How Do Food Delivery Services Make Money

Who are Deliveroo?

Deliveroo is the food delivery tech company (or foodtech) that has been dominating the roads of some of the largest urban cities with their distinctive black and green colours to deliver your favourite meal within record time. On the surface, Deliveroo is a relatively simple service that allows users to order from their favourite restaurants within a 32 minute time frame. However, looking under the hood you soon discover that apparent simplicity masks what should be considered a well-oiled operational machine that is more like a UPS logistics company than a pizza boy delivery service.

What makes them unique?

Index Venture's Martin Mignot best explains the food delivery landscape and how Deliveroo positions themselves uniquely in the market in his article "The Food Delivery Wars" where he breaks down the industry as those that cook, those that deliver and those that take orders. Within these three areas, there are certain players that overlap their operations across some or all of these dimensions. Deliveroo approaches these dimensions by positioning themselves as the service that will take your order, route it to the relevant restaurant, pick up your order and deliver it to your door step. Not only does this offer the customer a variety of choices and Deliveroo control of the end-to-end experience but it opens up a whole world of restaurants that didn't have a delivery service who can now be served by Deliveroo's logistics platform. This is distinctively different from the aggregators and fully integrated services like JustEat and Pronto respectively.

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Source: The Food Delivery Wars

Deliveroo has managed in part to crack open a new market by leveraging low-cost and widely adopted technologies (i.e smartphone devices) and crafting an in-house logistic platform that is powered by a series of algorithms that optimises drivers' routes and manages the driver supply to serve varying demand.

So how does it make money?

To quote Deliveroo's CEO and founder Will Shu, they aim to:

" deliver high-quality food from favourite local restaurants to people's homes and offices, and we do it quickly — the average delivery time is 32 minutes — through our technology and logistics platform."

Delivery time is key to this whole operation. You can have the best apps and a Chinese sized delivery fleet but if you get a cold GBK burger that took an hour to deliver, you might as well have gotten it yourself. So let's assume that from the time a person makes an order to the time it takes a restaurant to prepare a meal, it will be around 22 minutes before it's ready for pickup and delivery. Deliveroo trumpets efficiency and is keen to streamline their process from any waste, therefore drivers will need to be well utilised and be typically within a 2.2km radius (the average cyclist* is riding at 17.5km/h in a urban area) to arrive within 12 minutes of pickup, which leaves a cyclist with 8 minutes to serve the 2.2km radius. In the end, a cyclist spends 20 minutes per order and can squeeze 3 deliveries per hour. The cyclist being within a 2.2km radius of a restaurant is important because it allows Deliveroo to fit in as many orders within an hour (and reduce their average hour wage cost) without jeopardising the quality of their service. Restaurants tend to be concentrated within an area, which makes this plan executable and still leave enough time to serve a well-sized area.

The components of Deliveroo's revenue come from users in the form of delivery fees at £2.50 and commission fees from restaurants. The commission they charge is generally 10% of the order, with the average order being around £30. Therefore a typical order will generate around £5.50 and within an hour Deliveroo can typically generate around £16.50 per driver.

In terms of costs, I would predict Deliveroo pays its drivers around the minimum UK wage at £7 per hour with a £1 bonus per successful delivery. If we take the assumption that a driver can typically complete 3 orders per hour, a Deliveroo driver will cost about £10 per hour during the peak hours of 12pm-3pm and 6pm – 9pm**.

A quick and dirty calculation seems to suggest that per driver, Deliveroo's business model makes them profitable over a year. This is of course dependent on a host of simplified assumptions (see below) and looking purely at bicycle riders*** but it seems to suggest that Deliveroo's underlying model is a sound one that justifies the $200 million it has been able to raise from the private market.

	Day	Month	Year
Revenue	£99.00	£693.00	£8,316.00
Delivery Fee	£45.00	£315.00	£3,780.00
Commission Fee	£54.00	£378.00	£4,536.00

Costs	£224.00	£668.00	£6,366.00
Hourly Wage****	£56.00	£392.00	£4,704.00
Commission per Order	£18.00	£126.00	£1,512.00
Uniform & Equipment*****	£150.00	£150.00	£150.00

Profit	-£125.00	£25.00	£1,950.00
Margin	-126.26%	3.61%	23.45%

Profit per Driver

How does the future look?

With the impending introduction of drones and driverless cars it becomes almost impossible to say but if you take Will Shu's word that he wants you to order from Deliveroo at least twice a day you get the sense that they envision themselves as becoming accessible enough to become part of your daily routine rather than a one-off weekly treat. That means either their revenue model will need to change to make it more affordable with lower delivery and commission fees or they will need to integrate backwards and take control of the cooking/prep process.

The latter choice runs counter to Martin Mignot's argument that being fully integrated limits customer choice but no one said you had to cook the food yourself, you just need to own the kitchen. Deliveroo seems to be heading in that direction by investing in centralised kitchen spaces that will be able to host a number of restaurants and in turn reduce significantly the overhead costs associated with solely owning your own premise. This has the potential to reduce food delivery prices and create greater flexibility for restaurants. Making my dream of eating Wagamama twice a day closer to reality.

Assumptions

*Based on a 2006 study by St Petersburg, Florida on the effects of bike lanes in urban areas

**Deliveroo also has with drivers with scooters, which they pay 25p more per hour and petrol costs. However, I would imagine that scooters can deliver signficantly more within an hour

***A simplified assumption that orders are only made during peak hours, however, a order can be made from Deliveroo from noon till 11pm

****Assuming the average driver works for 8 hours a day, 7 days a week

*****Assuming the equipment provided costs them uniform (GBP50), helmet (GBP50) and transportation bag (GBP50). Bike and iPhone need to be provided by the driver