The restaurant business has suffered disproportionately during the social distancing phase with some even closing down.
The food delivery business in UAE has also seen a drop of 15-20 per cent during this period as consumers spend more time cooking at home and with hygiene concerns played on their minds.
Historically, food delivery and restaurants have formed a symbiotic relationship that benefited both. Food delivery platforms spend high amounts on technology, marketing and customer care to attract and retain their users. They primarily charged transaction-based commissions on restaurants to ensure interests of both parties were aligned.
These platforms took care of logistics and delivery enabling restaurants to focus on their core functions. Restaurants, on the other hand, modified their systems to integrate with these platforms and the systematic data collection by food delivery platforms.
They also worked with food delivery platforms to refine their products and rationalise their footprint using the rich data provided. Restaurants supported food delivery platforms by keeping their menus/pricing up to date and frequently providing generous promotions to customers.
Orders pile up
This symbiotic relationship resulted in the food delivery sector growing by more than 20 per cent in the UAE representing almost 7 per cent of total UAE food services market in 2019. Our discussions with restaurants indicate online restaurants saw an average of 30 per cent incremental sales as a result of food delivery platforms, with customers adopting this convenient model and ordering more than they normally would.
The steep decline in demand now has resulted in disagreements between restaurant owners and food delivery platforms over the way to tackle the slowdown brought on by Covid-19, with the primary contentious area being the commissions charged by food delivery platforms.
Earlier, food delivery platforms used to be seen as creating incremental revenue for restaurants and they did not mind paying commissions on the orders derived from food delivery platforms. Thus, these platforms helped improve overall utilisation of restaurants, enabling them to improve their bottom-line in the process. Our estimates indicate restaurants were able to improve their margins by as much as 40 per cent on the back of online food delivery demand.
However, post Covid-19, with dine-in suffering, the economics of restaurants have changed drastically as overall sales declined and delivery orders made up the majority of transactions. Restaurants, especially small and medium, have expressed concerns that delivery platforms were charging too high a commission and the model is not sustainable in the current scenario.
Their concern is that the platforms have not been flexible in supporting restaurants. Things have come to a standstill and restaurants have recently announced plans to launch their own food delivery platform.
Food delivery platforms have been putting in heavy investments to change consumer habits. They have invested in technology, customer care, delivery infrastructure and innovative channels such as “dark kitchens” and “dark stores” to drive efficiency. While restaurants benefited on their top-line and bottom line with the advent of food delivery operators, the latter continue to lose money as they continue to invest in the hope of future profits.
For example, Delivery Hero — the owner of Talabat, Carriage, Hunger station and Zomato UAE — is still not generating profits.
Post Covid-19, decline in food delivery volumes and higher cost of operation resulted in the unit economics of already stretched food delivery platforms to suffer further. These platforms have expressed concerns about unrealistic expectations from restaurants to reduce commissions significantly — especially when they have already reduced their delivery charges, invested in driver hygiene, delayed some commission revenues, and worked with restaurants to right-size their footprint.
Collaboration is critical
Given the difficult environment for the food services industry even after the lockdown is lifted, it is important all players focus on the bigger picture and seek solutions in an objective manner. Food delivery platforms have created a large customer base on the back of a scalable tech with significant operational capabilities. Such capabilities are typically expensive to build and could take time for restaurants to develop as it is not their core competency.
Restaurants are critical for the survival of food delivery platforms as without a large collection, these platforms’ value diminishes. Majority of food delivery volumes come from chain restaurants — their future stance will be key.
Both parties would be better off investing in understanding shifting customer demands, optimising their footprint at a micro-cluster level, investing in delivery infrastructure and optimising operations. An escalation in any disagreement will consume valuable resources and potentially result in more fragmentation of customer demand. This is something both sides cannot afford at this time.
— Sandeep Ganediwalla is Managing Partner at Redseer Consulting Middle East.