The Failure of Food Delivery Startups

Marc Andreessen popularized the idea that in a “great market,” a company’s “product doesn’t need to be great; it just has to basically work.” I believe that’s what’s happening in the world of food delivery. Here’s why.

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Uber Eats, DoorDash, Postmates, and Grubhub are praised by a market so busy and desperate for quick, crave-able, and convenient food that, in turn, consumers are willing to settle for soggy food, jacked-up prices, and borderline exploitation of restaurants and gig workers. Sure, there’s a time and place for these services –– like when you can’t or shouldn’t leave your home for whatever reason, including a global pandemic –– but once you peel back the layers of modern food delivery, you’ll realize the whole operation is sort of unbelievable –– and not in a good way.

Let’s talk about how we got here –– and what’s really going on.

Growth, not quality, is the name of the game

The delivery service that attracts the most customers should attract the most restaurants and drivers, leading to better service and even more customers, etc. This network effect creates a continuously-compounding advantage, which is why many in the startup-investment community believe eventually one company will dominate the delivery market –– and all others will die.

As a result, an unprecedented amount of investment capital has flown into a handful of aggressive competitors leading to the delivery wars. Until there’s only one company left standing, growth is the sole focus.

Consequently, food delivery is turning a blind eye to decency and quality.

For example, Postmates, DoorDash, and Grubhub have aggressively grown their restaurant selection without getting permission from restaurants. Sara Jones of Eater reported that instead of asking permission, delivery services will list restaurants in search, take orders, then call them into restaurants and send couriers to pick them up.

Many dishes unoptimized for delivery end up featured, leading to cold, soggy food. Even worse, Seattle restaurant owner David Meinert details that the menus posted for all his restaurants are incorrect, with either wrong prices or with items the restaurant no longer offers.

In a statement to Eater, Grubhub said they’re adding non-partnered restaurants “so we will not be at a disadvantage compared to any other food delivery platform.” It says “the non-partnered model is no doubt a bad experience for diners, drivers and restaurants. But our peers have shown growth – although not profits – using the tactic, and we believe there is a benefit to having a larger restaurant network: from finding new diners and not giving diners any reason to go elsewhere.”

This helps explain why a 2019 US Foods poll discovered a significant portion of delivery customers are “consistently irritated” when food is delivered late, not warm and/or fresh, incorrect, or messed up during delivery.

These companies have no consideration for small restaurants and the misrepresentation of their brands. When things go wrong in food delivery, unfortunately, the diner often blames the restaurant, even when they are not at fault or aren’t even aware their dishes are offered for delivery.

Under these conditions, delivery surely can’t replicate the flavor of a home-cooked or chef-prepared meal.

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Hate to break it to you, but delivery apps are eating up your wallet 

Food delivery comes at an insane cost. A recent report by Brian Chen of the New York Times found that orders made on Uber Eats, DoorDash, and Postmates are marked up as high as 91%.

“The problem is egregiously price-gouging customers,” Grubhub CEO Matt Maloney said of his competitors in 2019. “At some point, they will figure it out. I trust the consumer, ultimately.”

When you order through a delivery app, you typically pay for high service fees, extra costs hidden in menu markups and subscription programs Maloney calls “bogus.”

Forbes demonstrates just how easy it is for a $30 dumpling order to cost over $45, once a $5.99 delivery fee and $4.60 service fee is tacked on before tax and a reasonable tip.

As food delivery costs soar, consumers are soon realizing that dining at a restaurant or even ordering a personal chef is a lot less expensive in the long run.

Meal delivery apps are killing your favorite restaurants

Chris Webb, CEO of ChowNow, a software company that allows restaurants to manage their own delivery, reveals that when big-name delivery apps first opened their doors, they pitched restaurants a reasonable commission, around 6%. But now, as customers have come to depend on food delivery for convenience, some service providers have enacted a bait and switch and raised their commissions to as high as 50 cents on the dollar.

While delivery apps promise restaurants the revenue they bring is incremental, delivery orders are actively replacing restaurants’ core business instead of complementing. A research report published by Morgan Stanley showed that “43% of delivery patrons said a meal they ordered in was replacing one they would have otherwise eaten at a restaurant.”

If that wasn’t bad enough, the restaurant game is as tough as it gets. Margins have always been razor thin, typically falling between 3 to 5%.

“We saw a direct correlation between the delivery services and the reduction of our income,” a restaurant owner who closed two locations after employing delivery apps told The New York Times. “It was like death by a thousand cuts.”

Upon the closure of San Francisco favorite Gaslamp Cafe, the owners wrote in a sign, “any profit from [the] sale is stripped away by the fees they charge… which leaves only enough to cover the cost of food.”

It’s abundantly clear that consumers are hungry for convenient food options. But in a bold attempt to bring zero-hassle convenience to the daily food dilemma, food delivery has shifted the restaurant industry several steps back in terms of quality, affordability, and sustainability.

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How should the industry battle back?

To be frank, the delivery wars will not end until a winner is declared. In order for the restaurant industry to protect itself, they’re going to have to redevelop themselves with the future in mind. Let’s break it down.

As Nick Abouzeid of Shrug Capital says, “delicious food, combined with a wonderful setting and service will always draw in friends and families looking for a wonderful night out.” Mediocre restaurants will fizzle out, but smaller, niche restaurants that provide an experience will survive.

Another way to prepare for the future is to go all-in on, and optimize for, delivery. Every dish should be designed to taste great after traveling, and all unnecessary expenses that cut into margins should be eliminated. Think tables, chairs, waitstaff. The profitable kitchen is called a “ghost kitchen.” Basically, it’s just a kitchen with an iPad to print delivery orders.

My final suggestion is for chefs to consider operating efficient and affordable personal chef services. By offering a restaurant-like-menu and cooking fresh meals in-home for families, diners can enjoy the restaurant experience in the comfort of their home, and chefs can start their own food businesses without any fixed costs.

Ultimately, diners are demanding convenience. Those who are able to deliver convenience and comfort along with freshness and quality will rise far above the rest.

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About the author: Matt is the CEO of Chefit, a marketplace for in-home personal chefs at the same price as dining out or ordering in. During this time for concern, we have temporarily shifted to offering homemade food delivery from local chefs, and we are proud to provide a community-based platform that can help alleviate hardships for both consumers and talented chefs in our community.

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