5 key ingredients in successful food delivery apps

The restaurant food delivery market is booming, as it caters to America’s growing desire to get on-demand meals for a dine-at-home lifestyle. This trend is influencing how restaurant orders are placed and paid for.

PayPal's planned investment of $500 million in Uber demonstrates a desire to cement its position as the ride-sharing app's lead payment processing partner in the U.S., particularly as Uber's food delivery aspirations rev up.

Consumers are now going online or downloading mobile apps run by third-party delivery companies such as Uber Eats, Grubhub, DoorDash and Postmates, browsing menus from hundreds of participating restaurants, ordering the food digitally and ultimately paying for the food, delivery fee and tip with stored payments cards, earned reward points, Google Pay or Venmo. Since the delivery companies are not tied to the restaurants, they can support a wider delivery area and focus on offering an Uber-like purchasing and payments experience.

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Grubhub is the biggest of the food delivery companies based on users and market share, owing in large part to numerous acquisitions it has made over the last decade. These include: AllMenus and campusfood in 2011; Seamless (merger) in 2013; DiningIn, Restaurants on the Run and Delivered Dish in 2015; LAbite in 2016; EAT24 and select Order Up markets in 2017; and LevelUp (loyalty), Tapingo and the remaining Order Up markets in 2018.

DoorDash, the No. 2 company based on the number of users (in market share it’s third) has also benefited from acquisition. In 2017 it acquired the delivery and logistics startup Rickshaw to expand its network of drivers and customers.

Uber has been able to build a large user base due to the fact that Uber Eats is integrated with the Uber ride sharing app. While there is a separate Uber Eats app available for food ordering, existing Uber ride share customers don’t need to download it.

While Postmates has one of the smallest user bases in food delivery, it has some dedicated followers. Golden State Warriors basketball star Kevin Durant realized that he was so hooked on Postmates for delivering food and apparel that he decided to invest in the company in 2016. His seven-figure investment in Postmates is reportedly up 10 times in value.
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Delivery drivers for third-party food delivery companies, as well as ride-sharing firms and grocery shopping apps, are almost always treated as independent contractors. They earn a delivery fee, which tends to be determined based on a number of factors which may include a guaranteed minimum for a trip or delivery, trip distance, customer tipping, type of delivery, and rush hour surcharges. The figures in the chart above were calculated into an hourly wage by drivers themselves.

Unfortunately, delivery companies have become increasingly reliant on customer tipping to pay their employees a minimum fee. On DoorDash’s website it states that its drivers or “Dashers” are shown a guaranteed minimum fee they will earn for a delivery. If the customer’s tip plus $1 from DoorDash does not equal the guaranteed minimum, it will then contribute the balance to reach the minimum. DoorDash revealed to Fast Company magazine in February that 15% of its customers leave no tip, so it must pay the entire guaranteed minimum to its drivers. In 45% of cases, customers do leave a tip, but not enough to cover the minimum so DoorDash has to pay the balance.

Drivers are also clamoring to get their pay faster so they can use the money for immediate expenses. Grubhub pays its drivers every Thursday, but states that it may take three to five days for the money to show up in their account. In contrast, Square revealed in its second-quarter 2018 earnings call that 30% of Caviar couriers use Square Cash to receive payment immediately after completing a delivery, and they can spend the money immediately with a Cash Card.
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The market for food delivery will reach over $75 billion by 2022, up from almost $43 billion in 2017.

According to a report by investment and securities firm Cowen Inc., the entire growth in the food delivery market over the next few years will be driven by online (PC/laptop/mobile) ordering and most of that is through food delivery companies such as Grubhub, Postmates and Amazon Restaurants (Amazon’s food delivery service). Cowen analysts predict that offline restaurant delivery will lose over $2 billion in value as fewer consumers will be choosing to pick up the phone to call a restaurant.

One way delivery companies are trying to encourage more growth is to make it more convenient for consumers to pay for their orders. Since third-party food delivery companies are increasingly catering to millennials and Gen Z, they’ve realized that they need to adapt to how these younger consumers want to pay. Grubhub, the largest third-party delivery app, announced last April that it would make food ordering easier via an integration with Venmo. In July, Uber added a Venmo payment option for rides and Uber Eats orders.
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Consumers of all ages are moving to the convenience of online food ordering. Based on an annual study from Market Force Information Inc., the penetration level of consumers who have ordered meals online in the last 90 days has jumped from 11% in 2015 to 39% of consumers in 2018.

In addition to Kevin Durant, other celebrities that are equally as hooked on third-party food delivery apps. Rapper Post Malone spent $40,000 in 2018 on food and other items with Postmates, including $8,000 on a Popeye Biscuit order at Coachella. Billionaire cosmetics entrepreneur and one of the stars of Keeping Up With The Kardashians, Kylie Jenner, spent $10,000 in 2018 with Postmates. The company reported that she made 186 orders during the year for items including Chicken McNuggets and Oreo McFlurries to Don Julio Anejo 1942 Tequila to blankets and nail polish remover.
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Consolidation, led by Grubhub, has been a big factor in the concentration of the third-party food delivery market — coupled with Uber’s ability to leverage its ride share business into food delivery. Just four companies dominate upward of 90% of the third-party food delivery market, according to research company Edison Trends.

DoorDash, which has been seen as the dark horse in the race, has been able to add massive amounts of users and has taken five share points away from Grubhub between January and July of 2018. Postmates, highlighting celebrity usage and endorsements, along with the fact that it is willing to deliver more than just food, has built a unique market niche for itself.

Grubhub claims to have 105,000 takeout restaurants in 2,000 U.S. cities and London. It processes 467,500 daily orders. DoorDash raised $400 million in a Series F funding round to help it fuel growth — it’s adding more than 30,000 customers weekly and delivers from 310,000 restaurants and stores. Uber Eats serves hundreds of cities in the U.S., South America, Europe, Asia, Australia and Africa.
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