Why food delivery is an uphill battle for Amazon, Google, and Uber
For such a simple concept, the same-day delivery market is starting to look mighty complicated. Established players like Amazon are expanding to include food and alcohol on demand, while Google (GOOG) is throwing some of its substantial resources into grocery and produce delivery in select cities, building upon its Express service for dry foods and other products.
The ever-ambitious Uber is also getting in on the action, with UberEATS already up and running in several cities and its own version of restaurant delivery rumored to be launching in New York this fall. Whereas these companies once merely dipped their toes into the world of on-demand services, they’re now blurring the distinction between specialized delivery companies and full-fledged restaurant delivery services.
With so many companies vying to deliver dinner, alcohol and just about anything else, how does a consumer choose which to use? And with a business model that entails low profit margins, what’s the upside for Uber and others?
According to Sucharita Mulpuru, vice president and principal analyst at Forrester Research, while there is consumer demand for such services, it doesn’t mean success will come easily to even the heavyweights. “Every market had for years expensive B2B courier services but these players are looking to undercut those with a consumer offering,” she says. “The problem is that consumers don’t usually want to pay for this service and retailers don’t have the margin to pay for this either.”
While Amazon (AMZN) has leveraged its ample inventory to bring same-day delivery of select merchandise to 14 metro areas, food on demand is a whole other issue. As Mulpuru explains, “It’s particularly expensive to manage time-constrained, local deliveries unless you limit the delivery area and limit the number of items that can be delivered.” She points to pizza delivery as one example of this business model working; in other words, the simpler the better.
Of course, Amazon, Google, and Uber aren’t the only ones to try their luck at food delivery: GrubHub-Seamless has had success acting as an intermediary between customers and restaurants, though it’s beginning to experiment with handling the deliveries itself as well.
For all these various companies—not to mention startups like Postmates—the biggest challenge is scale. For this reason, the bigger the pocket book, the better chances a business has of succeeding.
“Google could absolutely be a player here and they finally have a smart guy with a retail background trying to build this out in Brian Elliott,” says Mulpuru, referring to the general manager of Google Express. “That said, Google could very well decide this is a fool’s errand and there is no way they could do this profitably, so I wouldn’t be surprised if they say in a year, ‘we’ve tried our best…let’s bail on [this] endeavor.'”
Beyond the challenges of hiring and managing a workforce to handle the logistics of delivery, though, there’s the front end to consider. Ultimately, customer-facing infrastructure may also play a key role in determining a provider’s success—since earning loyal customers requires a simple, intuitive interface that scales well to mobile, while also incorporating excellent customer service practices.
In any case, though, this could be one instance where bigger companies are better off leaving the market to smaller startups.
“Whoever is left standing will finally admit that it’s best to just cut your losses and be a much smaller albeit profitable business,” says Mulpuru. “Uber is probably in a good position to be the last firm standing because they have a huge primary business of transporting people. To increase utilization of drivers, they may encourage drivers to take cheap package deliveries—Uber already has coverage in most major markets, and one of the biggest complaints from drivers is revenue,which this may help to address.”
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