Food delivery service. Mobile application.

(Archive)

Food delivery startups are taking over, and they will do to restaurant owners what Uber did to taxi drivers.

The industry’s growth is exploding, with over $13.8 billion in VC investments in the last two years. Sales for the sector are expected to reach $200 billion by 2025, up from $82 billion in 2018.

But, like their ride-hailing counterparts, these startups aren’t profitable, and their current business model appears to be unsustainable unless they somehow extract more value from every transaction. Uber’s plan for obtaining more value from its core business is simple, replace humans with self-driving vehicles and pocket the 75 percent of fares that drivers currently take.

Food delivery startups have a similar plan for taking privately owned restaurants out of the equation to increase their margins, and it looks very similar to Amazon’s playbook.

The first step, which is already playing out, is to create a marketplace, an app, that hooks users by offering them extreme convenience, great pricing and lots of choices, the everything store.

The second step is to enhance the users’ experience while at the same time, creating a massive barrier to entry by building out fulfillment centers, same day delivery. Delivery startups are doing this by creating “cloud or virtual” kitchens.

Virtual kitchens are restaurant locations explicitly designed for deliveries. These kitchens are located in high-traffic areas, are shared by multiple restaurants, and don’t have any seating area; in fact, they don’t even do takeouts, only deliveries.

By sharing space and only working with delivery apps, virtual kitchens massively lower restaurants expenses, allowing them to open more locations and make more money. At first glance, this seems like an excellent opportunity for restaurants and chefs. Sadly, it’s not so simple.

By working within a virtual kitchen, restaurant owners effectively give up control of every part of their business, except for cooking, which makes them vulnerable to the platform deciding to squeeze them. Uber and Lyft drivers have consistently been victims of this as the two platforms have lowered rates, hurting the drivers’ bottom line.

The third step in Amazon’s playbook is to use the collected sales data to create “private-label brands,” which slowly but surely would take traditional restaurants out of business and transfer their profit margins to the delivery apps.

An example of this would be a delivery app identifying the top three sushi places in Puerto Rico, analyzing their top-grossing menu items, and then hiring chefs to create similar plates to be sold under a new brand. Every time someone searched for sushi in the app, the new brand could be placed at no cost, as the top search result and offer customers exactly what they want at a lower price.

History doesn’t repeat itself, but it tends to rhyme. Restaurant owners should learn from the mistakes made by taxi drivers and consumer products selling online if they want to survive the 2020s. As an industry, they need to take control of their distribution platform or harder times will come.

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