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Food Delivery & The Post-Lockdown Blues

Australia | Jul 06 2022

Australian food delivery start-ups are struggling to raise funds as appetite for takeaways fades.

-Demand for food delivery services has taken a hit post-lockdowns
-Start-up challengers in a battle for survival
-CreditorWatch doesn’t see prospects for the industry improving in the near future

Anna Rzhevkina

Food delivery start-ups in Australia struggle to stay afloat due to growing competition and increasing costs as consumers return to stores and restaurants after being locked at home during the pandemic.

Two companies, Send and Quicko, have abruptly left the market; others may face funding difficulties as investors take a more careful approach amid rising inflation and interest rates, analysts say.

In Australia, the food delivery industry is highly concentrated and dominated by three main companies.

Uber Eats has a market share of 52.9%, followed by Menulog with 19% and Deliveroo with 11.7%, according to IBISWorld data as of the end of 2021. Smaller players, such as Milkrun and Voly, have been trying to challenge the status quo.

Similar to larger firms, grocery delivery start-ups rely on capturing many users in a short amount of time to win market share. This prompts them to prioritise revenue and userbase growth over making a profit, often leading to widening losses.

“The business model assumes that the firm will be able to deliver profitability at a future point in time, once enough users are secured and competitors either leave the industry or are too small to pose a threat,” IBISWorld analyst Josh Treisman explains.

The loss-making business model means a constant risk to run out of cash. Start-up Send, which collapsed in May, spent $11m in just eight months, pushing for aggressive expansion, a report cited by revealed.

Send, which promised to deliver groceries in less than 10 minutes, blamed high expenses on wages and global challenges, ranging from the war in Ukraine to economic slowdown for its bankruptcy. “Despite attempts by management to reduce the losses incurred, it is clear that without external funding the company’s business model was not sustainable,” according to the company.

Venture capitalists do not rush to pour cash into grocery delivery as market growth slows down. While over the five years through 2021-22 IBISWorld expects industry revenue to increase at an annualised 20.6%, in the five years through 2026-27 growth is seen at just 1.4%.

In addition, investors generally take a more careful approach as rising inflation hits living standards around the globe, prompting consumers to spend more cautiously.

“As inflation and interest rates rise, households will be looking to trim the fat, making it increasingly difficult to justify the extra expense of buying groceries online,” chief executive officer credit reporting group CreditorWatch CEO Patrick Coghlan told FNArena.

Online grocery companies had the ideal business model during lockdowns but found it difficult to retain customers since consumers were able to shop at bricks and mortar supermarkets again, Coghlan explains.

In addition, recent data on retail sales indicate consumers prefer to buy their groceries in-store rather than online. Retail spending rose 0.6% from April and reached the highest level since March 2020 when the pandemic caused a temporary closure of stores, Australian Bureau of Statistics data show.

Treisman from IBISWorld says the removal of restrictions will likely take some business away from food delivery firms.

At the higher-income bracket, restaurants are projected to emphasise in-person dining experiences as unique to online food delivery, slowing revenue growth compared to during the height of pandemic-related restrictions.

Last year, grocery delivery start-up Voly entered the market with an ambition to grow its user base by offering 15-minute deliveries from a network of warehouses at retail prices.

Similar to other delivery start-ups, Voly needed a huge amount of cash to pay workers and keep operations running. But, with interest rates rising, venture capitalists were hesitant to invest in the challenging sector.

The April 2022 Business Risk Index by CreditorWatch showed food and beverage services had the highest risk of payment default over the next twelve months.

In June, Voly closed half its warehouses and cut its staff, prompting questions about the viability of its business model. The company co-founder Thibault Henry was not immediately available for comments.

Voly’s rival Milkrun recently surprised customers with a letter from a chief executive officer with apologies for late deliveries. Milkrun CEO and founder Dany Milham said there had been an “unacceptable decline” in customers’ experience.

Milham explained challenges included COVID-19 cases affecting the availability of staff, record rainfall in Sydney, and a need to scale a fully employed workforce quickly. “No excuses, you deserve better and I want you to know that I am committed to ensuring we make good on our promise,” Milham stated in an email to customers.

At the end of June, Milkrun ditched its promise of 10-minute deliveries to cut spending. The Milkrun site now says the customers will get their order “in minutes” instead of stating the precise time.

Leaked investor pitch documents obtained by local media showed the company was losing around $10 per order. In response, Milham told the Sydney Morning Herald the document was from April and out of date.

He admitted the company had been losing $40 per order at one point but said the situation since then improved considerably. Milham did not reply to FNArena’s request for comments.

On top of financing issues, food delivery firms have to deal with fierce competition as users are willing to easily switch between platforms. Larger firms such as Uber Eats can counteract this by offering a greater range of restaurant partners that cater to a wide customer base.

But start-ups may have to lower commissions to remain competitive, limiting market revenue growth, according to IBISWorld analyst Treisman.

According to Treisman: “Firms are likely to adopt alternative business models, particularly in the smaller start-up space, to try and capture fluid customer bases”.

Regulatory concerns add pressure. Delivery firms cut their costs by relying on independent contractors, not employees with rights to benefits such as sick leave or minimum wages.

However, the new Labour government has promised a radical overhaul of the employment system to ensure the safety of employees and fair wages.

The exact timeline for these reforms has not been announced yet. “If new legislation is passed, this would likely reduce revenue and profitability for operators, significantly impacting the future market growth,” according to Treisman.

Uber and the Transport Workers Union have recently signed an agreement on proposed employment standards and benefits – a statement of principles that re-regulate work in the Australian rideshare and food delivery industry.

The union and Uber also have agreed to jointly support the establishment of a new regulatory body, which will be responsible for setting minimum earnings and baseline conditions for food delivery gig workers.

With margins tightening, CreditorWatch doesn’t see prospects for food delivery firms improving in the near future.

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