Why the notion that Just Eat would “dominate” the UK market in takeout-food delivery is simply wrong… & some basic economics of this model…
As most readers here will know, one of the latest companies we launched with Team Europe is “DeliveryHero“.
Delivery Hero connects takeout-food restaurants with consumers. Just give us your zip code, and we show who can deliver pizza, pasta, sushi and that like to your neighborhood in 30 – 60 minutes.
This is a very interesting business with a very clear and sustainable value proposition to both, consumers and restaurants.
Although it’s still early, we are pretty bullish on the model and started to expand globally. Amongst others, we launched sister-sites in Australia, Russia and Mexico.
Also, we recently partnered with an UK, company, Hungry House.
Via that partnership I’v got some interesting insights in one of our competitors, just eat.
They frequently seem to claim with their investors, that they would “dominate the UK market” and have a “monopoly like position” where nobody can enter. Being a player in the UK market now myself, I don’t like those statements, since they are clearly wrong.
Let me explain – in this particular model it is really possible to achieve such dominant positions. Just Eat has it in Denmark, where it plays since 8 years or so. Since the company house in Denmark is pretty transparent, that tells us, that such a position is very interesting – they make about EUR 4 Mio EBIT in Denmark (and still growing) – and for all of those who don’t live in Copenhagen or Schleswig Holstein and don’t want to wikipedia it – Denmark is a country with a mere 5 Mio inhabitants! So, quite interesting. One other country which seems to be on it’s good way to be dominated by one player is swedish OnlinePizza – a four year old company.
Anyway, how does it work? The business is one of a channel-switch. A lot of people order in. Usually they have leaflets from restaurants in their mailboxes and then place a phone call in the restaurant. This works well, but is not perfect. You never know if you have all the relevant leaflets and placing a phone call can be quite unnerving at times. For people who use the internet, the computer or smart-phone is a much more convenient method to order. And that’s what we do at deliveryhero – we make consumers “switch the channel” – from the phone-channel to the internet (smartphone or web) channel. Additionally, we bring new consumers in, who never bothered to order via the phone, but with the new channel interent they start to order in as well.
Now, to make a consumer switch (or start to use order in at all), we need to spend marketing EURos. This is not cheap, but in the long run its profitable, since a lot of consumers come back more frequently. We get a commission for every order, which eventually at some point makes up for our customer acquisition costs.
But to be able to play this game, we need to build a “restaurant network” – that is, sign contracts with thousands of relevant restaurants, put their menues into a database, and that like. This is quite an large upfront investment!
Back to the customer acquisition costs – you need to acquire enough customers to pay not only the marketing, but also fort the investment, that it takes to build the restaurant network.
Now, you theoretically can spend marketing EURos on three sets of customers – those who switch from telephone to your internet site or begin to order in for the first time, or those who switch from one of your competitors internet side to yours. The Only problem with that: to get a consumer from a competitor is 5-10x more costly, then to get a new customer who switches from the telephone! So, now you see. Once a larger portion of consumers switch from the phone, it gets more and more costly to build a new player in this market. there are also other barriers connected to the restaurants and dominating specific marketing channels, but don’t want to go into detail here.
But back to the problem of “dominance” and “monopoly like” positions. Those basically evolve, when so many consumers are “taken” by one player, that it is not worth for a new player to enter the market, since he likely would not be able to recoup his costs of enter the market (i.e. to build a basic organization and a restaurant network).
Now we can ask ourselves, if that is already the case in markets like Denmark, Sweden or the UK. In the first two it probably is. In the third one, UK, it’s very clearly NOT. Why? Very simple, the company that we partnered with, hungry house, is a profitable company which already has a restaurant-netowrk of close to 5.000 restaurants (and this number is growing). So, the investment is already done. As a comparison: just eat has about a 10.000 restaurants on their site in the UK – so, they are double “our” size – that is for sure significant. But for sure not “dominant” or “monopoly like”.
Same to the actual amount of orders – from the data that we have, Just Eat has 3-4 as many orders as Hungry House (hungry house has low hundred thousands per month, Just Eat UK high hundred-thousends per month). Again, yes, they are significantly larger, but by far not dominant.
Anyway, I think each geography is large enough to sustain 2-3 players of very decent profitability- and some geographies will end up with dominant players, some others not. In any case the model will be a profitable one, any in any case beneficial to both, the restaurants as well as the consumers. I’m excited to be part of establishing this new way of ordering in throughout the globe. And if you have not tried it yet, do it today – visit www.deliveryhero.com