delivery new percent food online market players

The changing market for food deliveryThe business of delivering restaurant meals to the home is undergoing rapidchange as new online platforms race to capture markets and customers acrossthe Americas, Asia, Europe, and the Middle East. Although these new Internetplatforms are attracting considerable investment and high valuations—already,five are valued at more than $1 billion—little real knowledge about marketdynamics, growth potential, or customer behavior exists. Research fromMcKinsey, based on a six-month study covering 16 countries around the globe,provides insight into this fast-changing market.## The shape of the market todayWorldwide, the market for food delivery stands at €83 billion, or 1 percent ofthe total food market and 4 percent of food sold through restaurants and fast-food chains. It has already matured in most countries, with an overall annualgrowth rate estimated at just 3.5 percent for the next five years.By far, the most common form of delivery is the traditional model, in whichthe consumer places an order with the local pizza parlor or Chinese restaurant(although many other kinds of restaurants, particularly in urban areas, nowoffer delivery) and waits for the restaurant to bring the food to the door.This traditional category has a 90 percent market share, and most of thoseorders—almost three-quarters—are still placed by phone.However, as in so many other sectors, the rise of digital technology isreshaping the market. Consumers accustomed to shopping online through apps orwebsites, with maximum convenience and transparency, increasingly expect thesame experience when it comes to ordering dinner.## Two tiers for online food deliveryTwo types of online platforms have risen to fill that void. The first type isthe “aggregators,” which emerged roughly 15 years ago; the second is the “newdelivery” players, which appeared in 2013. Both allow consumers to comparemenus, scan and post reviews, and place orders from a variety of restaurantswith a single click. The aggregators, which are part of the traditional-delivery category, simply take orders from customers and route them torestaurants, which handle the delivery themselves. In contrast, the new-delivery players build their own logistics networks, providing delivery forrestaurants that don’t have their own drivers.### AggregatorsAggregators build on the traditional model for food delivery, offering accessto multiple restaurants through a single online portal. By logging in to thesite or the app, consumers can quickly compare menus, prices, and reviews frompeers. The aggregators collect a fixed margin of the order, which is paid bythe restaurant, and the restaurant handles the actual delivery. There is noadditional cost to the consumer. With their asset-light model, aggregatorspost earnings before interest, taxes, depreciation, and amortization (EBITDA)margins of 40 to 50 percent. Although investment continues to pour in(Delivery Hero and Foodpanda, for example, both attracted €100 million in newinvestment in 2015), most of the consolidation in this subcategory has alreadyoccurred. Four players—Delivery Hero, Foodpanda, GrubHub, and Just Eat—haveachieved global scale. These four players tend to focus on different regions.On a national level, there are typically two or three competitors thatdominate, mostly driven by their ability to build a large user base.Consolidation is advanced in most markets and will likely continue. McKinseyresearch shows that just 26 percent of traditional-delivery orders are madeonline today, but we expect this share to increase rapidly.### New deliveryJust like the aggregators, new-delivery players allow consumers to compareofferings and order meals from a group of restaurants through a single websiteor app. Crucially, the players in this category also provide the logistics forthe restaurant. This allows them to open a new segment of the restaurantmarket to home delivery: higher-end restaurants that traditionally did notdeliver. The new-delivery players are compensated by the restaurant with afixed margin of the order, as well as with a small flat fee from the customer.Despite the higher costs of maintaining delivery vehicles and drivers, thenew-delivery players achieve EBITDA margins of more than 30 percent. Playersinclude brands that operate globally such as Deliveroo and Foodora, which arecontinuing to capture new regions. We believe the addressable market for newdelivery will reach more than €20 billion by 2025.Would you like to learn more about our Telecommunications Practice?Both aggregators and new-delivery players have attracted significantinvestment, allowing them to advertise widely and build recognition for theirbrands quickly. GrubHub and Just Eat, for example, each reported marketingbudgets of about €70 million in 2015. Since there is no limit to the number ofrestaurants these platforms can sign up, once they enter a market, they cangrow rapidly (see sidebar, “The new-delivery business model.”)## The new-delivery opportunityThe opportunity for new delivery is to extend food delivery to a new group ofrestaurants and customers. Rather than competing directly with theaggregators, new-delivery players are expanding the overall market. However,it is possible that in the future even lower-end traditional-deliveryrestaurants will migrate to new delivery because they will find it more costefficient to outsource logistics; thus, new delivery poses at least apotential threat of disruption to the aggregators.The growth in new delivery is driven by two sources of consumer demand. Thisfirst is as a substitution for dining in a restaurant. With new delivery,consumers can dine at home with the same quality food they would enjoy at afine restaurant. Some platforms even include Michelin-starred establishmentsin their offerings in selected cities. The second source of demand is as asubstitution for meals prepared and consumed at home.## Customer behaviorCustomers drawn to the new online food-delivery platforms have a different setof needs and expectations from the traditional pizza customer. Our studyuncovered the following important traits: * Platforms are sticky. New-delivery platforms, which personalize the ordering experience by storing relevant customer data, are sticky (Exhibit 1). Once customers sign up, 80 percent never or rarely leave for another platform, creating a strong winner-take-all dynamic, in which the reward goes to the player who can sign up the most customers in the shortest amount of time. * Time is critical. Speed of delivery is the biggest variable in customer satisfaction, with an average 60 percent of consumers across markets citing it as a key factor. The optimal wait time is no more than 60 minutes. * Meals are for home. Most orders—82 percent—were placed from home, while only 16 percent were placed from the workplace. * Orders spike on weekends. The highest-volume days for the online platforms were Friday, Saturday, and Sunday, when 74 percent of orders were placed.Exhibit 1We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:[email protected]## Channel migrationWith the new online platforms making inroads around the world, the food-delivery market is in the midst of a dramatic channel migration. We expectonline delivery to grow by 25.0 percent per year from 2015 to 2018 in keymarkets, after which it will taper off to 14.9 percent per year until 2020(Exhibit 2).Exhibit 2We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:[email protected] research indicates that online’s penetration of the total food-deliverymarket broke 30 percent in 2016. We believe penetration rates will growfurther as the market matures, eventually reaching 65 percent per year. Thisis the pattern we’ve seen, for example, in the more mature flight-bookingcategory, which has seen a dramatic channel migration over the past 10 to 15years, as well as for selected food-delivery players, such as Domino’s Pizzain the United States. It is quite likely that the food category will followthese patterns.We’ve already seen much of that growth pattern play out in Europe, whereonline penetration rates run from 56 percent in Sweden to 43 percent inAustria. At the other end of the spectrum, Asia, Latin America, and the MiddleEast are at the beginning of the growth cycle. The key catalysts for theadoption of online food delivery are the overall level of funding for theindustry and the size of marketing budgets. Technology penetration—mainlysmartphone and online penetration—has only been slightly relevant to the speedof adoption so far due to the geographic expansion of food players. We believethat the food category will grow in line with the smartphone category as newsmartphone users adapt their behavior to take full advantage of thetechnology.How a tech unicorn creates valueWith the top five global players having reached a combined valuation of morethan €10 billion, the key question is what a sustainable level ofprofitability will be for the online-food-delivery business models. The markethas become more bullish on the sector, giving the players that are stillprivate significantly higher valuations and higher levels of funding thanearlier companies achieved at the same stage (Exhibit 3). Two of the top fiveonline deliverers, GrubHub and Just Eat, made their IPOs in 2014. They raisedmoderate total funding, of less than €100 million, before their IPOs. Incontrast, Delivery Hero and Deliveroo, which could see their own IPOs in thenext year or two, already have high valuation-to-equity ratios: Delivery Herohas €2.7 billion valuation versus €1.2 billion funding (a ratio of 2.2:1) andDeliveroo has an estimated valuation of €1 billion versus total funding of€400 million (2.5:1). Clearly, the market believes there is still rapid growthahead for these players. The challenge now is for them to deliver on thatbelief.Exhibit 3We strive to provide individuals with disabilities equal access to ourwebsite. If you would like information about this content we will be happy towork with you. Please email us at:[email protected]