Is third-party delivery becoming a three-company race?
It appears that way, at least for now.
Most of the growth in third-party delivery over the past year has come from just two companies: DoorDash and Uber Eats. They’ve joined market leader Grubhub to form what appears to be a "big three" in the delivery and online ordering business—though a fourth company, Postmates, is also growing.
If such trends continue, the result could have major implications for restaurant companies and especially smaller chains that might be forced to accept less favorable deals just to get in front of the providers’ customers.
“The real estate on the customers’ phones is limited,” said Nick Mazing, director of research for financial services firm Sentieo. “Will the land-grab only benefit the largest existing players, and then strategically disadvantage smaller brands who are now forced into a relationship with an order-and-delivery company just to be in front of customers?”
There’s no question that delivery is growing at a breakneck pace, as venture capital-backed providers quickly expand, and restaurant companies scramble to add the service with a belief that more customers will want their food that way.
But much of the recent growth has been concentrated with Uber Eats and DoorDash.
According to Technomic, Grubhub was the dominant delivery provider in the fourth quarter of 2017, accounting for $1.1 billion of the $1.9 billion market—or nearly 60% of the sales generated by the five largest companies, which also include Postmates and Caviar.
Sales had increased 45% by the fourth quarter of 2018—when delivery providers generated $2.8 billion in revenue.
Uber Eats and DoorDash together combined for 82% of that growth. Their share of the revenues generated by the five largest players rose dramatically over the past year alone, from 30% of that market to 46%.
It’s easy to see why. Uber Eats’ growth has come largely thanks to its landmark 2017 deal with McDonald’s Corp. that today stands as one of the most important industry deals in recent years: It essentially put the delivery race into hyperdrive.
DoorDash, meanwhile, has aggressively inked deals with numerous companies such as Wendy’s, Dunkin’ Brands and Chipotle Mexican Grill and, backed by well over $1 billion in investment, has marketed those firms heavily while expanding into more markets.
Grubhub hasn’t exactly sat idly by and watched all of this happen. It had a landmark deal of its own with Yum Brands, which last year agreed to invest $200 million in the online ordering service. Grubhub is now providing delivery for Yum’s KFC and Taco Bell brands, which receive favorable delivery rates.
But restaurant companies might be ceding too much power over to the delivery providers.
Restaurant company executives clearly view delivery with a certain sense of priority—even though such orders still represent a tiny fraction of their overall business.
In general, restaurant companies rarely mention vendors in their earnings calls with investors.
According to a search of transcripts on Sentieo, mentions of DoorDash on company transcripts increased five times, from just 12 mentions in 2016 to 62 last year.
Uber Eats, which was created in 2016, saw an even bigger jump, from just four mentions that year to 62 in 2018, according to a search of Sentieo. Grubhub, the market leader, saw mentions increase from 13 to 63 over the same time period.
By contrast, we found few mentions of giant food distributor Sysco in earnings call transcripts.
Restaurant companies are giving delivery providers a lot of power—essentially handing the relationship with their customer over to an intermediary that might not have the chains’ best interests in mind. “No other vendor has that kind of power,” Mazing said. “Sysco can’t take the relationship. The payment processor can’t. So this is a new threat.”
To be sure, the delivery business is still quite early in its history. At just under $10 billion, the five largest providers wouldn’t even be a top-five restaurant chain, based on Technomic's Top 500 Chain Restaurant Report.
In addition, these companies have to make a profit, something that has yet to happen. It’s still possible that the business can’t quite make it work.
But it’s clear that a certain segment of the population loves delivery, despite its cost. It’s also difficult for restaurant companies to start their own services and do so profitably.
The four largest players own the most popular food and drink mobile apps right now, setting up a future in which they are becoming the mobile marketplace of choice for food orders.
As such, the market is setting up to give major advantages to large chains that can negotiate better rates with these companies, leaving smaller companies with lower profits—or forcing them to merge with other smaller restaurant chains in a bid to improve their own negotiating leverage.