How the world eats has changed drastically.
A little under two decades ago, restaurant-quality meal delivery was largely limited to foods such as pizza and Chinese but now you can get anything from a snack to a full five-course meal on your dining table.
The advent of appealing, user-friendly apps, tech-enabled driver networks coupled with changing consumer expectations and pandemic-led behaviour change has unlocked the potential for food delivery.
Globally this market is now worth more than the US $200 Bn, with several global players such as Uber and Doordash in the mix.
It’s no surprise then, that SEA is no exception to this phenomenon.
Straight to your doorstep
In SEA, food delivery has been steadily growing from 2015 to 2020. The convenience of getting the same food delivered to your house was a good customer proposition and saw increased adoption.
Then the pandemic hit and food delivery went from being a “good to have” to a must-have. Its size tripled from US$4.2 billion in 2019 to US$11.9 billion in 2020.
While demand slowed in 2021, SEA still recorded 30% growth in GMV to reach US $15.5 billion in 2021. Overall, this is expected to become a US $50 billion market by 2030.
So what is driving this in SEA?
The “demand” side of food delivery is easy to explain.
Customers who are willing to shell out a few bucks for the convenience of having food delivered to them will be part of the addressable market. The market is not confined to genders, age, or even location, given the proliferation of these services.
The supply side is far more interesting and nuanced when it comes to food delivery in SEA.
SEA is a deeply fragmented market when it comes to the food supply, with 90% of restaurants independent chains and not part of larger franchises.
Arguably, when COVID hit, these restaurants were desperate for solutions to keep things running. Given the thin margins most independent chains run at, 3-4 months of no revenue effectively results in death.
The food delivery platforms, then, came to save the day. By allowing merchants to onboard seamlessly, they provided a lifeline for these establishments when they were in survival mode.
So who were these players, and how are they going about business?
Leading the pack
Within Southeast Asia, Indonesia, Thailand and Singapore continue to be the top 3 markets by total volumes.
In terms of the players, while there is a number attacking the space, market share rests with a few players.
Grab is the outright leader by share at the moment, commanding over 50% of the market share. It has managed to expand aggressively by keeping customer acquisition costs low by tapping into its “super-app” customer base from other segments such as mobility.
However, several players have entered the fray, each going about their strategy in a unique way.
Diversification strategy of leading food delivery platforms
As the market reopens and growth slows, large players have started leveraging their existing delivery infrastructure to diversify their offerings and offer innovative solutions to both customers and restaurants.
With rich data on the existing user base and access to customers through marketing tools, restaurants can now test new brands and concepts through these delivery platforms without significant upfront investment.
For example, Yummy Kitchen, a cloud kitchen in Indonesia, partnered with Grab to create delivery-only brands. Moreover, restaurants are leveraging customers’ order history to send targeted ads to attract customers through dine-in vouchers and subscription services.
In other cases, delivery platforms are choosing to integrate vertically and capture a larger share of the market. For example, with rich data on customers’ order patterns, Grab has carefully expanded its GrabKitchen footprint in select areas to improve its efficiency and expand its reach.
While some platforms have chosen to expand their reach, others are cementing their presence in each market by targeting different customer segments. Deliveroo, for instance, has chosen to focus on higher-end restaurants and customers in Singapore, targeting the central area and expat districts in the city.
As players continue to diversify within the food delivery space, they have simultaneously chosen to push the boundary further, to fresh food, grocery and customer-to-customer parcel delivery.
The predominant choice amongst these options has been to start on-demand and next-day grocery services due to the huge potential for expansion in these segments.
The billion-dollar question
Despite all these strides and unique strategies, a key question seems to remain – will food delivery in Southeast Asia ever be profitable?
Opinion remains split. Cynics comment about the deep discounting required for these models to attract consumers, without which they would never work. This factor, on top of rising wages and logistics costs, coupled with already low average orders (in Indonesia particularly, where they are ~US$8.3), makes the unit economics of this business hard.
But it is easy to use metrics today and dismiss this model. One has to make an estimation of what a steady-state looks like. There is no better comparison for these players than China’s Meituan.
Starting off as a deeply unprofitable model, it reached an inflection point in 2017 and turned profitable on a gross margin basis. Then, it continued to rationalize operating expenses.
As of 2021, its food delivery business had a margin of ~6.4%.
The levers it pulled were not rocket science. Rather, it was a combination of smart investment in logistics infrastructure, data, and a more sustainable scalable model (the company pioneered a franchise and agency model for lower-tier cities).
The secret sauce for this business ultimately lies in efficient execution.
What’s the appetite going forward?
2022 is obviously shaping to be a tough year for the space.
Given the general lack of profitability in this segment, it will be interesting to see which players rationalize growth vs costs and who capitalize.
However, with the volumes, we are now seeing, and the number of players in Southeast Asia, it certainly seems like food delivery is here to stay.
While sentiment at the moment against these businesses tends to remain negative, those playing the long-term game of efficient execution will likely win out in the lucrative SEA market.