​The Uber-ization of Food: Why Investors are Pouring Billions into Online Delivery Companies

Joel Anderson |

The ICR Conference held in Orlando from January 11-13th was the source of a lot of intrigue, breaking some of the biggest stories of the week. Most notably, Chipotle Mexican Grill (CMG) took advantage of the conference to reverse weeks of bad headlines surrounding food safety on Wednesday, deliver solid numbers on same store sales and tack its stock price back in the familiar upwards direction to the tune of nearly 6.00%.

However, what had many forward-thinking folks in the restaurant space most excited was the panel hosted at the conference: “Delivery: A Look at Restaurants On-Demand.”

The “sharing economy” and growth of ideas like ride sharing has given rise to the vision of a new future for food, as well. One where consumers can order online and have their meals and groceries delivered directly to their homes, an ongoing revolution that has inspired companies, venture capitalists, and consumers alike.

The Growing To Go Menu

The drivers of this current evolution of the food industry lie in the same basic catalysts that are revolutionizing so much else about our economy: the Internet and mobile devices. A new level of interconnectivity is generating new efficiencies that should permanently alter the consumer experience. Just as Uber and Lyft discovered that smartphones could utterly revolutionize the taxi industry, a wide variety of players are beginning to understand how restaurants and grocery stores could apply similar lessons to their industry.

The current online food industry is still a pretty small portion of the truly massive grocery and restaurant industry as a whole. In fact, it accounts for less than 15% ($9 billion of $70 billion) of the delivery and take-out market alone, let alone the $1 trillion annual market for groceries. However, the growth in investment for the space has been truly stunning. Where 2012 and 2013 saw $25 million and $46 million invested respectively, that number spiked to $600 million in 2014 and then nearly doubled to $1.15 billion in 2015.

For venture capitalists, there are myriad options available, each with its own vision for the future.

Uber Offering More than Just Bottles of Water

The different platforms, apps and stores each have their own take on where the market is headed. Simple online ordering sites are the simplest application, and the ones with the most early success. GrubHub (GRUB) and Eat24 (YELP) are the early leaders in this space, simply using their site as a portal to connect customers with a variety of options nearby that deliver or provide pick-up. There’s also Olo, a company that allows people to order ahead at fast-casual restaurants and avoid lines.

However, the next step appears to be in offering delivery services themselves. More than anything else, Uber and Lyft have shown a path towards building out an effective network of drivers and vehicles without a major upfront capital investment. As such, plenty of companies are offering delivery services via on-demand drivers from restaurants that wouldn’t normally offer delivery. Unsurprisingly, Uber is one of the most prominent entrants, with Uber Fresh, which will pick up orders from local restaurants and delivery them. It has competitors, though, like Caviar, a similar service acquired by payment company Square in 2014.

The potential for independent delivery networks that would simply fit into place with the existing food economy start to become even more intriguing when you consider the interest in both driverless vehicles and drones from companies like Google (GOOG) and Amazon (AMZN). The building of a new automated transportation infrastructure could be just what pushes stores and restaurants to begin catering to those people ready to stay home and order in.

Grocers Getting into the Delivery Game

Of course, these delivery companies are their own entities, while the restaurants remain separate and autonomous. Increasingly, though, there are options that extend beyond this.

At first blush, grocery delivery is more of a challenge than restaurant services. Restaurants are already built to create a compact, deliverable product, even if it’s simply traveling from the kitchen to the table. Grocery stores, however, have aisle after aisle of goods. The act of shopping is time consuming, and putting orders together would seem to be a bridge too far from a logistical standpoint.

Unless, that is, you completely rethink the grocery store itself, as FreshDirect has in New York. In fact, much of the inefficiency in grocery shopping is created by the customers themselves. The need to place items out on display, organized onto shelves, so that people can wander about searching for what they need, creates a level of chaos that extends the process for everyone involved. Not to mention, the need to place freezers and coolers in the same massive room with everything else creates huge levels of energy waste.

By removing the customer’s direct involvement entirely, a new degree of efficient operations becomes possible. FreshDirect keeps things carefully organized in a way that facilitates filling people’s orders rather than allowing them to wander around until they find things.

A Revolution in Eating

When you consider this model, one where consumers do all their shopping on a website and physical facilities can be designed with efficiency as the primary concern, it truly reshapes the entire food industry. A restaurant organized on similar principles could also have a lot of potential, gearing its kitchen towards production while saving on the considerable costs of maintaining a dining room and wait staff.

Blue Apron, for instance, sends ingredients that are portioned and prepped for cooking, allowing end users to take the final steps in making their meal. Taking things even a step further, services like Maple, Sprig, and Spoonrocket are all taking that final step of preparing and then delivering the meals themselves.

A future where restaurants are built on delivery-only services, accepting orders online and sending them out, could actually offer serious competitive advantages for many restaurants.

Restaurants Minus the Restaurant

That said, it would be a mistake to assume that this revolution is being driven entirely by start-ups. The existing restaurant and grocery industry is also recognizing the potential contained in these changes.

“To-go ordering is the fastest growing part of our business and a significant percentage of guests order to go from their mobile devices,” said vice president of digital innovation and guest experience at Chili’s, Wade Allen. “By improving our online ordering platform, we see a direct correlation for higher sales due to an improved digital guest experience.”

Those in the food industry ready to adapt are faced with huge new opportunities.

“Digital ordering isn’t a ‘nice to have’ any longer, it’s on its way to becoming the dominant ordering channel for many restaurant brands,” states Marty Hahnfeld, President of Sales and Marketing for Olo. “Pizza took 15 years to go from 0 percent to 50 percent digital — we’re now witnessing a two-times acceleration in that rate for the non-pizza brands, with many of our clients now doubling (or more) their digital sales annually.”

On the whole, the same changes sweeping up the rest of our economy are penetrating the food industry as well. A sleeker, more connected, more efficient world is arising, and food delivery appears to be a key piece of that future.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CMG Chipotle Mexican Grill Inc. 363.45 -32.82 -8.28 4,032,506
YELP Yelp Inc. Class A 36.24 -0.25 -0.69 773,365
AMZN Amazon.com Inc. 765.14 5.78 0.76 3,139,517
GOOG Alphabet Inc. 759.15 -3.37 -0.44 1,184,212
GRUB GrubHub Inc. 36.38 0.04 0.11 863,844

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