How food delivery platforms in Singapore are reasonably priced
Covid-19 has been tough on the F&B industry and the recent lockdown has pushed some restaurants to or over the edge, no doubt. Many restaurants are left with revenue from takeaway and delivery alone while dine-in has disappeared. Others scramble to get in to these revenue channels in order to sustain as they previously were depending on dine-in sales alone.
Delivery under a spotlight
Due to this seismic shift delivery platforms and solutions have seen huge growth and the whole industry has become more or less dependent on them.
Where there’s growth spotlights and magnifiers appear and the market is demanding for delivery platforms to drop their rates as they are perceived to be exorbitant.
While this demand for leniency is understandable given the current crisis, we should think logically and analyse what these fees actually consist of. Especially since we deem these platforms suddenly as an essential part of our supply chain we shouldn’t take them for granted.
This article goes in depth and will show that these fees are needed so that we can all get the quality and convenience that we are so used to. I will also highlight that there’s actually several (delivery) options available in the ecosystem for restaurants to get through the crisis and beyond.
Food Delivery platforms
Platforms such as Grabfood, Foodpanda and Deliveroo have proven to serve a big segment of the market. In only a few years time they have created a whole new revenue stream for a lot of restaurants while opening up a range of new options for consumers to conveniently choose from.
How do delivery platforms work?
Quite straightforward; they combine a large number of restaurants in one mobile app, they then let consumers select from different menus, place orders and make payment with their favorite place to get food delivered to their doorstep.
Why are they doing this?
The idea is that by aggregating a large number of restaurants on a platform one can achieve the scale needed to drive down logistics and marketing costs so the platform can sustain as a meaningful business over time.
Fees broken down
There’s essentially 3 main components that are covered in the fees, the 20–30% that is being charged to the restaurants and consumer together:
- Marketing costs
- Logistics costs
- Payment costs
Example: say you order your favorite meal that costs 100 SGD.
As mentioned platforms charge anywhere between 20–30% so let’s work with 30 SGD for clarity:
- It will cost the delivery platform between 8–20 SGD to deliver it (depending on distance, salary of the rider and size of your order) to your doorstep. Let’s assume that it will cost them on average around 10 SGD.
- This leaves around 20 SGD for marketing costs (advertisement / promotions) to generate the order for the restaurant. For sake of the example, let’s assume that for each order generated, the platform needs to spend 5 SGD in marketing cost. (It’s on the high side, but I don’t have access to the actual number, however the example still works).
- The average online credit card payment provider earns around 2–4% (let’s assume 2 SGD) when you pay.
That leaves roughly 13 SGD gross margin (13%) for the platform to operate the business.
Very profitable right? Not really..
It is important to keep in mind is that the average bucket value (or Gross Merchandise Value ‘GMV’) per order in reality is much lower than 100 SGD.
I can also order a bubble tea with a small meal for 25 SGD. And as you can imagine this is actually the majority of the orders placed on the platform.
Fees for the platform for a 25 SGD order: 7.5 SGD.
- Logistics costs will still be around 10
- 0.5 SGD for the payment fees
- 5 SGD for marketing costs
The platform is actually losing 8 SGD on this order
Sure, one will say: ’As long as they have a lot of orders, the platform can be very profitable right, they can drive down marketing and logistics cost, and the GMV will average out between small and large orders?’.
That would be true if they were a simple marketplace matching consumers to restaurants in which case the high 13% margin would be very healthy.
Platform or Service Provider?
It is important to understand that players such as Grabfood, Foodpanda and Deliveroo are not actually a platform or a marketplace that match supply and demand. They are a service provider and need to run an extensive customer service, technology, marketing and logistics operations to get your favorite meal delivered. Some of them have even launched their own kitchens.
If something happens to your delivery or the food arrives cold, you will call the customer service of the platform and not the restaurant directly right?
The will definitely be able generate profit over time. Which is good right, we want them to sustain? But the bottom line is that it is actually hard, very hard for businesses such as Grabfood, Foodpanda and Deliveroo to survive and they have invested substantial capital to achieve the scale where they are today. Lowering their fees might mean that they end up subsidising the F&B industry.
What does this mean for a restaurant?
At this point in time restaurants (that have gotten a whole new revenue stream, so let’s look at the value created) can either accept the fees charged by the platforms, which in my opinion are not unreasonable considering the above, or they can choose to go around the platform and do it themselves.
There’s a lot of options available in the market to manage your own food delivery operations, but the restaurant will need to be prepared to ramp up their marketing spendings, customer service and logistics operations.
Food Ordering Solutions
There’s several software solutions (SaaS) in the market that provide you with the tools to run and maintain your own delivery operations. Some known names are Oddle, Tabsquare, Kaddra, Weeloy and Butleric.
What do they offer?
- Marketing tools such as SMS, push notifications and EDM. But restaurants will need to have a database of customers that they can reach out to. Some smarter solutions actually help to cross-sell between dine-in and delivery. But keep in mind, it’s the restaurant who will need to spend dollars on marketing. (On a side note, most ordering solutions give access to the behavioural data of customer that previously placed an order with the restaurant, something delivery platforms don’t do. Huge benefit!)
- Online ordering solution that you can offer to your customers to view the menu, place orders and make online payment. Typically these solutions are white-labeled with the brand of the restaurant.
- Delivery integrations that allow restaurants to get orders delivered to customers through logistics providers available in the market.
Most solutions provide limited active marketing, logistics and customer support when it comes to delivery as they are software businesses and the restaurant is expected to manage the operations themselves.
Costs of ordering solutions?
Let’s break down the costs to deliver that same 100 SGD order from the example above.
- How much the restaurant is willing to spend on marketing is essentially on them. Depending on the strength of their brand and marketing team they might need to spend anywhere between 1 SGD to 10 SGD per order. So roughly 1–10%.
- We need to add the cost of the software solution which, depending on the solution provider could be anywhere between a license fee of 200 SGD per month to 10% of the GMV per order. So the actual cost per order for the solution highly depends on the number of orders and GMV per order.
- The payment provider that collect and disperse credit card payments will typically earn around 2–4%.
- The costs of logistics is usually slightly higher compared to the delivery platforms as most restaurant do not have sufficient scale to drive down these costs. On average it will cost a restaurant between 12–25 SGD to get orders delivered.
So on the lower end the cost per order using a delivery ordering software solution is around 20%, however if the restaurant does not have an established brand and the resources to manage the solution it might costs them up to 30% or even more.
Seems we end up in a similar cost range as the platforms?
Delivery Ordering Solution or Platform, which is better?
One can conclude that ordering solutions make sense for (established) restaurants that have the resources to manage their own delivery operations.
For the majority of restaurants it’s actually cheaper to use delivery platforms, especially those with less resources or those that charge a lower GMV per order. However, even for them they can choose a mix of solutions once they grow their brand and customer base. They could let the delivery platforms handle the small orders and use their own ordering solutions to deliver larger orders for families and perhaps office lunches.
What if delivery platforms increase their prices?
I’d say there’s a healthy incentive to not increase the prices and stay around the same 20–30% that they are currently charging. We know that restaurants can choose to do it themselves at the infliction point of around 30%. Hence increasing the fees will cause them to lose customers over time.
Why this is all very good for everyone in the market?
Beyond the crisis:
- The consumer will see an increased number of options to choose from
- Restaurants will (continue to) have a revenue delivery stream and can share the kitchen cost between dine-in, takeaway and delivery
- We are creating more jobs for delivery riders
- We are driving innovation and more new smart cloud kitchens (low cost operations that focus on delivery alone) will appear
