Food delivery: fad or lasting business?

According to a study by the NPD Groupfood deliveries organised via web-based platforms have been in constant growth over the past few years. Orders placed digitally are up around the world, despite the overall restaurant industry remaining stable or even slowing down in places.

Growth

The phenomenon is in full flow in Europe. Digital food delivery has grown by 19% in Germany, 16% in Spain, 15% in France, 13% in Italy and 8% in Great Britain. Generally speaking, pizza is the most popular food ordered, but there are a few exceptions. Brazilians, for example, like ordering chips, while the French have a weakness for hamburgers.

According to research by McKinsey, the global food delivery industry is worth a total of €83 billion – equal to 1% of the food industry as a whole. It is set to grow by 3.5% per year over the next five years. However, the traditional method of ordering home delivery – whereby customers phone up to place their order – still accounts for 90% of the industry. In Italy, the industry is worth €2 billion and digital ordering only accounts for 3%.

Elsewhere in Europe, online orders account for 56% of the whole in Sweden and 43% in Austria, while at the other end of the spectrum, the Asian, Latin American and Middle Eastern markets are just starting to experience growth. The key catalysts for digital food delivery services are industry funding and the size of individual players’ marketing budgets.

The value of the biggest global players

After the news that the sector’s five biggest companies have reached an overall value of €10 billion, the big question is what the sustainable profitability level for digital food delivery businesses really looks like. The market has become more bullish with the sector, offering private companies valuations and levels of funding far in excess of those obtained by similar companies in the past. Two of the biggest food delivery services, GrubHub and Just Eat, completed their IPOs in 2014. They were only able to raise moderate funding, under €100 million, before the IPOs. By contrast, Delivery Hero and Deliveroo, who could launch their own IPOs in the next two years, already have elevated value/equity ratios. Delivery Hero is valued at €2.7 billion against €1.2 billion in funding (a ratio of 2.2 to 1), while Deliveroo is valued at an estimated €1 billion against overall funding of €4 million (2.5 to 1). Clearly, the market is expecting these companies to grow – and grow quickly. Now, the challenge is to maintain that confidence.