Grubhub and DoorDash are valued at more than $7 billion each, and the other major third-party delivery players are raising money fast. Why are investors so keen on this space?
Spoiler alert! It's not about the food! For those of us old enough to remember the dot- com boom there may be some scary comparisons. For example, DoorDash is now worth more than many retailers and restaurant chains with thousands of brick and mortar physical locations. In addition, many of the third-party delivery companies make no money. So, how do we explain this aside from irrational investor exuberance?
As we noted above, it is not just about the food. First, the delivery market requires massive scale. Eventually only a few players will survive, and those will be the ones that achieve economies of scale. Amazon made very little money in its early years as it scaled up. So too with the third-party delivery apps.
Beyond food, we are living in a convenience driven economy with consumers used to shopping online and having their products arrive within a couple of days, or increasingly the next day or even same day. Many of the food delivery platforms will also deliver groceries, pharmacy products and household items.
As technology evolves, we will see driverless cars, drones, and smaller automated delivery vehicles. This is not some distant science fiction story. It is entirely reasonable to expect this to happen with the next decade. Leaving aside the broader societal issues of unemployed drivers, from a company perspective removing the driver cost will be significant for delivery companies. In effect they will become large technology companies with delivery as one of their services.
This last point leads us to a major reason for the investment. Data. The dominant players in this industry are actually technology platforms constantly gathering data about consumer preferences. They know what items you like to order, at what time of day, at what location. They know how often you re-order and how you rate each item. They know how long each driver took to deliver. Consumer preference data is a valuable commodity. In fact, some of the companies in this space are already contacting restaurant owners and suggesting they set up their own Virtual Restaurants to satisfy a consumer demand they have identified from their data. For example, Uber Eats may observe a large demand for fried chicken in a certain geographical area that is underserved. It may then approach a restaurant on its platform that has performed well, and suggest they open a Virtual Restaurant focused on fried chicken. In fact, Uber Eats is currently helping set up more than 800 Virtual Restaurants on it's platform.
Bottom line - maybe it is not irrational exuberance. Maybe these investors just know more than we do!