Is GrabFood Singapore chasing a pipe dream?

High operating costs, strong competition are among challenges it faces in finding its sweet spot

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GRABFOOD Singapore is not ready to talk about what an optimised food delivery business model would look like, its top executive said. All it can say, for now, is that it will use technology to make the service a sustainable one for all stakeholders.

But with high operating costs, strong competition and several factors unique to the local food scene, the question is: Will an optimised model ever exist?

"There are a lot of unanswered questions, actually, related to this," said Dilip Roussenaly, who heads the business unit in Singapore.

"I think those things take time in terms of thinking through the models, and the impact on the different constituents (of the marketplace) and what that means. There is a subtle balance between what consumers are ready to pay, what delivery partners need to get to sustain themselves, and what the merchants need."

Mr Roussenaly's comments follow weeks of heightened scrutiny of the food delivery business. The topic was thrust into the spotlight when a wave of restaurants criticised delivery platforms for the high commissions they charge, particularly during the Covid-19 "circuit breaker" period when food and beverage (F&B) players were ordered by the authorities to stop serving dine-in customers from April 7.

Addressing the issue, Mr Roussenaly said the unhappiness likely stems from the inability of delivery to cover for the plunge in core revenue suffered by the businesses. But the food delivery model was never meant to replace dine-in sales, he said. The value-add of a third-party delivery platform is in increasing visibility for the restaurant, opening up an additional sales channel with zero investment from the merchant, and ensuring consistent service levels.

Even then, "it's undeniable that the cost is high for the convenience of food delivery", he added.

Besides the large marketing and user acquisition costs typically borne by startups, a lot of venture funding is spent on operating a fleet of delivery riders.

In contrast, asset-light models such as Dutch online ordering group have a lower cost of sales.'s core business model relies on restaurants delivering food themselves, with its user platform serving as a source of orders and payments.

The company recorded a gross profit margin of 91 per cent in 2019, after excluding the impact of its budding delivery service Scoober, which would drag the margin down to 73 per cent if accounted for. Delivery expenses, totalling 73.9 million euros (S$113 million), made up 67 per cent of the firm's cost of sales.

That is not to say that operationally-intensive models are a lost cause. Relentless attention to operational efficiency was part of what allowed Meituan Dianping in China to edge out a horde of competitors in food delivery and eventually break even in 2019.

Meituan, which obsessed over everything from incentives structures to e-scooter maintenance, held a market share of nearly two-thirds as at the end of Q2 last year, according to data analytics firm Trustdata.

The company, which listed in Hong Kong in September 2018, announced a net profit of 2.2 billion yuan (S$439.3 million), or adjusted profit of 4.7 billion yuan, for the year ended Dec 31, 2019. The group had recorded a loss of 115.5 billion yuan and an adjusted loss of 8.3 billion yuan the year before.

GrabFood in Singapore has also been trying to increase the efficiency of its rider pool, said Mr Roussenaly. For instance, the platform assigns a new job to a rider that is already on a delivery, so that there is no downtime. It also groups orders for deliveries to the same area. Grab said it has seen a reduction of about 15 per cent for time spent on completing each order.

One of the issues that the company has constantly been tackling is building scale. For food delivery platforms like GrabFood, a critical mass of orders is crucial so they can leverage economies of scale to overcome the pain of low-margin orders and improve rider economics through sufficient order density.

To ramp up order volume, GrabFood has been working on making delivery more attractive to consumers - a challenge in a market saturated with easily accessible food options. It recently released a beta service that allows users to choose from a variety of F&B stores located in the same area. This means that for the same delivery fee in a single order, users can get access to a wider range of food options.

The platform has seen some traction since launching two years ago. Gross merchandise value grew an average of 20 per cent each month in 2019. But Grab did not say how many transactions each user made on average, which is an indicator of how "sticky" the platform is.

Assuming that GrabFood manages to scale up sufficiently and optimise the delivery model, how lucrative can the business get?

To answer this, Meituan's numbers are worth a closer look. Food delivery, while accounting for 56 per cent of revenue, yielded a gross profit margin of 18.7 per cent. In contrast, Meituan's in-store, hotel and travel segment, which provides merchants with a platform to market their services and goods, churned out a generous gross profit margin of 88.6 per cent.

Notably, such margins in food delivery were achieved only after the firm managed to scale up sufficiently to 450.5 million transacting users, 6.2 million active merchants, and an average of 27.4 transactions per annual user as at end-2019.

As it is, food delivery has become a way for Meituan to attract users to its platform, then cross-sell other higher-margin services, said Chen Guoli, an associate professor of strategy at INSEAD who has been tracking the development of tech firms in China and Singapore.

GrabFood might end up doing the same thing as Meituan by adding complementary services on its platform. It already is pushing other initiatives such as helping merchants digitalise and sell better.

But GrabFood has more immediate concerns at this point. The overall Grab entity is under immense pressure from the Covid-19 crisis, which has battered the firm's transport business. This means the group cannot rely on gains from its profitable units, while loss-making units such as food delivery have likely accelerated cash burn as demand for the service ramps up.

Furthermore, GrabFood now faces stiffer competition as new models of food delivery emerge. Logistics player Lalamove is now aiming to be a viable option for food delivery in the long term. Restaurant booking app Chope, which already has a host of F&B players on its platform, has also launched its own delivery service in partnership with taxi operator SMRT. It has capped commissions at 15 per cent.

On the emergence of new models, including merchants setting up their own delivery fleets, Mr Roussenaly said: "Merchants are free to opt for whatever makes sense for them. I think it's healthy."

Now that the pandemic has elevated food delivery to an essential service, it is a good time for GrabFood to scale up. But how much can it scale up by? Even if it retains users post-Covid-19, is the massive scale needed to turn a profit even possible in Singapore?

Until an answer is found, venture capital-backed food delivery players will keep experimenting to find a sweet spot. These so-called disruptors will have to work hard to shake off the impression that they are chasing a pipe dream.

READ MORE: GrabFood bent on serving hawkers despite major barriers


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