One of the biggest areas of development and disruption in food delivery is the emergence of “ghost kitchens”. These food preparation centres, usually separate from restaurants, focus on takeaways and delivery. They have myriad benefits. Alongside being able to save on labour costs by using customer data to work out high-demand periods, property maintenance is lower, as landlords are responsible instead. Restaurants could also cut input costs through operating a reduced menu for takeaways. Moreover, it can mean lower staff turnover, which is another way of saving money. Although no data is available, one expert told Third Bridge that the ghost kitchen environment can improve employee retention, as it takes chefs and other staff out of the often small, busy restaurant kitchens to purpose-built premises and removes part of their workload.
Ghost kitchen developers have proven disruptive in several ways. Just as ride-hailing app Uber posed challenges to city governments, ghost kitchens have also proven problematic. Local governments have had to decide how to define these: are they a warehouse, restaurant, food court or something new entirely? As the authorities have not caught up to this new business model, it is adding to the difficulties in opening a ghost kitchen. Companies are slowed down by having to obtain health and safety permits, for instance, while having multiple stakeholders involved complicates the process.
Uber found itself temporarily banned in London after black cab drivers protested against the disruptive new company. After a court hearing – and changes to its operating methods – the company regained its licence in 2018. Similarly, there have been attempts to restrict the growth of third-party delivery companies. Their emergence in the past few years took some restaurants and food suppliers by surprise; they had not heard of the likes of Just Eat, Deliveroo or Uber Eats. In some cases, suppliers attempted to take legal action against delivery companies.
But, as Third Bridge Forum’s Interviews uncovered, the industry has passed through this phase towards a “season of pragmatism”, with companies finally facing up to the reality of delivery companies. In return, third-party delivery companies have become more reasonable and realised that they can work together with ghost kitchens and other players in the supply chain to secure mutual success.
Another example of the major changes taking place in the food delivery sector is M&As, such as that of Just Eat and Takeaway.com, which announced the plan to merge in mid-2019. There is the potential for significant efficiencies across the two businesses, specialists said. Takeaway.com already has a history of successfully merging brands in Germany. Possible actions for the two merging groups could include reviewing other brands that the two companies own, such as SkipTheDishes, owned by Just Eat, and Foodora, which belongs to Takeaway.com.
However, in the past few years, these aggregator companies have not been as profitable as some investors might hope. This is largely due to a focus on acquiring new restaurant clients and expanding their coverage areas. However, if they were to shift their strategy and focus on execution – for instance directing customers who were attracted to their platform by a particular restaurant to more expensive offerings – then profitability would undoubtedly increase.
There is also talk of other types of consolidation. For example, some third-party delivery companies are exploring a form of vertical integration by opening their own ghost kitchens: Uber Eats recently opened a kitchen in Paris, while Deliveroo has been testing food preparation centres in converted shipping containers in London. However, in order to become a fully vertically integrated provider, a great deal of resources and capital is required. More commonly, brands are outsourcing part of their production or part of the delivery chain.
Outside of M&As, the next phase of growth for third-party delivery companies is most likely to come from signing up established traditional fast-food providers such as McDonald’s, Burger King, Tim Horton, Starbucks and Subway. All of these have agreed deals with various delivery apps, with some agreements including special offers or dual-marketing campaigns.
While these established brands have been slower than smaller, more localised outlets to sign up to third-party delivery apps, their acceptance of the model is likely to drive significant growth for the likes of Just Eat and Uber Eats. And restaurant chains are beginning to realise that proprietary delivery services can be expensive and difficult to operate.
Furthermore, even companies with well-established delivery services are being affected by aggregators. Domino’s Pizza Group has recently seen its market share dented in the UK as rivals such as Pizza Hut and Papa John’s have joined third-party delivery apps. One specialist suggested that this threat could push Domino’s to explore either a partnership with an aggregator or launching its own delivery service for other food outlets, using its established delivery system.
This problem also highlights one of the issues that some providers have with aggregated apps and platforms: losing customer loyalty. Aggregators come between a restaurant and its customers. Although the restaurant might retain those customers in the short term, the range of options on the intermediary platform is likely to draw them away in the long term. However, this has led some outlets to create online portals, which are in turn becoming a threat to aggregator platforms. This way, outlets can ensure customer loyalty and collect data.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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