With steep commissions, have food delivery apps failed to disrupt?

THE high merchant fees charged by food delivery platforms are under scrutiny amid the Covid-19 outbreak, in a reckoning that may be overdue. The big question now is if these apps have fallen short on delivering productivity gains that translate to cost savings.

With the freeze on dining-in up to May 4, on-demand food delivery apps GrabFood, foodpanda and Deliveroo have been elevated to the league of essential services.

It would seem like the opportunity of a lifetime for the disruptors to display operational efficiency. After all, scale is something that these players have fought tooth and nail for in a years-long cash burn war.

For at least the next month, scale is suddenly within reach. Deliveroo has onboarded more than 600 new restaurants since late-January. All three players told BT last week that order volumes have risen amid the outbreak.

But this has been overshadowed by the flak that food delivery platforms have drawn for steep commissions. BT understands that the platforms charge a commission of between 20 and 40 per cent for regular deliveries, and between 10 and 20 per cent for self pick-up orders.

Such rates are "too exorbitant" for hawkers, said Melvin Yong, assistant secretary-general of the National Trades Union Congress (NTUC), in a blog post. "In some cases, the commission fees exceed the hawker's profit margins!" he remarked.

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GrabFood has since waived commissions for self pick-up orders up to May 4. It would not be surprising if all platforms eventually lower their commissions to aid struggling merchants. But that may be just a band-aid fashioned out of venture money. And these firms are not charities.

Even if the platforms are able to fund discounts, bigger questions loom. Why do the food delivery platforms need to charge such high commissions in the first place, and why are they loss-making despite this? Has their technology failed to optimise delivery sufficiently to lower merchant fees?

And when it comes to self pick-up orders, are the platforms delivering sufficient value to justify that 10 to 20 per cent in fees levied?

Disruption may be due among the disruptors. If food delivery apps' algorithms have failed to lower merchant fees, re-engineering is necessary. In the case of hawker centres, for instance, the apps may want to "innovate beyond single-store orders" to instead serve bundled orders, as Mr Yong suggested in his post.

Or the fault may not lie with technology but in cost structure. Has too much been spent on manpower, for instance, instead of investing in technology that would reduce labour?

Resolving this sticky issue is crucial. After all, some merchants are already exploring in-house delivery over the apps, like Cantonese restaurant chain Ka-Soh. The chain has tapped on foodpanda and Deliveroo for seven years, and started using GrabFood more recently, said managing director Cedric Tang.

But with the outbreak, Mr Tang is now developing his own delivery software to cut out the apps "that take a chunk of our profits". He may tap on taxis or last-mile logistics firms for deliveries, and if this proves cheaper, possibly continue even past the outbreak.

Asked whether food delivery apps are truly delivering value, a Deliveroo spokesperson said that its model is "great for everyone", citing that it can help restaurants that don't usually do takeaway up revenues by 30 per cent. foodpanda said that it is looking into how to support merchants, but did not respond to follow-up queries on delivering value. GrabFood declined to comment.

If food delivery apps want to keep their lunch and eat it too, they need to ensure that their technology can deliver value not just on good days, but in inclement weather too.

Ultimately, Covid-19 isn't just a public relations test for tech firms, but a wake-up call that sound unit economics is the best proof of value for a startup, not the billions in venture capital backing.

With additional reporting by Vivien Shiao