an important point in this story, because at the time this wasn’t smoke and mirrors. Food delivery was an extremely compelling growth driver for restaurants. I believed deeply in what I was selling back then. Where I stand today… well, we’ll get to that shortly.

Operations

These were objections about the actual mechanics of receiving and fulfilling orders. These objections were common from merchants who ran high-volume operations or simply didn’t care about growth enough to create new processes. Chipotle, who was one of my favorite clients, is the best example of this that I remember. Their operational concerns were 100% warranted and legitimate. How is a team member working the tortilla press station with a line of customers out the door supposed to pull a fax off a fax machine and disrupt throughput? (You read that right - FAX. In the early days a fax paired with a robo-call to confirm receipt was the most common way to send an order to a restaurant.)

Looking back, this was a thrilling chapter in food delivery that I remember fondly. The industry was laced with optimism and we were solving exciting and complex problems. I’ll never forget the first time I ordered dinner after OrderUp launched its delivery tracking feature. I watched my dinner traveling to my row home in Baltimore via an icon on a map and I knew that we were on to something big.

Chapter Two: The race for scale AKA promo code hell (2015-2018)

Do you remember the first time you placed a 3PD order?

Chances are that when you did, you had a juicy promo code.

If you lived in Chicago city limits in 2016 and had a household income above $50k, I am personally responsible for spamming you with direct mailers. Sorry about that.

The point is, the next chapter of food delivery was the race for scale. During these years, the industry transformed from a local game to one that would be won on a national level. As a two-sided marketplace, the race was simple: get a bunch of the best restaurants on your platform and create enough demand for orders to retain them. With an explosive competitive set, the ability to do this quickly was critical. It was no longer about getting restaurants in the game and soothing their operational and financial concerns. It was about choking our your competitive set in a land-grab race for scale. VC money was being poured into the industry and the word profitability was in nobody’s vocabulary. The name of the game was to grow quickly and at any cost.

This phrase wasn’t just about scaling growth- it was about scaling everything. There is an enormous amount of work that happens behind the scenes in delivery. How do you scale menu creation? How do you scale the supply chain for tablets? How do you manage time-sensitive support for three distinct stakeholders - restaurants, drivers, and hangry customers?

So basically, we all worked really hard and functioned a bit like chickens with our head cut off eager to win the race for scale. That race was run with a few common techniques:

Aggressive discounting

Food delivery companies aren’t the most original bunch, but perhaps we didn’t have the time to be. The easiest way to drive mass consumer adoption in a short period of time? Throw money at customers to use your product. The most ridiculous marketing promotion that I recall in the space was Postmates offering $100 in delivery credits to new users. They ran that god forsaken promotion for like three years too. I could rant at length about the faulty economics of that offer, but they did get acquired for $2.7B, so I guess the last laugh is theirs. There were a lot of problems with the discounting strategy - namely the fact that consumers could eat free for a month by making their rounds through all of the available new user discounts across a huge number of commoditized platforms (more on that later.)

“Type three” delivery

This was an internal OrderUp term and I’m sure that other players had their own code names for it, but the practice that I’m referring to is advertising restaurants that the 3PD company does not actually have a contractual relationship with. This happened in a variety of ways, but the basic mechanics were calling in or placing orders at a restaurant as if you were the customer and equipping drivers with a prepaid debit card to pay for them upon pickup. These were not revenue-generating orders, but they could be very strategic. From a consumer perspective, they allowed delivery companies to advertise the highest quality restaurants without the inconvenience of having to go sell them. Sometimes this method even helped you close the deal with the restaurant. I’ll keep the chain anonymous, but at OrderUp we closed a deal with a top 10 QSR by creating a data-driven case study this way. Other times, it backfired completely. Cease and desist letters, stories of drivers being verbally assaulted in-store, and other horror stories also happened.

Exclusivity deals

Any fellow industry vet shudders at the mere mention of this term. The premise was simple: build a fortress around the most important restaurant partners by making them an offer they couldn’t refuse. Influential restaurants who agreed to go exclusive with one partner were rewarded with rock-bottom commission rates and/or special perks (marketing features, POS integration, enhanced support, etc.) One of the best known exclusivity deals was between Grubhub and Yum brands (who even went so far as to invest in their company) in early 2018. Spoiler: they’re no longer exclusive.

City Launch Playbooks

There was an important nuance at play in the race for scale, though - geography. A delivery company’s growth was often measured in the number of cities that they operated in. Adding more cities was no easy feat, either. Local marketplaces in general are notoriously difficult, but when you consider the unique dynamics of food delivery, it’s nearly a miracle that any of them scaled as fast as they did. Each new city required liquidity amongst restaurants, diners, and drivers. Players in the delivery space got really good at building repeatable and scalable playbooks to launch cities, but ultimately one thing became clear: the race was not going to be won city by city. It would have to be won nationally. Because of this, chain restaurants became a very important character in the food delivery story.

National Deals

Players were still pretty differentiated during these years. OrderUp, for example had a big focus on college towns, which were really important markets for brands like Chipotle, Noodles & Co, and Qdoba. That differentiated geographic footprint earned OrderUp a spot as one of Chipotle’s 4 exclusive delivery partners, a feat we were all incredibly proud of. For most major chains though, the leading predictor of which 3PD got the deal was the number of locations they could service. Because of that, the 3PD players with the most scale began to pick up a commanding lead on the little guys. This ended up being probably the most important virtuous cycle that determined winners and losers in the space. The playbook became:

• Grow fast so that you have the footprint to win national deals

• Once you have enough national deals, reverse-engineer all the geos where those brands overlap and launch them with a running start on supply

• Rinse and repeat steps 1 and 2 until you’re not just in a certain number of cities, but “everywhere.”

These were interesting years for me. At the peak of our momentum securing national deals, OrderUp was acquired. Groupon then proceeded to use chunks of the OrderUp infrastructure and team to launch delivery under their own brand (a decision that none of the OrderUp team supported that ultimately became their downfall.) By 2018, you could say I was jaded, but I still wanted to help restaurants win with technology. I joined the team at Ritual, drawn to their differentiated focus on daily pickup habits and their genuinely merchant-centric culture.

Chapter Three: The three C’s: commoditization, cannibalization, and consolidation (2019-2020)

By 2019, 3PD had reached adoption and scale that I only dreamed about when I got into the space, but the age old saying applies: more money, more problems.

What started as a way to empower restaurants with technology and deliver consumer convenience (pun intended) transformed into all-out Hunger Games (pun also intended) that led both tech companies and restaurants to question their survival. Several things have happened, which I call the “three C’s:”

Commoditization

Name a feature that DoorDash has that UberEats doesn’t.

I’ll bet you can’t.

The players in the game have become completely commoditized - offering a feature set, geographic footprint, service level, and pricing model that is largely identical. A lot of people are talking abut the commoditization of platforms, but I think there is a much more alarming trend at play here: 3PD is also commoditizing restaurants.

The restaurant industry has historically been called “hospitality.” Let’s define that:

the friendly and generous reception and entertainment of guests, visitors, or strangers.

Is receiving a sack of lukewarm Indian food on my doorstep hospitality? I struggle to say that it is. I typically don’t even interact with the driver.

Historically the two most important outputs of a restaurant are their food and their service. With the growth of 3PD, the service portion of that is being farmed out to an independent contractor driving food around town for a low wage. Let’s be honest - they don’t care about you or your food, and have minimal skin in the game when it comes to providing hospitality.

With service at best delegated to someone else, and at worst entirely eliminated, food becomes the only thing that differentiates restaurants. Don’t get me wrong, food is a pretty important thing (says the woman who is married to a Chef.) Food is the core product and it can be an art form with a tremendous story to tell. But to what extend do a few photos and menu descriptions in a static UX accurate and richly tell that story? In the absence of richer user interfaces that allow for branding and storytelling, what do you get? Commoditized food.

Cannibalization

This will perhaps be my biggest #hottake in this post: I believe that, for most restaurants, 3PD stopped being profitable within the last several years. As I mentioned earlier, the core thesis behind the third party delivery pitch is the idea that the orders that come through that stack of tablets are incremental. When food delivery makes up <10% of your business, everyone is happy about that seemingly incremental 10%, but what happens when it makes up 50% of your business? Does paying a 20%+ commission on half of all orders you sent out the door not have a cannibalistic impact on your business?

When Grubhub has growth hacked your Google Place listing and customers who search for your restaurant are now ordering through their platform with a corresponding commission, does that not have a cannibalistic impact on your business? I don’t say any of this to demonize food delivery companies. I say this because I think it’s important to acknowledge the side effects, many of which unintended, of the proliferation of 3PD. Some food delivery companies have made changes to address this, whether that be passing more of the delivery costs onto consumers vs. restaurants or allowing restaurants to discretely mark up their menu prices to offset commissions. These are considerate stop-gap measures, but ultimately I believe that the only real solution here is a total re-imagining of the value chain for food delivery (more on this later.)

Consolidation

As mentioned in my banter about the aforementioned promo code wars, the cost of many 3PDs competing with one another was high. Customer acquisition costs were simply unsustainable because there were too many players going after the same base of consumers for any one of them to reach the scale needed to become profitable. One of the best ways to improve your margins is to simply make your competitor disappear so that you don’t have to keep spending to beat them. And that is exactly what the leaders in the industry did. Smaller players like OrderUp, Postmates, Caviar, Eat24 etc. were acquired, resulting in a two-player game between DoorDash and UberEats. You could argue that Grubhub is still in the race as well, but I personally find them irrelevant due to their glaring lack of innovation and downward trajectory.

Chapter Four: Mass adoption via black swan event (COVID)

According to the Deliveroo’s CEO, Will Shu, COVID has catapulted the growth of food delivery 2-3 years into the future. Ghost kitchens are said to have accelerated 5 years into the future. This year was, undoubtedly, a growth spirt for third party delivery.

The story is now one of a small number of players servicing an enormous number of restaurants and diners, who rely on delivery more than ever before. But, the dichotomy between the restaurant experience and the third party delivery company experience right now is jarring. Restaurants are hurting more than ever and delivery giants are thriving more than ever (depending on your definition of thriving I suppose. DoorDash’s IPO was a smooth move because the surge of amazing COVID data pretty well buries the fact that they still aren’t profitable.)

Suddenly the rights of restaurants has become a public issue, with several local governments intervening to impose caps on 3PD commissions.

What will become of all this? More importantly, what should become of all this? In a part two to this post, I’ll share my viewpoint on what’s in the crystal ball.