Deliveroo’s aim to kill off its restaurant partners

Eater London has an article that details Deliveroo’s roadmap and the changes to its business model which was presented to investors in a slide presentation.  The changes put Deliveroo’s Restaurant partners directly in the firing line with it planning to commence to cook its own food.

The objectives for Deliveroo are to:

  1. Create its own food offerings, personalised for customers
  2. Half the cost of food for customers
  3. Automate delivery
  4. Automate food production
  5. Double its profit margins

According to Eater, the slide presentation had a heading – “Own Content,” which was described as ‘hyper-personalized food produced by Deliveroo; lower price of food; create daily use case; greater margin due to supply chain savings and automation’.  Create daily use case means that they are planning on Deliveroo dramatically increasing the number of times that people order from them.

Deliveroo has built up a rich database of customer preferences, ordering frequency and contact details.  Not much of this is shared with the ‘Restaurant Partners.’  Restaurants do not get the customers email details. This is explained as being a ‘privacy issue’, but in reality, it is around using the restaurant for fulfillment only and cutting them out of the relationship with the customer as an intermediate step until they learn how to cook food and replace the restaurants wholly.

Deliveroo Dark Kitchens as an intermediate step.

We believe that Deliveroo Editions Dark Kitchens are an intermediate step.  They are testing out the infrastructure and learning how chefs run the kitchens before planning to move their own staff into the kitchens to increase margins.

This will have dire consequences for many restaurants. Losing the take out and delivery revenue will make many unprofitable, especially given that the delivery aggregators are doing everything in their power to kill off the dine in experience. In an industry notorious for low margins, this will force many restaurants to close we believe.

This will be Restaurant Armageddon for a lot of small restaurants. It will see Deliveroo, with a large database of individual customer preferences and ordering histories, knowing the numbers and locations of people liking certain cuisines. Deliveroo will then be able to extend the Deliveroo Dark Kitchen concept to see Deliveroo staff in the kitchens, rather than the restaurant owners who are now prepping the meals in the Editions kitchens.

Deliveroo Valuation

According to Crunchbase, Deliveroo raised $385 million in a Series F round which was announced in September. It has had 9 raisings for a total amount of $860 million and is valued at over $2 billion.

Following the raising, Martin Mignot, a partnew at Index Ventures stated that, “There is a lot of room to rethink how we eat.”  This is part of the negative implications for Restaurant owners we believe, with the risk that vertical integration by Deliveroo to cook the food will cut Restaurants out of the increasingly lucrative delivery market.

According to the latest financial results for Roofoods LTD it had revenue of £120 million in 2016, up from £18 million in 2015.  It’s cost of sales was £127 million and administrative expenses where £142 million.  It lost £129 million on revenue of £128 million.  This would be the reason behind the raising September 2017.  The loss in 2015 was £30 million.

Deliveroo – The Clear and Present Danger for Restaurants

Deliveroo competition
Deliveroo is aiming to start cooking it’s own food in direct competition with it’s Restaurant ‘partners’

What we have previously thought would be the endgame for the delivery aggregators appears to be coming to pass, with the evolution of dark kitchens to Deliveroo preparing their own food. Deliveroo, Delivery Hero, UberEats and GrubHub are probably planning to ride out the issues over minimum wages and entitlements for riders until self driving vehicles mean that they can get rider of the riders and make delivery profitable for them.

Just Eat and Menulog are morphing to provide delivery in an attempt to compete with Delivery Hero, Grub Hub, Delivery Hero and UberEats, which have been eating into Just Eats traditional customers.

With Deliveroo planning to cook their own food, we believe that GrubHub and UberEats cannot be far behind.  In a notoriously unprofitable segment, any opportunity to increase margins will be seized upon by all competitors.

What should Restaurants do?

  1.  Look closely to the profitability of the contracts with Deliveroo and other delivery aggregators and online ordering companies.
  2. Develop your brand.
  3. Build your customer database.
  4. Be unique.
  5. Use our Free Restaurant OnLine Ordering system.  Yes it is free, no monthly or per order charges and it feeds into a CRM system.  We have customers saving thousands per month by using FROLO.

We believe that the concept will appeal to the lower end of the market.  It is like McDonald’s offering to deliver food, which they always do. Whilst anyone can eat McDonald’s, (they have huge supply chain economies of scale), not everyone wants to eat McDonald’s. Deliveroo will have the advantage of selling a wider variety of cuisines, but apart from that, automated delivery will be ubiquitous, potentially with drones or self driving vehicles providing restaurants with their own delivery means.

There will always be a market for crappy food that is really cheap, there will also be a market for new food, great food, exotic food, tasty food, food that is healthy, is vegan, that is gluten free, food that excites and food that inspires. This is what Restaurants do, this is what a chef does.  Deliveroo cooking and delivering their cheap food will attract the bottom end of the market, but there will still be a place for great restaurants.

Strong restaurants, especially the small family owned restaurants, are increasingly looking to Restaurant Disintermediation to take back their brands and their customer relationships.

Restaurant Delivery is not new, it has been around since the 70’s.  What is new is the ability for companies like Deliveroo and Foodora to compete against restaurants by paying below the minimum wage as a part of the Gig economy.

Deliveroo has been asked for comment on the details of the article posted in Eater, but did not respond.

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