The Problem
Last updated
Last updated
Fueled by venture capital and exponential growth ambitions, the “Winner-Takes-All” strategy is all about acquiring market share at any cost. It’s a strategy that is losing massively in the current social-economic climate.
The objective of this strategy is to become a market monopolist. These monopolists can dictate any price to try and establish a profit margin, but when operating at a very low, or negative operational margin, raising prices becomes a necessity that inevitably results in their service conditions becoming unsustainable for their user base. In the world of food delivery & takeaway platforms, where WTA platforms struggle to operate at a profitable margin this model results in an unsustainable dependency by restaurant owners on these e-commerce platforms.
Therefore, current meal-ordering and -delivery market leaders follow an unsustainable path of never-ending price increases to squeeze restaurants and consumers for earnings. They've acquired market share during the last decade at any price, amounting to major company losses, and now that they've positioned themselves as market-leaders they are increasing fees and prices endlessly across the board.
To gain a better understanding of the economics for food delivery & takeaway platforms, the five major revenue streams have been laid out:
Commission fee per order, depending on whether it’s a delivery or takeaway order (15–30% per order)
Delivery fee, if the platform facilitates the delivery ($2–5 per order)
Customer service charges, subscription models (variable fee)
Administration costs for the restaurants ($0,21 per order surcharge)
Optional: in-app advertising (variable fee)
In most cases, the tip given to the delivery driver is the main source of income for said driver. Because of this, platform services can afford to pay a lower wage to their drivers to try and keep operational costs low. Whilst this doesn’t directly impact the restaurant business, it goes to show how even tips are further inflating the prices at which consumers can get some food on their table, and to which extent the base unit economics of the delivery model do not work.
Effectively, a 47% premium is paid for the total service by the consumer. The merchant only receives 61% of the value the consumer paid. About 24% of this value (consisting mostly of the tip paid) ends up over at the drivers. That leaves 15% for these platforms for its business revenue. 39% of the amount paid by the consumer, ends up at the platform and the drivers. Recently, more and more evidence is surfacing in which these platforms refuse refunds or operate low quality customer-service in cases where the consumer, or restaurant, are not served properly, amounting further to the conclusion that they operate a low-margin, high-fallible service.
It is clear that the commissions paid for the last-mile delivery service take up a large portion of the order's earnings and the restaurant's fees. It is the most commonly criticised side of the business model, especially since last-mile delivery is still barely profitable with these high service-fees. This wouldn’t be an issue if restaurants had a healthy margin to start with.
The reality is, restaurants are losing money on platform and delivery fees. At the same time, restaurants are reluctant to give up on delivery, because they need economies of scale in order to offset their fixed operating costs. If costs keep rising, the situation will become increasingly untenable. The three major cost drivers that restaurants face:
Food: 28–32%
Labor: 28–32%
Housing: 22–29%
This means that on average a restaurant spends 78–93% of the order's earnings on these three base necessities. To put it differently, a $30 meal costs the restaurant $25.65 on average leaving $4.35 on average in profits. This operational margin is negated by the platform's fees charged for advertisements, administration costs and delivery-service.
