A decade ago, ordering a takeaway involved picking up the phone, speaking to the guy at the local pizza shop and waiting longer-than-expected to get it delivered. Now, with the proliferation of smartphones, improvements in location tracking technology, and heavy investments in last-mile logistics networks, delivery apps have redefined the food delivery experience.
It’s an industry that’s been rapidly expanding across the globe and is already worth over $13bn today, according to food industry strategy firm Pentallect. However, Swiss investment bank UBS’s research arm, the Evidence Lab, believes this is only the beginning. It estimates an industry value of $365bn (£303bn) by 2030.
It singled out British tech giant Just Eat (LSE:JE) as a key beneficiary of this trend. I agree with this assessment and expect JustEat to see long-term success, despite the industry’s many challenges.
Consumer behaviour
A few years ago, research from McKinsey & Co found that delivery apps like Just Eat had a phenomenal record of retaining the customers they managed to sign up. Over 80% of delivery app users rarely or never left the first platform they picked.
And the amount of food being ordered on these platforms has been rapidly expanding. Just Eat’s 27m customers place an order 8.7 times a year on average, it said in its latest results, so most customers are using the app about roughly every six weeks.
The stickiness of its app gives Just Eat leverage over its suppliers, which includes both restaurants and delivery drivers. This is a competitive advantage in an increasingly crowded market.
Winner-take-all
Although Just Eat pioneered the online food delivery business model, it’s now far from the only player in this market. Tech giants like Amazon and Uber have more recently tossed their hats into the ring. And given Just eat’s international exposure, it is worth noting that local start-ups around the world, like Swiggy and Foodora, are expanding at a fast rate too.
UBS’s research counted 350 food delivery apps globally. However, it believes this crowded state of the market is temporary. The industry has razor-thin margins, which means economies of scale and superior logistics networks will eventually win out.
It turns out creating a network of thousands of drivers, winning millions of customers, signing exclusive deals with major food chains, and developing a sophisticated mobile platform isn’t easy.
Not only does Just Eat have a head start on the competition, but when its proposed merger with Dutch peer Takeaway.com is completed, the combined entity will be the largest global food delivery conglomerate.
That combined entity is expected to be worth £10bn. I believe that’s a fair price, based on the assumption that the global market will expand to £300bn, as well as on the view that Just Eat will capture a significant chunk of it, and that customer retention rates should be sustained over the long term.
Foolish takeaway
The food delivery industry has been transformed beyond recognition over the past decade. However, the sector is still relatively new and has plenty of room to grow globally.
The stickiness of these apps and the economies of scale required to make the business model viable indicate that the sector should consolidate around a handful of mega-brands. I’m willing to bet Just Eat, with its head start over rivals and planned merger, could be among the winners.
