Why restaurant food delivery is more sustainable than grocery delivery

I’ve ranted a fair bit about both grocery and restaurant delivery on this blog. I’ve criticised the former on grounds that it incurs both inventory and retail transportation costs, and the latter because availability of inventory information is a challenge.

In terms of performance, grocery delivery companies seem to be doing just fine while the restaurant delivery business is getting decimated. Delyver was acquired by BigBasket (a grocery delivery company). JustEat.in was eaten by Foodpanda. Foodpanda, as this Mint story shows, is in deep trouble. TinyOwl had to shut some offices leading to scary scenes. Swiggy is in a way last man standing.

Yet, from a fundamentals perspective, I’m more bullish on the restaurant delivery business than the grocery delivery business, and that has to do with cost structure.

There are two fundamental constraints that drive restaurant capacity – the capacity of the kitchen and the capacity of the seating space. The amount of sales a restaurant can do is the lower of these two capacities. If kitchen capacity is the constraints, there is not much the restaurant can do, apart from perhaps expanding the kitchen or getting rid of some seating space. If seating capacity is the constraint, however, there is easy recourse – delivery.

By delivering food to a customer’s location, the restaurant is swapping cost of providing real estate for the customer to consume the food to the cost of delivery. Apart from the high cost of real estate, seating capacity also results in massive overheads for restaurants, in terms of furniture maintenance, wait staff, cleaning, reservations, etc. Cutting seating space (or even eliminating it altogether, like in places like Veena Stores) can thus save significant overheads for the restaurant.

Thus, a restaurant whose seating capacity determines its overall capacity (and hence sales) will not mind offering a discount on takeaways and deliveries – such sales only affect the company kitchen capacity (currently not a constraint) resulting in lower costs compared to in-house sales. Some of these savings in costs can be used for delivery, while still possibly offering the customer a discount. And restaurant delivery companies such as Swiggy can be used by restaurants to avoid fixed costs on delivery.

Grocery retailers again have a similar pair of constraints – inventory capacity of their shops and counter/checkout capacity for serving customers. If the checkout capacity exceeds inventory capacity, there is not much the shop can do. If the inventory capacity exceeds checkout capacity, attempts should be made to sell without involving the checkout counter.

The problem with services such as Grofers or PepperTap, however, is that their “executives” who pick up the order from the stores need to go through the same checkout process as “normal” customers. In other words, in the current process, the capacity of the retailer is not getting enhanced by means of offering third-party delivery. In other words, there is no direct cost saving for the retailer that can be used to cover for delivery costs. Grocery retail being a lower margin business than restaurants doesn’t help.

One way to get around this is by processing delivery orders in lean times when checkout counters are free, but that prevents “on demand” delivery. Another way is for tighter integration between grocer and shipper (which sidesteps use of scarce checkout counters), but that leads to limited partnerships and shrinks the market.

 

It is interesting that the restaurant delivery market is imploding before the grocery delivery one. Based on economic logic, it should be the other way round!

2 thoughts on “Why restaurant food delivery is more sustainable than grocery delivery”

  1. Karthik,

    There is another – I believe more sustainable – model of grocery delivery, which bypasses the retail outlet. This makes more economic sense: at scale, it cuts two layers from the delivery process. A typical branded grocery item goes from the company’s ‘depot’ (C&F agent) to a local distributor, to the retailer, from where the consumer picks it up, or has it delivered by the grocer.
    A web-based delivery system will have goods shipped from the C&F agent, and on to the consumer. Such a system will achieve efficiencies in ordering and stocking; in addition, it will substitute expensive real estate close to residential areas with depot space in industrial/semi-rural areas.

    This is the model companies such as Big Basket are using, and I believe it is sound.

    In addition to the economies of selling 3rd party brands, there are the huge opportunities in buying and packaging bulk staples; in developing private labels, etc.

    Mohit

    1. Hi Mohit

      I’m a strong supporter of the BigBasket model. I’d addressed this in a previous post where I’d compared BigBasket to Grofers (http://noenthuda.com/blog/2015/08/05/why-grofers-is-not-a-sustainable-business/), my argument being that BigBasket cuts the cost of storing inventory at the retail level which can be more than made up in terms of “retail delivery” costs.

      So in this post I was only comparing the Grofers model with that of Swiggy etc. Left BigBasket out of the picture.

      Karthik

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