Food Delivery Start-ups

US vs. Korea


The Pros and Cons of Food Delivery Start-ups: Why are VCs Giving Up on On-Demand Delivery services?
Food Delivery Start-ups
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I. The global food delivery startup trend

In the past, food delivery was an optional service provided by the manufacturer, restaurant, or franchise.

  • Delivery as a complimentary service: Restaurants that offered food deliveries originally did so at a low cost to consumers with the purpose of reaching more customers.
  • A broadening delivery tradition in Asia: While ordering for delivery is a service only offered by large pizza chains in the United States (e.g. Dominos, Papa John’s), in Asia, numerous restaurants spanning across a multitude of cuisines (e.g. Chinese, fried-chicken, pig’s feet) offer delivery services
  • There were no companies that only specialized in delivery.

However, in the past five years, multiple companies specializing in food delivery and operating online have emerged.

  • Online food delivery businesses make an appearance: These businesses used websites and mobile devices to simultaneously advertise and offer delivery on behalf of restaurants.
  • The rapid growth of the food delivery industry: From 2011 to 2015, the food delivery industry has seen an annual growth rate of 40% as measured by the increase in the number of users and sales.
  • Moving the food delivery service online: In 2011, 92% of the food delivery market was offline. In 2017, the offline claim to the industry has shrunk to about 50%.

It was not a large IT company, but online startups that pioneered the creation and expansion of the food delivery industry.

  • US & UK: Since 2011, startups like Postmates, GrubHub, and DoorDash have dominated the US food delivery industry, and in the UK market, Deliveroo.
  • China & India: China’s dominant services are (a startup backed by Alibaba) and Meituan (a startup backed by Tencent). India’s dominant services are Foodpanda and Just Eat (a UK-based start-up).
  • South Korea: The food delivery industry in South Korea is dominated by the startup Baedal Minjok and Yogiyo.

Until 2016, VC firms throughout the world invested a total of $10B into various businesses in the food delivery industry. This market was viewed as favorably as those for ride-sharing (e.g. Uber and Lyft) and hospitality services (e.g. AirBnB).

  • Investments: Up to date, approximately 10T KRW have been invested into 130 different food delivery startups.
  • Sequoia Capital, the world’s largest VC firm, alone has invested in 14 different food delivery startups.
  • Next generation Unicorn: When DoorDash, established in 2013 by Stanford students, received its Series B funding in 2015, the company was viewed along the ranks of Uber and AirBnB. DoorDash has also been valued by Chinese firms at $3B.

In the US, food delivery startups (e.g. DoorDash and Postmates) developed on platforms based on a “sharing economy” model, quickly filling a country once void of deliveries to one overflowing with such services.

  • Once a “wasteland” for food delivery: Because of the United States’ relatively low average population density, and because most restaurants did not have either the physical capital nor the manpower to accomplish deliveries, the country was considered a “wasteland” when it came to food delivery.
  • DoorDash’s delivery service: Nicknamed the “Uber of Delivery,” DoorDash allows ordinary citizens to use their cars and bikes to deliver food on-demand. They use the sharing economy model to make up for the shortage in delivery infrastructure.
  • DoorDash’s service model: 1) Look up the restaurant. 2) Choose items to purchase. 3) Pay online. 4) Receive an [1] ETA and track the delivery real-time using Google Maps. 5) Submit a review of the experience and confirm the product-market fit.
  • DoorDash’s profit model: DoorDash charges the customer $5-10 up front and receives a 20% commission as ad revenue from each restaurant displayed on its platform.

II. A recession of delivery startups

However, there has been a recent surge of doubt with respect to the profitability of food delivery startups

  • A rise in bankruptcy: American food manufacturing and delivery startup SpoonRocket filed for bankruptcy in March, 2016. Indian startups PepperTap and TinyOwl also went out of business in April.
  • Fall in company value: Valued at $1B in its Series B funding, DoorDash was priced at $700M in its most recent valuation, demonstrating a jarring 16% decline in company value within a short period.

Observing the slowing growth of food delivery startups and their failure to meet the expectations of becoming the “Next Uber,” the media cites the “fierce competition,” “narrow profit margin,” and “operational difficulties” as sources of the industry’s decline.

  • Fierce competition: The food delivery market is overcrowded, and startups face further threats from Uber and Amazon, two companies that are seeking an opportunity to enter the market
  • Narrow profit margin: Though the startups are making huge sales, the competition, marketing costs, and the sky high costs of labor are [2] stymying growth and narrowing the profit margin.
  • Operational difficulties: Compared to models that connect passengers to drivers (Uber/Lyft) or homeowners to guests (AirBnB), there are far greater complications in the food delivery service. Companies must not only facilitate the connection of not two, but three parties – the restaurant, the delivery person, and the customers – but they must also ensure the quality of the food and moderate the flow of deliveries during peak hours (lunch and dinner). Furthermore, because high volumes of deliveries correspond with greater road traffic, it is hard to secure the quality of the food/keep them from spoiling.

Fundamentally, though, food delivery startups are dying because they have failed to “wow” customers.

  • Hypothetical [3]“wow” factors: Greater hospitality at 50-70% of the original price.
  • Hypothetical “wow” factors of the food delivery startup: The startup guarantees that the food be delivered within 10-20 minutes and succeeds in preserving the freshness of the dish at a fraction of the cost.
  • The reality: It takes 30+ minutes to deliver the food, and by the time the food arrives, it does not taste as good. The price does not counteract this loss in quality. Eventually, customers opt to ride an Uber to the restaurant, and set aside the food delivery app for a rare occasion.

III. The current state and future of Korean delivery startups

Korean food delivery companies are in a better position in the industry than are US startups.

  • Baedal Minjok and Yogiyo, the premier services mediate deliveries, rather than accomplishing the deliveries themselves. The service is convenient and offers [4] perks to users.

But looking ahead, it is hard to imagine how we can improve upon this service.

  • Challenges that rise from market saturation and competition: Although Baedal Minjok and Yogiyo are the most popular services in Korea right now, more and more companies are entering the market, making competition even more fierce.
  • Diverse approaches: Koreans are investigating value chain expansions (e.g. including food manufacturers into the process), partnering with more restaurants, and other new business and growth approaches.

Will American food delivery startups overcome these obstacles and become the “next Uber”? What are the key differences between the food delivery startups and market in Korea and the US? Will Korean companies be able to expand to the States? How else might they pursue growth?

Please talk with your Tutor about your experience using food delivery services, and take the opportunity to improve your spoken English.

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