This article first appeared in The Edge Malaysia Weekly on June 14, 2021 - June 20, 2021

IN May 2019, in a column titled “Meal kits, food delivery and the Death of the Kitchen”, I wrote about the popularity of food delivery apps that were emerging as utilities, in some cases even replacing kitchens with fully cooked meals or partially prepared meal kits.

UberEats, DoorDash, Postmates and GrubHub in North America; JustEat Takeaway and DeliveryHero in Europe; Deliveroo in the UK and Australia; Meituan Dianping in China; and the likes of GrabFood and Foodpanda in Southeast Asia were delivering great value for customers even as they destroyed shareholder value. “Nobody is making money in food delivery,” I wrote at the time, predicting that it was indeed highly unlikely that anyone would ever make money unless there was massive consolidation in the space that upended the economics of the business.

Two years on, the meal delivery business has grown dramatically in the aftermath of the Covid-19 pandemic’s rolling lockdowns. Moreover, there has been a lot of consolidation in the sector. But as the world starts to open up in the wake of soaring vaccination rates, the food delivery business faces its moment of truth. Can it finally turn a profit? Or will the economics of the business deteriorate as more people go out and eat in restaurants again instead of giving Uber­Eats, Foodpanda or Meituan a huge tip for braving the lockdown and delivering a few dishes to their doorstep?

Food and grocery delivery apps process and send orders directly to partner restaurants or grocery stores and their delivery drivers bring the meals or bags of groceries to your home. The apps earn money by charging restaurants or grocery stores a percentage of the order and customers a service fee. The pandemic accelerated the trend of ordering food or groceries online rather than venturing out with a mask and socially distancing ourselves from other shoppers to avoid Covid-19. Many urban white-collar households had higher disposable incomes during the pandemic because they saved on commuting while working from home and avoided eating outside. Some spent part of the savings to occasionally order from food or grocery delivery firms.

Here is the problem: Food and grocery delivery is probably one of the worst business models in the world.

Although DoorDash, UberEats, GrubHub and others saw a hefty increase in revenues, their operating expenses are growing faster than the rise in revenues. The meal delivery firms have to pay drivers, set aside money for marketing and promotions and an array of administrative or operating expenses, including refunds to customers.

In a recent report on food delivery, Deutsche Bank noted that DoorDash, which raised US$3.4 billion (RM14 billion) in its IPO last December, made just 90 US cents last year on an average food order of US$36. That is a gross margin of 2.9% in a record-breaking year for food delivery when much of the world was under lockdown. In a more normalised year, like this year, with companies having to fork out more money to entice drivers, the economics of food delivery does not make sense.

Less than 15% of North American households regularly use a meal delivery service. At the height of the pandemic, that figure might have gone up to say 20% on a good day, possibly slightly higher, but the point is that the majority of households still do not order food from the smartphone apps. They would rather cook at home. UBS estimates that global online food delivery in the top 14 markets is likely to double between January 2020 and end-2024, driven by greater order frequency, cultural shifts and growing average order values. Unfortunately, the deteriorating economics of meal delivery means the math just does not work.

If you think the food delivery business is bad, grocery delivery is far worse. At the height of the pandemic last year, I tried Instacart, the biggest grocery delivery firm. To get stuff delivered from my favourite supermarket, Instacart was charging me a total of US$14, plus taxes, for US$40 worth of groceries for one-hour delivery and I was expected to give the delivery guy a big tip as well. After three or four deliveries, I vowed never to use Instacart again.

Delivery-only ghost kitchens or virtual kitchens, which are also called cloud kitchens or dark kitchens, are one way to cut costs and improve meal delivery economics. And ghost stores may be the way to cut grocery delivery costs. People will not pay US$15 in delivery charges to get US$40 worth of groceries. But if you can eliminate the delivery charges and get the groceries to their home in 15 to 30 minutes, they might be tempted to use an app than go to a supermarket.

Last week, Missfresh, an online grocery delivery unicorn that operates as Meiri Youxian in China, filed its F-1, the registration form for foreign companies that want to list in the US. Backed by Tencent Holdings Ltd, Goldman Sachs Group Inc, venture capital (VC) firm Tiger Global Management and investment company Abu Dhabi Capital Group, Missfresh now has more than eight million affluent urban households as users and operates 650 “distributed mini-warehouses” in 16 major Chinese cities that allow it to source items from farmers directly. In many Chinese cities, Missfresh can get you groceries in 20 to 25 minutes. Last year, despite Covid-19 restrictions across China, it chalked up an average delivery time of just 39 minutes. With the goal of disrupting the traditional grocery shopping model, Missfresh, which will list on Nasdaq next month, now aims to cut delivery times in most cities to under 30 minutes.

As a user of both food and grocery delivery apps, I believe the key is ultra-fast or super delivery. In the post-Covid world, customers will not pay a huge premium for food that is delivered 30 minutes to an hour after it is ordered or wait two to three hours for groceries. If you can get me something in 15 minutes, I do not mind paying an extra five or 10 bucks.

Last week, JOKR, a new speedy grocery delivery service, was launched in parts of New York. It was founded by serial entrepreneur Ralf Wenzel, who co-founded popular Southeast Asian food delivery app Foodpanda and helped lead its global expansion, ultimately merging it with German competitor Delivery Hero in December 2016.

JOKR promises to be the future of on-demand grocery delivery by getting you that chicken sandwich, ready-to-heat pasta, carton of milk or bunch of apples — indeed, a fairly wide selection of products that you might find in the local deli or convenience store — in just 15 minutes or less. And, oh, there are no order minimums, unlike many of the grocery or food delivery apps, and absolutely no delivery fees. Want one carton of fresh milk and strawberries or grapes delivered to your home? Most apps will either reject the order or tell you that you need to order more items to go with it before they can deliver. Not JOKR.

Here is how ultra-fast 15-minute grocery delivery works: JOKR builds micro-hub storefronts on side streets in denser urban areas such as New York. Essentially, these are ghost stores, akin to ghost kitchens in food delivery, that use data to forecast what customers in that neighbourhood want and when, and then strategically places these micro-fulfilment centres for speedy delivery. Think of these as mini markets, but carrying far more goods that can be quickly dispatched to people in the area. Algorithms predict local behaviour and buying patterns.

Let’s say you live in a New York neighbourhood that is predominantly Asian — Chinese, Japanese, Koreans and so on. That area would have a high demand for bags of rice or packets of ramen or kimchi. In an affluent neighbourhood, there would be higher demand for high-priced gourmet items and, in poorer areas, there is higher demand for low-priced merchandise.

JOKR had been operating across Latin America — in key Brazilian cities such as São Paolo, Peruvian capital Lima and Mexico City — for several months before its New York launch. It raised money from Japan’s SoftBank Group Corp, as well as German venture capital firm HV Capital and Silicon Valley investor Tiger Global. Wenzel stumbled on the ghost kitchen idea when he was working for Foodpanda. After the firm was sold to Delivery Hero, he decided to use the ghost kitchen model to build ghost stores for groceries. To cut delivery times, JOKR focuses on being as near to its customers as possible. If it cannot deliver in 15 minutes, it will not take your order.

JOKR is basically a data-centric app that uses artificial intelligence to identify not only what the customer wants and when he may want something but also what the company’s micro-fulfilment centres might need to meet the neighbourhood’s demands. Early in the morning, demand for milk, toothpaste or orange juice might be high while, late in the evening, items such as ready-to-cook pasta, fresh fruit and beer might be higher. The app’s algorithms build a dynamic inventory and catalogue management system that can replenish and rotate inventory or pre-forecast suggestions for customers.

JOKR procures the goods it sells directly from brands, manufacturers or wholesalers to keep its costs low. That is why JOKR has been labelled a ghost kitchen of sorts for groceries and everyday items. Instead of relying on delivery charges such as Postmates or Instacart, JOKR generates revenues from a small margin on its products. “Our ability to procure directly and cut out middlemen like wholesalers, distributors or supermarkets allows us to tap into a margin pool that is higher than that of traditional online marketplaces, which pick a product only from existing stores and supermarkets, and then add a delivery fee to make their proposition work,” Wenzel was quoted as saying at the New York launch last week.

And instead of relying on part-time riders, like UberEats, Foodpanda or GrabFood does, JOKR delivery people are full-time employees. Because they deliver within a small radius in an urban neighbourhood, delivery guys tend to know their customers.

Few companies globally have been able to execute on delivery and make money. E-commerce giant Amazon.com is already doing same-day deliveries in many cities but Amazon is not in the food delivery business. It has a 7% stake in UK’s Deliveroo, which should help its foray in the sector. DoorDash and others are experimenting with robots that glide along sidewalks to deliver goods. Once you take away the cost of the driver, food delivery suddenly becomes a more viable business.

Until then, food and grocery delivery firms will continue to raise more money to keep afloat. Chinese online-grocery app operator Dingdong Maicai recently filed for an IPO on the New York Stock Exchange. The firm had just two months ago raised US$1 billion from investors, including SoftBank Vision Fund, at a US$5.1 billion valuation.

Meal and grocery delivery firms are hungry for new capital, yet they are spending almost as fast as they can raise money, which means they are perpetually in fundraising mode. Most of them have done rapid fundraising rounds before racing to an IPO. Indeed, even after a listing, they just keep on raising new money, diluting existing shareholders as the path to profitability remains rocky.

Chinese food delivery giant Meituan raised US$4.2 billion in an IPO in late 2018. In March, it raised a whopping US$10 billion more in a secondary offering less than  three years after its mammoth IPO. Despite regulatory fines, Meituan, which has remade itself into a platform of sorts, is likely turn a profit next year.

Assif Shameen is a technology and business writer based in North America

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