Deliveroo’s Virtual Restaurant Model Will Eat The Food Service Industry, as Amazon Piles In To Fund US Expansion - Forbes

Alarm bells should be ringing for casual dining restaurants, large and small, because an unstoppable wave of disruption is coming. They will soon find themselves in a price war with UK tech start-up Deliveroo, Uber Eats, and (separately) Uber Founder Travis Kalanick, competing for market share against thousands of new “virtual restaurants” (aka “dark kitchens” or “cloud kitchens” or “ghost kitchens”), that can be set up and serving customers in almost any location - for a fraction of the normal cost. 

Amazon have switched sides, from competing against, to investing $hundreds-of-millions in UK scale-up Deliveroo, to help it achieve its radical goals. Deliveroo’s "leaked investor slides” reportedly reveal plans to cut food costs by 50% for consumers by launching their own food offerings, and to double their profitability. The company believes it can do this with a powerful combination of new technology, and business model innovation. It is a Blue Ocean innovation strategy, industrialising the food service process with their own mini food factories, while eliminating inefficiency (jobs) through automation - including riders. Among the aims are to normalize high quality take-out food... To make your home kitchen redundant.

SAINT-OUEN, FRANCE: A state-of-the-art virtual restaurant. It is the first French cooking site of the British ready meals delivery company Deliveroo, which has already opened 74 Editions on different continents. (Photo by Aurelien Morissard/IP3/Getty

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Trojan Horse

Incumbent restaurants don’t need to be reminded of their high fixed costs, particularly the rent, creditors, and headcount. It was for this reason that so many initially welcomed in Deliveroo to help augment their sales and maximise kitchen productivity. For the restaurant, it can cost 20-30% of the order value, however; which reveals just how motivated the supply chain is. 

The original offer was to promote restaurant’s products on the mobile app as an aggregator, and offer independent delivery as a service. If a 3rd party app is willing to invest in the technology, win the customers, and organise the labor, why not let them? It may have seemed like a ‘no-brainer’ at the time. Deliveroo was welcomed in as a gift. 

But Deliveroo is not a ‘delivery’ business, despite how it presents itself. It is a marketplace, like Amazon for hot food. The company outsources delivery to a network of freelancers (who are not subject to minimum wage). Restaurant ‘partners’ could well become servants to their new marketplace friends, if Deliveroo expand production independently, and find aggressive new ways to cut prices through vertical integration. These appear to be the company’s aims. 

Business Model 1.0: Enablement of Restaurants

The original business model innovation was to treat thousands of restaurants as a de facto wholesale network. They took take-away up market, as a middle man mobile tech innovator, and reached an untapped market of consumers; an affluent and time-poor demographic. 

Operationally, running a hybrid model (eat-in and take-away) is hard for many restaurants, so a delivery partnership makes sense. Sophisticated British brands Itsu and Pizza Express have tried to deliver themselves, but failed. Economies of scale aren’t easily achievable for single restaurants, or even for chains. Deliveroo solved this problem, by farming out delivery to a network of freelancers, paid on commission. Freelancers can cover many restaurants simultaneously, and can flex their hours around anticipated demand, at their own risk. 

Deliveroo recruit, Billy Shannon, a self-employed food-delivery courier. The 18-year-old jumps on his bike as an order comes in, mindful that he is paid not by the hour, but by the number of deliveries he makes. / AFP / DANIEL LEAL-OLIVAS / TO GO

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This controversial gig economy model costs Deliveroo and Uber much less than hiring staff. It rewards productive people, reduces risk and capital costs for Deliveroo, and the “virtual fleet” can service restaurants relatively cost-effectively. Economies of scale are achievable, albeit, both UberEats and Deliveroo appear to subsidize the process for consumers. The scalability of this business model is infinitely greater than launching their own (conventional) restaurants, and indeed, hiring their own drivers. 

Deliveroo contribute no labour towards order fulfilment. They have low relative costs per meal, while capturing up to 30% of the sale value. They don’t produce any food, they don’t have to buy or rent any restaurant properties, they don’t have to manage staff or stock, and they don’t even have to do the delivery. They do, however, own the customer relationship, the data, and handle the cash. It is a major dilemma for restaurant ‘partners’ to work with them, but many now can’t afford to back out.

Between the restaurants and the app, who is master, and who is servant in this situation? Deliveroo have built a direct channel of communication with millions of customers, borrowing the restaurants’ reputations for good food, to build up their own loyal customer base. They can analyze billions of data points from across the market, but don’t share this with the restaurants, of course. Deliveroo have higher profit margins than many of their suppliers do, without carrying equivalent risks. Most importantly of all, Deliveroo own the pipeline. They can now service entire cities. 

Exponential Growth

All VC-backed companies are searching for high growth. Deliveroo has shown us what exponential growth really looks like; 107,117% growth over four years. It is by far the fastest growing company in the UK, and is now heading for The USA, where UberEats have progressed fast as arch-rival copy-cats. 

Deliveroo went viral. After just 6 years, they now sell food from 80,000 restaurants to over 6 million customers, reaching an estimated Enterprise Value of $4billion. Expect this valuation to keep going up. 

Impressively, they have deflected a potential take-over from arch-rivals UberEats, and beaten Amazon into submission. Deliveroo’s new war chest of $575m is largely sponsored by Amazon. They will use it to fund aggressive growth, while changing the nature of the business, to find more customers and encourage daily purchases. Together they will pursue a second generation business model that may remind readers of Amazon for its industrial efficiency. This is where the disruption starts.

Deliveroo 2.0: Radical Goals

Visionary Founder Will Shu apparently hopes to “replace your kitchen”. Enter industrial “cloud kitchens” - the virtual restaurant model coming to a neighbourhood near you. 

Customers appear happy with the concept of a virtual restaurant, especially if it gives them more choice and convenience. Trials of these kitchens in London, France and Dubai have been branded as ‘Deliveroo Editions’. Restaurateurs in London were invited in to occupy 30 or so of these kitchens, selling food on the App under their own brand, for an undisclosed commission, which has helped the company to maintain an image as an enabling ‘partner’. It has also allowed Deliveroo to prove out the value hypothesis of these virtual restaurants, in preparation for scaling up. The hypothesis was that customers would buy into it, so long as the food and delivery are good. 

Deliveroo now plan to increase the supply of these virtual restaurants internationally, using ultra-low-cost prefabricated ‘Roo Boxes’, and by converting low-cost spaces into delivery hubs. According to one authoritative source, speaking off the record, a portable kitchen can be created for as little as $12,000. By comparison on costs, productivity, and scalability, these lean kitchen units are 10x more efficient, or more. A single operation can ship over 2,000 dishes per day; an exponential increase in throughput compared to a hybrid restaurant supplier. And this is just the start of it. 

Huge savings on real estate and staffing can be passed on to consumers through this new micro-industrial kitchen model. Real estate costs alone can be reduced by 90% or more in London. Next generation automation technologies promise to extend their cost advantages even further - well beyond the reach of incumbents. Amazon have already done this with warehousing. Robots and drones will eventually deliver for both companies. With this trajectory, Amazon have chosen to join them now, before it is too late.

Virtual restaurants will help Deliveroo to achieve their 4 radical goals:

• Hyper-personalized food - produced by Deliveroo
• Lower price of food (by 50%)
• Create a daily use case for consumers
• Greater margin due to supply chain savings and automation

With capital in hand, they see the opportunity to service tens of millions of customers on a daily basis, and move the goalposts on an entire industry. This is the kind of macro thinking that attracts Venture Investors to back you through Series G funding, while your business is hemorrhaging cash. None of them want to miss out. 

We can anticipate thousands of branded “cloud kitchens” to launch in major cities over the next 24 months, selling the same class of food as restaurants, at a lower cost. Sooner or later, Deliveroo will run their own kitchens, having already worked out how much cheaper it can be. More tech companies will pile in too; they have already started. Uber have been public about their high expectations in this space. We are witnessing a paradigm shift in the market; a Blue Ocean business model innovation going mainstream.

Many conventional restaurants remain blissfully unaware of what happens next. A price war is coming. Ruthless competitive practice and scorched-earth should be expected, as Big Money has arrived. The rules of the game have changed. There will be many casualties.

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https://www.forbes.com/sites/douglasbell/2019/08/26/deliveroos-virtual-restaurant-model-will-eat-the-food-service-industry-as-amazon-piles-in-to-fund-us-expansion/ 2019-08-26 17:50:08Z