Food Delivery Wars and the Micropreneur

Source: Vietcetera

Last week, armies of scooter drivers in turquoise jackets began showing up on the streets of Da Nang. During peak hours, they zipped through traffic to drop off meals for Baemin, the newest entrant to the local food delivery scene. During down time, they hung around roadside cafes alongside drivers wearing Now’s red and Grab’s green uniforms. The scenes were an eye-catching announcement for Baemin’s rollout, a feat of visual branding characteristic of South Korean companies. But they also serve as a declaration of war — more specifically, the kind of online wars that are increasingly shaping offline lives.

Skeptic that I am, a million reasons ran through my head for why Vietnam would make a particularly challenging market to crack: widespread availability of cheap and delicious street food options; an ingrained habit of home cooking; a culture of sharing sit-down meals on social occasions (from nhậu to đám giỗ to tất niên); and a tropical climate where it’s never too cold to leave the house. More importantly, Vietnam has mostly kept Covid at bay and avoided going into full lockdowns, which have been a major food delivery windfall in the rest of the world. With onsite dining being business as usual, consumers never really had a reason to change their habits.

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But to brush off delivery platforms’s potential would be to underestimate the power of venture capital. All around the world, platforms are being subsidized by mountains of venture capital to train consumers into an unsustainable habit. And the end game can spotlight big questions not only for the future of the restaurant industry, but also for the workforce — the micropreneur class that make up close to half of Vietnam’s GDP but stand to be permanently left behind by the networked economy.

The Lose-Lose Proposition

If there ever was a lose-lose-lose business model, it is that of delivery platforms.

Sure, companies will tell you that they’re creating jobs for millions of gig workers while allowing a flexible work schedule. That they will help restaurants grow their topline by bringing in more customers and adding an income stream. That customers will have ready-made meals at the click of a button, sometimes at an even lower cost than home cooking. This win-win scenario will all be made possible by algorithms that perfectly match supply and demand, turbocharging productivity. In their marketing collaterals, the platforms co-opt a language of empowerment and allyship.

The reality could not be further from this vision. In most markets, restaurants see their profits draining as more of their revenue shifts to delivery. Drivers risk their health and safety to be paid minimum wages, with few if any benefits. Customers pay a hefty premium for meals that have been quietly marked up and convoluted service fees that hide the true cost of convenience. Platforms report spectacular losses year after year. To put it plainly, there is just not enough margin in a bowl of pho to go around to so many parties.

Moreover, food delivery is not a winner-takes-all market. Both customers and restaurants can sign up for multiple competing apps, which makes it borderline impossible to build a defensible network. It can sometimes feel as though all venture capitalists are accomplishing is subsidizing a rat race to the bottom.

What about Doordash and Meituan Dianping, you ask? Both are prime examples of platforms that have recently become profitable and established dominant market positions after years of shouldering losses. But here again, there are no secrets to their apparent successes. Doordash squeaked out a slim profit during a period of record Covid cases and business closures in the US, when it was either Doordash or die for restaurants. The immediate needs of keeping the lights on and paying the bills were more pressing for small businesses and recently laid off workers than the potential long-term impact on their bottom lines.

Meituan boasts of superior operational efficiencies, which is corporate speak for labor exploitation. Part of the company’s drive to profitability includes getting each driver to deliver 40% more orders. Drivers are forced to speed against traffic to make impossibly short delivery times, or face serious penalties from delays of even mere seconds. There have been instances of driver deaths from exhaustion and traffic accidents.¹ Meituan claims that it has innovative marketing structures, which is yet another euphemism for pitting restaurants against one another. To gain visibility on the app, restaurants must either offer customer promotions out of pocket or pay extra advertising fees, on top of the 20–30% rate of commission. In doing so, the middleman essentially pressures their sellers into subsidizing the costs of customer acquisition (and re-acquisition). Meituan makes the economics suck less for itself by making them suck more for the ecosystem.

From Aggregation to Disaggregation

What is the end goal of this rat race? One possibility is industry consolidation. Internationally, the space has seen considerable consolidation in recent years, with deals between Grubhub and Seamless, Uber and Postmates, Just Eat and Takeaway, and Just Eat Takeaway and Grubhub, to name but the most well-known examples. Domestically, Baemin gained entry into the Vietnam market by acquiring Foodpanda’s Vietnam operations as well as the app Vietnammm.

Consolidation can help the bottom line by giving platforms monopolistic pricing power. But players are setting their sights much further than market share or unit economics. The true gains lie in the disintermediation of restaurants and their customers.

We can look to ecommerce and hospitality for examples of successful disintermediation. In the early days, ecommerce platforms and online travel agencies positioned themselves as allies to small businesses. They sold the promise of greater access to customers, facilitated by value-added services such as marketing, payments, and logistics.

Soon enough, customers were no longer calling up their trusted hotels to make direct bookings. They were now trained to go on Expedia.com to split hairs among hundreds of closely matched options and avail themselves of whatever promotion is being offered. Buyers no longer cared so much about the brands of household products — Amazon had used customer data to develop private label items that were cheaper and arrived quicker than any branded alternatives. At the same time platforms are selling one merchant’s products to a wider pool of customers, they’re also selling for the merchant’s competitors, all while collecting massive intelligence on demand patterns to later use at the merchants’ expense.

The same playbook is being used in food delivery. As soon as customers get into the habit of checking their apps around meal times, the bargaining chips change hands irreversibly. It is now the platforms who own the customer relationships, the platforms who decide which offers to run and which restaurants to promote for the day. It’s the platforms who can withhold customer names and addresses from restaurants by citing “privacy concerns.” The very same platforms can now begin to charge for pickups and reservations, further eating into restaurants’ pie. They can begin to vertically integrate and sell their own dark kitchen meals at a fraction of the cost, repeating what Amazon and Netflix did on their rise to domination.

Earlier in the article, I mentioned a list of headwinds for food delivery in Vietnam. There are also compelling reasons why delivery could scale faster and become profitable sooner in Vietnam than in the West. Vietnam has a population density of 308 residents per square kilometer, more than three times that of the US, which makes for a higher density of orders. Scooters make it faster to dash around on busy roads compared to cars, and the lack of parking or congestion regulations can reduce turnaround times. Street food stalls are probably similar to ghost kitchens in their cost structures, in that they don’t need to pay rent or hire wait staff. This can keep prices competitive for delivered street meals, even with the added cost of transportation. Rising income inequality is driving both a demand group capable of affording regular deliveries, as well as a large population of migrant workers willing to accept lower wages.²

As a greater share of consumer dining budgets goes towards delivery platforms, there will be fiercer competition and greater bifurcation in the restaurant industry. The larger chain restaurants will survive who are able to continue owning their customer relationships and negotiate favorable terms with delivery platforms. So will experience-led restaurants who differentiate based on food quality and dining experience. But the mid-level restaurants, your neighborhood pho vendors and bun bo shops, have neither the cost advantage of street food carts, nor the differentiation of higher end restaurants. They will struggle in a world where discovery takes place by going on an app instead of walking down the block.

The food delivery war is not only waged amongst platforms. Whether the companies intend it or not, it is also a war waged against the current labor structure and distribution of resources.

The Internet’s Inequality Problem

In a way, the rise of Internet aggregators is inevitable. No one can stop the inexorable march of the zero marginal cost revolution.

I don’t agree with a lot of the things that Dara Khosrowshahi, CEO of Uber, said in his recent interview with Kara Swisher. But he hit the nail on the head about the redistributive consequences of the Internet economy:

“The issue that I see as far as these systems go is that in the ’50s, ’60s capital increasingly became digitized. Intellectual property became the new property. And capital and IP essentially can move, are completely digital, and governments essentially have no leverage over capital and IP versus labor that is stuck in a particular place. So all of the leverage is against labor, and capital and IP are essentially free to do anything that they want… [Government] investment doesn’t go into plants that put more people to work, the investment goes into automation or code that increasingly automate work and reduce the need for labor and allow these companies to essentially buy back more stock and to create more wealth for the capital owners.”

It’s not a Doordash or an Uber issue. A reshuffling of the workforce is a natural consequence of a new economic order. If it’s not Meituan, it would have been another platform. If it’s not Now or Grab or Baemin or Loship, it would have been someone else. Khosrowshahi has disrupted the travel industry as CEO of Expedia, and he’s doing it again with delivery as CEO of Uber.

I am not a tech pessimist. I recognize that aggregators have created a whole new class of value for modern consumers. At the same time, Vietnam’s economy is much more dominated by small businesses than developed economies elsewhere in Asia or in the West. SMEs account for 98% of all businesses, 50% of employment, and 40% of GDP. Their real economic contribution is probably even higher if taking into account the large informal economy.

This puts the country in an especially vulnerable spot from the effects of digitization. As tech aggregators assume a greater share of the economy, they will be able to create more wealth with less labor. The end result could be a stark polarization between a small class of knowledge workers who reap endlessly scalable wealth from the networked economy, and a large class of gig laborers who increasingly depend on their tech overlords to make ends meet. As the country is moving directly from an agrarian to a digital economy, there will be no legacy, industrial-era middle class to soften the pain.

I’m probably not the only one to wonder what the alternatives are, whether there’s a future in which tech enablers can empower instead of disenfranchise micropreneurs.

Re-imagining the Future

In response to the threat of the retail apocalypse in the West, pundits and consultants urged brick-and-mortar stores to quickly digitize their operations and shift to an omnichannel strategy. In response to the restaurant apocalypse, a new crop of white-glove software solutions emerged to arm small businesses with order APIs that unbundle the different components of platform delivery, from marketing to CRM to payments and logistics. But how many restaurants in Vietnam can realistically go direct-to-consumer? Most Vietnamese SMEs have shallow levels of digitization and little cash in reserve to invest in IT upgrades. Conversely, SaaS providers may struggle to find a target audience and sufficient intellectual property protection.

Maybe the answer lies in social commerce. Most small businesses are already using Facebook and Zalo to interface with their customers, and transacting on social media would be a natural extension of people’s online activities. Perhaps something as simple as an AI-powered customer engagement system could allow customers to place their meal orders and forward order details to the kitchen for cooking and packing.

Maybe the answer lies in some form of bulk ordering or community group buying similar to Yunbanbao’s operating model in New York. Customers would be organized into chat groups based on geographical location. A local group leader would take people’s orders in advance, forward the collated orders to partner restaurants, and organize pickups at a neighborhood collection spot the next day. Some community leaders even deliver the orders themselves. By localizing the level of aggregation, this model can shave off the costs of customer acquisition and last-mile delivery. Restaurants, in turn, can enjoy a much lower commission rate due to lower overall overheads.

Maybe it’s a hyper-localized network of restaurants that incentivizes ordering from restaurants closest to you, such as Runningman’s model in Los Angeles. Maybe it’s a restaurant-driver coop model that charges by the month instead of by commission. Maybe it’s some version of Shopify for restaurants.

But the question is whether our micropreneurs can organize to innovate faster than food delivery companies can take over. And right now, the balance seems to be tipping towards the party with the venture capital.❏

Footnotes:

[1] The city of Shanghai reported 325 injuries and deaths involving food delivery drivers in the first half of 2019. The two leading platforms, Ele.me and Meituan, account for 70% of these incidents. In January 2021, a Meituan driver set himself on fire to protest working conditions.

[2] Some figures to consider: the top quintile earns ten times as much as the bottom quintile, comparable to the level of inequality observed in China and Mexico. This multiple is around 8 in the US and 5 in Western Europe. The income share of the bottom 40% has been on a steady decline.

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