WORLDVIEW: Naspers loves food delivery, but there are huge risks

If we've learned anything from the WeWork, Uber, and Lyft listings, it's that reality still matters – companies still need to make money and costs are still costs. Those lessons are eventually going to apply to Naspers favourite, food delivery..We're all familiar with the concept of food delivery – apps like Mr D Food, Uber Eats, and OrderIn allow you to tap a few buttons and get a hot meal delivered to your door in a matter of minutes. It's a wonderful thing for the busy consumer and it can help restaurants do more business..But is food delivery as brilliant as Naspers claims? Recent developments in the market raise some hard questions..___STEADY_PAYWALL___.Let's consider the granddaddy of all food delivery markets, the US. GrubHub was the first mover in US food delivery, and for years it comfortably dominated the sector and made a profit – a rarity in today's tech environment. Lately, though, the wheels have come off entirely..New competitors – including Uber Eats and DoorDash – have moved into the space. Flush with venture capital, they have been aggressively discounting their services and offering juicy promotions to win market share fast..The tactic is working. Customers, who don't care who delivers their food as long as it gets delivered fast and hot, have been switching to whatever app happens to cover the restaurant they want to order from at the best price on the day. Driven by loss-making pricing, DoorDash has quickly become America's biggest food delivery company, followed hard by loss-making Uber Eats..In the face of this, GrubHub has seen its market share and profits collapse, sending its share price plunging. In response, it has decided to enter the fray by cutting prices and starting to deliver food from fast food outlets like McDonald's..Now, the basic strategy these companies are pursuing is simple – it's a war of attrition. Raise the most capital and use that capital to sustain discounts and incentives until all your competitors are crushed. Then, when you're the dominant player, you can stop with the incentives, jack up prices, and rake in the cash. (This is, incidentally, the same strategy that Uber and its ride-hailing peers have been pursuing – they sell rides below cost in the hope that they can grab market share and cash in when they achieve monopoly status.).The essential pattern of the US market is being played out elsewhere around the world – the players vary but the game is the same in the UK, Germany, and elsewhere..Here's the problem with this..First, the strategy is pretty risky. Venture capitalists are putting up a lot of hard cash for the chance to dominate markets, but there can only be a handful of winners. This means that a lot of players are going to be burning cash for nothing – except possibly the hope of being acquired by the winner, I guess..Second, the food delivery market is pretty price sensitive. Consumers who are getting delivery with juicy venture-capital-funded discounts may not be so keen if prices rise once the dust settles. Indeed, GrubHub reports that the consumers it has been drawing in with its new promotions tend to order less and less often than its old consumers, suggesting they are being drawn in by low prices rather than a strong preference for delivery. And realistically, prices will have to rise quite a bit when there's no more venture capital to burn..After all, there is an unavoidable cost attached to delivering food. Someone must physically go to the restaurant, get the food, check the order, and then take it to the home (or workplace) of the person who ordered it. Since ordering is relatively unpredictable, coordinating to maximise efficiency is tough – no one has cracked the code yet. So, in most places, this problem is handled by using low-paid gig workers, who are treated as contractors or self-employed workers and who earn a fee per delivery rather than a wage..However, there are growing signs that these gig workers will eventually have to be considered workers. Pressure is growing to pass laws making gig workers into employees in places like California, the UK, and elsewhere. While companies that rely on gig workers, like ride-hailing firms and food delivery apps, are fighting hard against these rules, their costs could well increase over time if they have to start paying per hour instead of per trip..Many companies talk optimistically about replacing drivers with drones, but in reality, that means swapping low-paid drivers for highly paid technicians to manage a drone fleet, plus dealing with the inevitable legislative backlash if drones are blacking out the sky carrying people's Amazon packages and Lo Mein..Consumers have shown limited appetite for paying a hefty price tag for delivery and they get mad when apps inflate meal prices to cover the costs of delivery. So, no one really knows if the "monopoly margins" that the winning delivery app earns will be as good as they expect. In fact, GrubHub's latest earnings report says that it doesn't believe "a company can generate significant profits on just the logistics component of the business" (i.e. the actual food delivery bit). In other words, food delivery alone may turn out to be either unprofitable or just barely profitable..There are signs that food delivery companies understand this and are moving into different, potentially more profitable areas. For example, there's a lot of noise about dark or cloud kitchens – low-cost, purpose-built, warehouse kitchens that churn out generic takeaway meals just for food delivery companies. Again, however, the margins on bulk burgers and chips are not likely to be anything mind-blowing. And to the extent that food delivery apps succeed in making takeaways a commodity – that is, removing the premium people will pay for a restaurant brand they like – they'll have to accept the low margins associated with the model..Others, including GrubHub, say that they reckon food delivery is just a vehicle to generate online ad sales. To me, this seems a bit nuts – surely our entire economy can't be supported by ad sales? Yet this is what companies from GrubHub to Amazon are saying their future growth is counting on. No word on how they'll deal with the Google/Facebook duopoly, or what this model will look like, or how profitable it will be..Which brings us to Naspers. Naspers, which is the owner of local food delivery champion Mr D Food, is highly bullish on the food delivery sector and has poured money into companies like Swiggy in India, Delivery Hero in Europe, and iFood in Brazil. More recently, Naspers attempted an unsuccessful hostile bid for Europe's Just Eat..All of this suggests that Naspers is intending to play the game – investing capital in the hopes of being the last one standing in its key markets. Let's hope the eventual rewards are worth the price of admission.

WORLDVIEW: Naspers loves food delivery, but there are huge risks

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