The food delivery businesses have been affected badly. Courtesy of COVID-19, people are less likely to take their food outside their homes. However, the food industry has changed its strategies to keep everything in sync but it would not be a matter of minutes or days.
Health and safety hazards popped up during the pandemic time raising pricing demand for businesses. And more to that in 2022, people are again focused on dining options. Reasons can vary but the fact is that the factors eventually affect every corner of the food industry.
The food delivery industry is very unorganized and hefty to run.
Let’s look upon what are the major areas where the industry sits back. In this blog, we can together find out the unique reasons to identify the adversaries of the food delivery industry.
Let’s dive right in.
How is the market badly affected by the Food Delivery Businesses?
70% of the people are likely to drop the use of services the next time if they have failed the interest or face late deliveries the very first time.
As per the stats, Doordash faced a drop of $7M in the year 2021 and down its revenue to $468M.
The logistics are a dilemma for small food restaurants and food delivery businesses, to keep their cost and services under the price. It is very crucial for them that they keep on moderating the delivery radius for services and prefer the food quality at the decided cost. This would increase the cost of the food in the long run.
If multiple factors cause the businesses to be in vain, then where does the money go? This must be the question every business has.
There has been a big challenge for the food delivery business to bridge the gap and try something to make a difference. The challenges are caused by restaurants, customers, food aggregators, investors, and riders.
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Major Challenges of the Food Delivery Industry
The food delivery business has been staggering a lot in the last few years, the pandemic is one reason for that. It affects many categories in the domain industry. How?
Here are the top reasons:
1. Customers
a) Customer dissatisfaction: Consumers have lost direct communication with the restaurants due to multiple kitchens involved in food preparation and packaging. Maintaining the same taste, quality, and freshness at the same time is hard for the food business every time.
Customer satisfaction needs to focus on many features like high-end packaging, quality branding, cutlery demand, on-time delivery, order scheduling feature, and virtual assistance features for quick consultation with restaurants.
The business is adapting the new concept for fastening its services and deliveries, but it does have some other nightmares. The ghost or cloud kitchens make people less connected with restaurants due to their random and anonymous behavior.
Customer satisfaction builds business loyalty on the platforms. It prompts the user to visit them repetitively. It is the key factor for a food delivery business to run and earn great profits.
However, businesses fail to raise employee morale, resulting in a downgrading of the food quality standard.
b) Preferences: The choice among the customers has increased due to the growing variety of food interests. However, this would degrade customer retention. Customers are expecting more from the delivery business under the price. Quality, quantity, and hygiene are their prime concerns.
Food delivery services are improper for food handling and doorstep deliveries. There is no training for delivery boys. The companies are less interested in giving training.
c) Lack of Payment modes and halting issues: customers are always looking for a platform with multiple payment options, but if the food delivery app does not have this feature, then it would cause the customers a miserable situation.
2. Riders: Delivery riders issues
a) Disheartened drivers: Job pressure, financial burdens, and long working hours, combinedly affect the riders to adopt high-risk behaviors like rushed speed. Extreme weather conditions are faced by riders. There is a big pressure to complete the deliveries on time, avoid fines; ride even in high traffic, skip lunch, high petrol cost, work non-stop, and many more factors risk everyday roadblocks in the life of a rider.
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“We are slaves to them”; the quote stated by Zomato and Swiggy workers against the unfair practices. They are battling for unfair pay, high fuel pricing, no complementary, fewer commissions per food delivery, low base pay, health risk, unhygienic, virus carriers, lack of long run distance bonus, and no first-mile pay. There is no job security for their survival conditions.
For example, a full-time rider employee working for 12 hours a day straight, keeping aside every hassle, might earn on an average Rs 500- Rs 800 per day. From that sum, he had to pay Rs 400 for petrol minimum in a metro city.
Zomato and Swiggy give their riders an incentive of Rs 200 at fixed base earnings. There must be targets to meet for deliveries. With the summation of their fuel costing, maintenance and repairing, and others.
- The rider has to travel more to get some extra fare on the base fare of a minimum of 20. While the workers can’t log in or log off at the application on their wish. Workers are pressured to do peak time logins, weekend work, and hard for order cancellations.
- There is no priority for the bottom level or new workers. There is no motivation for them, which makes them relentless in the middle of the situation.
- On average the rider earns a base fare of $500 per month. The riders need compensation, insurance, and incentives.
- To meet the daily quota of deliveries the delivery boys began their journey from sunrise and ended at dawn.
- Fine for illegal parking, half of the income of the rider is spent on fine. Restaurants don’t allow riders to use their washrooms and any other facility.
- Riders have been cheated for insurance by the contractors to avail of the premium services but the fact is something different. They do not get any insurance and are charged 50%.
Likewise is the scenario the riders have been dealt with every day.
3. Food Aggregators platform
Food aggregators charged up to 30% commission from restaurants on taking their services. The food aggregators would have faced an unlikely situation in grabbing a large part of the market and earning profit. To avail of multiple services on the app, businesses have to pay more to every person. Apart from that, there is more scope to implement and less pricing to restore in the mobile app for food delivery, turning the aggregators vanish.
Some of the expenses are;
Take rate: is the commission restaurants pay to food aggregators.
Customer acquisition cost: a food aggregator is charged to get customers who come for the first time to the platform.
Consumers want more details once they start navigating and searching to add to a wishlist inside the app. They are not in the mood to be stuck in the middle.
Food aggregators are unable to keep pricing and instant filters in the app. It is a requirement in handling multiple restaurants but a big overhead to deal with.
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a)Food quality standards: By understanding the customers’ behavior you can sum up them with tasty foods and what they are looking for and expecting from the restaurants. Proper utilization of quality tools enables food businesses to fetch real data and stats.
The food regulations have made different laws and inspections to guarantee meal quality. But the businesses who are with low assets and money do not show their convenience to deliver ideal quality standards for customers. They have their own thoughts on that and it turns their business into losing money with losing customers.
b) Order drop-off and pick-up failure is another cause that is difficult to manage for them. Updating their app with the latest features and elements every time to avoid any to the customer and to the rider and stakeholders is the responsibility of the food aggregators.
c) Low average order value: to get the high-value frequency of orders, the food aggregators require to spend extra expenses on marketing and promotion so that the customers get to use the platforms.
d) Volatile pricing model: in the face of market competition, it becomes unpredictable for the food delivery apps to adhere to the fixed pricing model. They keep on changing their business strategies in the marketplace which affects the service prices of apps.
The fluctuation of the order rate across different areas is faced by the logistics of food delivery apps. Difficult to retain and engage the customers
e) Lack of right advertising models: if you are less used to advertising your app in the market chances are you could make yourself in a harsh situation. With the overexposed presence of similar businesses, one could fail to beat every time.
g) Unstable market: the market is when real? You can’t predict the market intricacies without using a prior tool and dedicated staff. To understand the market one needs to have ideal and experienced employees who help your team and app business before the time you would be in danger.
4. Restaurants:
The main reason why restaurants fail is due to their lack of resources and spirit to identify the market gaps and what is required.
According to some stats, in the food industries, more than 70% lose their charm and deviate from their path in the first 5 years.
The top reasons why the restaurants fail are;
a) Poor location with high rentals: most of the restaurants found their presence in dysfunctional areas or locations, causing their staff to be demotivated and unreal. The food industry is part of the creative industry unless your restaurant workers are refreshed and thrilled they can serve great inputs. High rentals in addition make it more difficult for you to manage your savings and profit. This pulls back the restaurants to serve the meals at adjustable costs.
b) Unsatisfying customer experience: the online presence makes everything fast and transparent. If the customers are dissatisfied with the services then most probably they put their feedback into the platform. This degrades your brand identity for sure.
c) Poor allocation of resources: if you fail to manage the staff and distribute them to various tasks then this would drain your performance in a short time. Sometimes the restaurants are too late to understand the gap between their working team and hard for them to manage.
d) Complex menu: in the race of who is best, most restaurants prepare fancy and unreal menus. The complex menu is difficult to understand or sometimes takes the customers away from your restaurant. This sounds not real but it is one of the reasons food restaurants lose their customers. The menu shows the real image of the restaurant and what they have and how unique their meals and services are from others.
e) High delivery cost- point-to-point pick up: as the flare rates have been increasing the companies admit that they are bound to take high charge of the customers. This hikes the customer’s pocket and they are disheartened by your platform. The flare covers the price of deliveries.
f) Theft causes the business money to be in a severe situation. 4% of the restaurants accept that they had faced too much money loss with the internal theft. The industry is driven by small and big food businesses, and only some of them have the assets to ideally manage their workers and their performance. In the business world, this puts the business in an alarming state. They have a low budget for management tools like CMS.
g) Not real understanding of analytics: the improper or confusion in analytics of leads puts your running restaurants into an empty state. Some restaurant owners are not sincere about their services. They understand the market late when they put them in difficult or garbage situations. They used low-cost or free tools which misled them for a long time.
This is the main reason why most restaurants fail to make money in the food delivery business.
h) No scope of marketing: due to the low budget for marketing the restaurant businesses fail to make their space in the great market. Marketing is something that can help to reduce the competitive effect and lucrative the brand identity.
If the restaurants are not aware of the reality in the time being, nothing will prolong them for the future, discouraging the owners from continuing in the same business.
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5. Investors:
If you’re an investor, looking into the real-time market stats then the food delivery industry might seem to be a failure source for you to earn and propagate your ROI.
These have seen a clear decline in the food delivery industry, impacting a great loss of interest amongst investors.
On the calculations part; the average price for the food order is like this;
Average order value> average order frequency. if the food cost increases then the customer drop rate would increase, creating high competitive pressure.
Even though restaurants keep on increasing their rates there has been inflation which makes an annoying experience for the customers. Only a very flat margin of profit for restaurants exists. Hence, delivery companies charge high delivery fares to them which they can’t afford.
It becomes a tough situation for investors to enter into the fallen industry with so many adversaries.
Let’s understand more with the help of metrics to find the economics of food orders:
- AOV: = average order value, this value is low.
- Take Rate: = it is the commission the restaurants pay (to deliver the food items to the customers) to food aggregators.
- Net delivery cost: = cost to deliver the food to the customer – the cost the customer pay
- Order S & M cost: sales and marketing cost= the marketing expenses cost for each order.
- AOF: average order frequency it is the number of times the customer orders in the lifetime of their food orders.
- CAC: customer acquisition costs the marketing expenses spent by the food aggregator so that the customer can make his first order.
= Total cost of sales and marketing divided by the total number of customers acquired
- Average fixed costs: cost for miscellaneous or admin costs like salaries, and tech infrastructure.
Now let’s calculate:
Customer Net Value (CNV): = The amount of profit (the net present value) the businesses have gained with multiple customer purchases over the time being, is the customer net value or customer lifetime value for the company.
And the formula is => CNV=
[AOV * Take Rate (%) – Net Delivery Costs – Order S&M ] * AOF – CAC – Average fixed costs
To understand the scenario we take an example:
Let’s suppose the AOV is rs 60, then the food aggregator earns rs 18. To deliver food, rs 20 expense has come, and the customer charged rs 7, hence the net delivery costs go to rs 13 (20-7=13). For every order expanse and marketing rs, 3 is costs.
As a result, the food aggregator contributes rs 2. Suppose the average customer orders are 50 in a year, then the food aggregator has to contribute rs 100. The average fixed price of rs 60 the aggregator has to spend.
Suppose the customer orders 50 times in his lifetime, the cost worth by the food aggregator is rs 200. If they spend less than rs 30, only then they will earn a profit.
For example;
Customer Net Value = [60*(30%)- 13 – 3 ] * (50*2) – CAC – 60
{Here let say, Net delivery costs = Rs 20 for food + Rs 7 for customer charge =Rs 13,
CAC= 50 times *3 customers / Rs 3 cost for S&M= Rs 50 per customer}
= 200- 50-60= Rs 90
But unfortunately in reality the scenario is not achievable for even the big players in the market. Like Talabat, Zomato and Delivery Hero are unable to earn profit in reality.
Hence businesses should reposition themselves communicate with the backward areas and improve their verticals.
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Final Conclusion:
Hence, in the concluding part, the food delivery businesses are becoming complex every day. Everyone is losing interest and looking for new paths to begin. Fewer of them have been trying and forged with that will to rescue from the miserable state. Nobody wants to invest in an industry with low proportions and disinterests. Get a custom food app solution with our dedicated developers.
One question randomly arises with the context that when everyone fails to remain in the market, then where does the money go?
