As cities worldwide went into lockdown last March, most businesses were forced to shut their doors and forgo revenues for a few tough weeks. You would think restaurant owners had an easier time, given they worked with food aggregators to power the on-demand food economy. You would be wrong.
Let me explain. Since its inception, the food economy hasnt been good to any of its stakeholders:
Restaurants complain of the astronomically high commission rates (up to 3035%) paid to food aggregators, feeling stuck with no clear alternatives.
Customers often complain of inconsistent quality and delays.
Food aggregators (and their investors) continue to lose money, and none have turned a penny since inception. Unprofitable growth-at-all-cost was acceptable in the past, but investors have grown impatient, asking their ventures for a clear path towards profitability.
Drivers/ riders complain of low pay and limited social protection (mostly in the US, where riders are considered as contractors and in many cases get paid less than minimum wage).
These challenges have led to rising tensions between the stakeholders, which triggered three key events, or rather turning points, in May / June of last year:
Uber Eats decided to close its operations in Middle Eastern markets.
Regional restaurants partnered with ChatFood, Taker , Zyda, Blink, and many other similar platforms to start their commission-free websites allowing customers to order directly from these websites.
Mohamad Alabbar, the founder of Noon, attacked food aggregators and promised to bring to the market a new service that would greatly reduce commissions.
Last week, Alabbar kept his promise, introducing Noon Food, a new food delivery service, that would limit its commission to 15%, and challenged others to follow suit. In parallel, Careem (the regions ride-hailing company recently acquired by Uber) removed its variable commission structure, asking restaurants to pay a fixed monthly fee instead and cover delivery expenses.
But how can Noon make money in such a tough industry, while others with twice the commission, cant?
Noon cant win following the same approach of current players, but if it changes how the game is played, the results could turn the industrys tough economics around.
Unit economics in food delivery
Food delivery order economics
Like ecommerce, unit economics in food delivery can be broken down into a simple formula where seven metrics determine a customer's net value:
AOV refers to the average order value, which in general is lower than other eCommerce categories, given most consumers order relatively cheap fast food items.
Take rate is the commission restaurants pay to food aggregators.
Net delivery cost is the cost to deliver the food to the consumer minus whatever fee the consumer pays.
Order S M cost refers to sales and marketing costs on each repeat order (covering payment fees and follow-on marketing expenses).
The above elements constitute the economics of an individual order. If you dont make money at this stage, I have terrible news for you! AOF refers to the average order frequency, which estimates how many times a consumer orders over the customer lifetime.
CAC is customer acquisition cost and refers to the marketing expense an aggregator incurs to get a customer to place their first order.
Average fixed costs refer to the general and administrative costs (salaries, tech infrastructure, office) and research development expenses, divided by the total number of customers.
Lets consider an example:
Assuming an AOV of AED 60, the food aggregators receive AED 18 (30% of AOV = take rate). It costs AED 20 to deliver the food, and the customer is charged AED 7, so the net delivery cost becomes AED 13. It also costs AED 3 for sales and marketing expenses per order.
As a result, the food aggregators keep AED 2 in order contribution out of each order. If a customer orders 50 times a year on average, they contribute AED 100 per year. At an average fixed cost per customer of AED 60, each customer generates AED 40 a year (before accounting for CAC).
Assuming a 5-year lifetime, a customer would be worth 200aed for the delivery aggregator. As long as theyre spending less than that to acquire them (lets say AED 30), theyre making money.
Unfortunately, this example is simplistic and theoretical. Reality is very different, and even the most efficient player in our region (Delivery Hero/Talabat) struggles to make money:
The difficulty of making money in food delivery
Three core issues are at the heart of why most players in the industry suffer:
Let me explain. Since its inception, the food economy hasnt been good to any of its stakeholders:
Restaurants complain of the astronomically high commission rates (up to 3035%) paid to food aggregators, feeling stuck with no clear alternatives.
Customers often complain of inconsistent quality and delays.
Food aggregators (and their investors) continue to lose money, and none have turned a penny since inception. Unprofitable growth-at-all-cost was acceptable in the past, but investors have grown impatient, asking their ventures for a clear path towards profitability.
Drivers/ riders complain of low pay and limited social protection (mostly in the US, where riders are considered as contractors and in many cases get paid less than minimum wage).
These challenges have led to rising tensions between the stakeholders, which triggered three key events, or rather turning points, in May / June of last year:
Uber Eats decided to close its operations in Middle Eastern markets.
Regional restaurants partnered with ChatFood, Taker , Zyda, Blink, and many other similar platforms to start their commission-free websites allowing customers to order directly from these websites.
Mohamad Alabbar, the founder of Noon, attacked food aggregators and promised to bring to the market a new service that would greatly reduce commissions.
Last week, Alabbar kept his promise, introducing Noon Food, a new food delivery service, that would limit its commission to 15%, and challenged others to follow suit. In parallel, Careem (the regions ride-hailing company recently acquired by Uber) removed its variable commission structure, asking restaurants to pay a fixed monthly fee instead and cover delivery expenses.
But how can Noon make money in such a tough industry, while others with twice the commission, cant?
Noon cant win following the same approach of current players, but if it changes how the game is played, the results could turn the industrys tough economics around.
Unit economics in food delivery
Food delivery order economics
Like ecommerce, unit economics in food delivery can be broken down into a simple formula where seven metrics determine a customer's net value:
AOV refers to the average order value, which in general is lower than other eCommerce categories, given most consumers order relatively cheap fast food items.
Take rate is the commission restaurants pay to food aggregators.
Net delivery cost is the cost to deliver the food to the consumer minus whatever fee the consumer pays.
Order S M cost refers to sales and marketing costs on each repeat order (covering payment fees and follow-on marketing expenses).
The above elements constitute the economics of an individual order. If you dont make money at this stage, I have terrible news for you! AOF refers to the average order frequency, which estimates how many times a consumer orders over the customer lifetime.
CAC is customer acquisition cost and refers to the marketing expense an aggregator incurs to get a customer to place their first order.
Average fixed costs refer to the general and administrative costs (salaries, tech infrastructure, office) and research development expenses, divided by the total number of customers.
Lets consider an example:
Assuming an AOV of AED 60, the food aggregators receive AED 18 (30% of AOV = take rate). It costs AED 20 to deliver the food, and the customer is charged AED 7, so the net delivery cost becomes AED 13. It also costs AED 3 for sales and marketing expenses per order.
As a result, the food aggregators keep AED 2 in order contribution out of each order. If a customer orders 50 times a year on average, they contribute AED 100 per year. At an average fixed cost per customer of AED 60, each customer generates AED 40 a year (before accounting for CAC).
Assuming a 5-year lifetime, a customer would be worth 200aed for the delivery aggregator. As long as theyre spending less than that to acquire them (lets say AED 30), theyre making money.
Unfortunately, this example is simplistic and theoretical. Reality is very different, and even the most efficient player in our region (Delivery Hero/Talabat) struggles to make money:
The difficulty of making money in food delivery
Three core issues are at the heart of why most players in the industry suffer: