Online food delivery volumes have skyrocketed during the lockdown in Nigeria, with a more than 50% increase in the items sold on Jumia Food between 2 March and 27 April. Restaurants have been shut to diners, meaning stranded and isolated households have few alternatives but to sample online food delivery.
There has also been a surge of interest from ride-hailing giants in the fledging food delivery industry. Ride-hailing volumes have collapsed, and a shotgun marriage between the two industries with contrasting Covid-19 fortunes seems imminent.
Earlier this month, Uber Technologies Inc. (UBER US), the ride-hailing behemoth, made an all-share bid for Grubhub, the US food delivery company. If successful, Uber would merge Grubhub (GRUB US) – which is valued at US$4.5 billion – with its own food delivery arm, Uber Eats. Grubhub shareholders would receive 2.15 Uber shares for each share.
Food delivery in Nigeria
In developing markets, the food delivery industry has particular issues to address. In this article we concentrate on the state of the industry in Nigeria, Africa's largest market. Though food delivery is the poor cousin of both e-commerce and ride-sharing in Nigeria, the industry now has revenue of nearly US$496m, yet it barely existed until five years ago.
The Nigerian market is led by Jumia (Buy, TP US$6.0), Africa's answer to Amazon. This e-commerce platform has a dedicated unit (Jumia Food) that has c50% market share in food delivery. Homegrown competitors include Ofadaa and Areachops.
Jumia Food has about 1 million customers spread across 30 African cities. In Lagos it has 4,000 restaurants including local leaders and chains such as KFC, Pizza Hut and McDonald's.
Jumia Foods has the logistics to complete a delivery in 45 minutes in Nigeria, and it delivers fresh food as well as prepared meals. According to the management discussion in 1Q2020 results, there has been a surge in demand for its services after Covid-19. Other platforms have shown a similar rise.
Could the marriage between Uber and Grubhub be replicated in Nigeria, with the country's ride-hailing leaders – such as Bolt – teaming up with food delivery companies? As with all potential tie-ups, there are opportunities and pitfalls. Investors should be mindful of the following:
(1) Food may be being delivered, but not profits... yet
Food delivery is an intrinsically unprofitable business, as it lacks the network effect. Though it is projected as a tech business, the scale economics that drive e-commerce and ride-sharing are elusive. The network effect occurs when the value of using the platform for each user rises as more users enter the platform.
Unlike Uber, which thrives with the expanding network of riders, food delivery companies are body shops. A typical delivery person can only make about two deliveries per hour.
According to Bloomberg consensus, GrubHub’s revenue may rise by a third by FY2022, but it may not generate positive cashflow from operations. It may be able to deliver food, but it will be a long time before it delivers profits.
Similarly, Food Jumia has seen its usage rise sharply in 1Q2020. But as far as we can tell, it does not seem to be profitable yet. The vast distances and stifling traffic of urban Nigeria means that the average deliveryman can only make a single delivery per hour. The economics are even more onerous, and if Food Jumia cannot turn a profit in a lockdown, it may never do so.
(2) Predatory pricing in Nigeria is a problem
Jumia Food now works with restaurants to offer relatively cheap meals. The typical pricing is in the range of US$4-5 per meal. This is an estimated 15% less than the 2018 average. The average user orders about six times a month, across the platform.
However, Jumia Food and its peers seem to have adopted a predatory pricing policy. They charge independent restaurants as much as 20% of an order, according to our estimates. This dilutes the profits of Nigeria's independent restaurants, and may not be sustainable.
(3) Nigeria's food delivery growth may plateau
The total size of Nigeria's food delivery business may triple from US$172m in 2017 to US$465m in 2020. The drivers are the discounts that Food Jumia has been procuring for customers. But we expect this growth trajectory to flatten in 2020-24 as the business becomes unsustainably cash negative.
There are two categories in the field – platform-to-customer delivery and restaurant-to-customer delivery. Food delivery platforms are not interested in following the Netflix model and expanding their own ‘content’ (ie in-house meal production). But restaurants recognise the merits of using platforms like Food Jumia. Given these dynamics, we expect the restaurant-to-consumer segment to outnumber platform-to-consumer delivery by a factor of 2 to 1 by 2024.
The main focus for growth is likely to be on the volume front rather than average revenue per user (ARPU), as ARPU is almost flat. Nigerian food delivery ARPUs are less than a fifth of the corresponding level in China, where food delivery and online payments are far more advanced.
(4) Food delivery would worsen EM e-commerce cash burn
EM e-commerce is on the rise, but in the Covid-19 era the rate of cash burn in the industry could come under greater scrutiny. Unfortunately, the food delivery business could actually increase the cash burn of EM e-commerce. As we argued in our Jumia initiation in July 2019, Amazon turned the corner in terms of cashflow from operations in FY2001 through judicious working capital management. It was able to renegotiate its procurement arrangements. The food delivery cash burn may encourage Jumia and its peers to adopt similar measures. A further scenario could be an acqusition of the fledging e-commerce players in markets such as Nigeria by major global companies such as Alibaba and Amazon.
Such an eventuality may encourage a rapid alliance between food delivery and ride-hailing. The two industries both have a need to arrest their respective cash burn. There is a replication of infrastructure in terms of technology and operating expenses, and both businesses depend on an army of foot soldiers (drivers and delivery workers) to buttress a technology platform. There is also the attraction of pooling customer information, as both segments have a treasure trove of data on customer behaviour.
We rate EM e-commerce players on their cash flow management, using our proprietary metric – the Cash Sustainability Index (CSI). Smaller EM e-commerce players such as JMIA US and SE UA fair poorly on this metric. BABA US and AMZN US are at the top of pile. There could be acquisitive interest in the smaller players if the cash burn persists.