Just Eat is a wildly profitable business. Deliveroo lost £129m last year.
So, why did Just Eat just announce that it will spend £50m – and wipe £600m off their market value – to develop its own delivery fleet, departing from its entrenched, profitable business model, and colliding with competitors like Deliveroo?
The difference between the two business models is stark but simple:
Just Eat is a marketplace that aggregates supply to consumers and funnels demand to participating restaurants. Deliveroo is a marketplace that aggregates supply to consumers, funnels demand to participating restaurants, and provides the logistical step between the two.
It’s tempting to treat both as tech businesses working within food & drink. But that assertion belies the operational and structural challenge of managing distribution, something Just Eat have historically not done. It also supposes that any business in 2018 is not, to some extent, a tech business.
Distribution matters, of course. Controlling distribution creates a ‘choke hold’ within the value chain, allowing massive value to be extracted and creating a position that can be easily defended. At least, that’s the theory.
Data can improve operational efficiencies – knowing how many delivery vehicles are needed at any given time, for example – and develop consumer insight – such as understanding how long people are willing to wait for their food.
Incumbents possess this data. Newcomers need to spend money to earn it and will remain at a disadvantage until they overtake the leading operator.
Ordering and delivery platforms are, by their nature, undifferentiated. They act as marketplaces, enabling sellers and buyers to connect. Instead, they fashion identity from the restaurants they partner with, coupled with advertising and publicity stunts.
Just Eat are synonymous with high volume, low-cost options. Deliveroo has cornered the higher end of the market. While this might appear to be a sustainable split, network effects dictate that every single user added to one of these networks increases its value over its competitor.
Restaurants maintain two, distinct, perishables items of inventory: Food & labour. Neither, once expired, retain any value. And, with margins as tight as they are in the trade, restaurants are always on the lookout for new acquisition channels to help maximise the value of their inventory.
Aggregating supply, therefore, is straightforward. Most restaurants maintain multiple digital-ordering channels and happily allow them to operate simultaneously, especially in high volume, urban areas.
However, even if restaurants and consumers are not loyal to their food-fulfilling apps, riders will be, eventually.
Riders can only undertake one delivery at a time. And there are only a finite number of riders (although the streets of London might belie this fact). So, a market leader will possess more riders, allowing them to serve more customers more quickly, improving the service. In turn, this attracts more customers and therefore more riders. Rapidly, one entity will win out.
This effect is compounded by the challenge of differentiation. If you’re selecting the same dishes, at the same prices, from the same restaurants, the only relevant advantage is which service will arrive at your door the fastest. Peter Plumb – The new CEO of Just Eat – voiced that the move to delivery is driven by a desire to compete for major contracts, such as those offered by the fast-food giants. (See King, Burger and FC, K).
That sounds great to investors but, in reality, only the market-leading delivery firm – based on the cycle highlighted above – will be in a position to service these mega contracts across the country. Rather, by entering this market, Just Eat is suggesting that their competitors will not only achieve profitability – a gamble in itself – but pose a threat to their long-term future. They’re essentially admitting that their current business model won’t be as valuable in the future as it is today.
The long-held view is that data, brand and network effects combine to create an insurmountable ‘moat’ for challengers to overcome. Just Eat are challenging that theory.
And they’re either playing to win, or they’re betting £50m on a horse that can’t.