Food delivery platforms and the tech revolution in emerging markets
Global Themes / Global

Food delivery platforms and the tech revolution in emerging markets

  • Digital food delivery is on the cusp of a major expansion in emerging markets

  • We examine the outlook for this evolving industry and who the key players are (with the brightest growth prospects)

  • Global leaders will be monitoring consolidation opportunities in EM – we identify potential acquisition targets

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
26 July 2020
Published byTellimer Research

Technological innovators are disrupting business, enabled by the increasing prevalence and power of smartphones.

In developed markets, this tech revolution is increasing convenience for consumers and creating efficiencies for vendors; in emerging markets, it is a game-changer.

In this in-depth report, part of our new series on technological disruption in emerging markets, we examine one such industry – digital food delivery.

Powered by the spread of smartphones, better access to broadband and the creation of delivery infrastructure, our view is that digital food delivery is on the cusp of a major expansion in emerging markets.

We examine what the outlook is for this rapidly evolving industry, who the key players are currently (and which are ripe for acquisition) and where growth prospects are brightest.

We focus in particular on the exciting (and fragmented) emerging markets of Nigeria, Vietnam, Kenya, Indonesia and Pakistan, identifying Jumia Food in Africa, Grab Food in Indonesia and Vietnam, and Delivery Hero in Pakistan as potential winners in the scramble for market share.

Global leaders, such as Grubhub, Meituan and Just Eat, meanwhile, are cash-rich and hungry for acquisitions. They will be monitoring consolidation opportunities in our key markets, especially given that even the best local players are bleeding cash.

Investment summary

Digital food delivery is on the cusp of growth in emerging markets

The growth drivers for digital food delivery in emerging markets are strong, including increasing usage of smartphones and growing broadband availability. Consumers in the urban areas of Nigeria, Pakistan, Vietnam and Kenya – four of the markets we focus on in this report – are attracted by the convenience of food delivery and are increasingly able to access it. Globally, we expect the market to grow at a CAGR of 7% in the next four years.

The transformation from restaurant-to-consumer (R2C) to platform-to-consumer (P2C) is underway in these markets. Although R2C still has a larger share for the time being, this indicates the potential for growth. In China, the move from R2C to P2C has powered the expansion of the market.

The industry is fragmented and cash-destructive in EM

Digital food delivery is fragmented in emerging markets. Jumia Food, the largest player in Nigeria, does not enjoy the commanding market share that Meituan has established in China, for example. This situation is mirrored in Pakistan and Vietnam.

Moreover, most companies in the industry are loss-making and cash-destructive – the market remains several stages below the profitability inflexion point. Even Meituan only managed to generate an operating profit for the first time in FY 19.

Hungry market leaders in search of growth are likely to look to acquire frontier and emerging food delivery players

The emerging market food industry is loss-making and its technology is sometimes lagging. Jumia Food lacks the infrastructure that US-based global player Grubhub enjoys, for example. Also, the companies are under-capitalised in an industry that is cash-destructive.

The global leaders, such as Meituan and Just Eat, have net cash balances of US$5bn-8bn. They are underleveraged and hungry for expansion. Given these market dynamics, we expect acquisitions by global leaders of food delivery businesses in Nigeria, Pakistan, Vietnam and Indonesia, among the countries we focus on in detail.

Who will be the targets?

The firms that are likely to attract the most attention from global leaders are those that are allied to larger e-commerce platforms. These include Jumia Food in Nigeria and Grab Foods in Indonesia and Vietnam.

These companies are likely to command more attention because they have relatively strong technology, in terms of billing and delivery. Also, the main focus of their parent is not food delivery. For instance, the parent company of Jumia Food – Jumia Technologies (on which we have a Buy recommendation) – is billed as the Amazon of Africa. The controlling shareholders may be more willing to dispose of their interests in what is essentially an extraneous business.

Industry overview: Digital food delivery is steaming hot!

Digital food delivery as a concept is 25 years old, with Pizza Hut pioneering a system in 1995. But technology and innovation have transformed the industry over the past five years – it has morphed into a US$110bn business that has reshaped dining habits and disrupted traditional restaurant models.

The number of people using digital food delivery has risen from 1.3bn in 2014 to 2.1bn in 2020. Until now, the biggest growth has been in developed markets and in the largest emerging market, China. However, that is set to change.

Two business models

The market is currently segmented into two business models.

1. Restaurant-to-consumer delivery (R2C)

In the R2C model, meals are ordered online and delivered by the restaurant. The restaurant or restaurant chain, such as Pizza Hut, is responsible for securing the order and delivering the meal.

2. Platform-to-consumer delivery (P2C)

In the P2C model, the order and delivery are both conducted by the platform. Uber Eats, for instance, would be responsible for securing the order and the delivery. Fave is an example of P2C in Southeast Asia. It provides delivery and a range of restaurant services.

Food delivery is now a tech platform game

We expect P2C to cement a lead over R2C in all countries.

P2C offers greater benefits to consumers than R2C. P2C provides users with the ability to compare menus across restaurants and order easily from a range of restaurants using a consistent interface and process. The delivery is conducted by the platform and not the restaurant, which again means a consistent customer experience across different restaurants.

In turn, this is beneficial to restaurants as it allows them to focus on their principal expertise of producing food for their customers. The logistics of delivery and vehicle maintenance are left to the P2C companies.

Figure 2: Revenue forecast in US$mn

Source: Statista, Tellimer Research

In China, P2C has highest ARPU

China is the most advanced market in digital food delivery. The Chinese food delivery industry is worth US$46bn, which is twice the size of the US market. The shift to P2C is apparent. Meituan-Dianping and are the giants of food delivery in China, with a combined market share of over 74%.

P2C has a much higher ARPU than R2C in China, which is in sharp contrast to the US and Europe. This suggests that, as the industry matures, large players will create P2C platforms that will command a premium. It is likely that the same trend will occur in food delivery across many emerging markets.

Figure 3: Food delivery – ARPU (US$)

Source: Statista

Market size and future development

We expect global food delivery revenue to rise at a CAGR of 10% between now and 2024. This would mean the industry would see a 51% increase during the period.

Figure 4: Global revenue forecast in US$mn

Source: Statista, Tellimer Research

For the full report please download the pdf.