Business Model of Food Aggregators

Food aggregators are in the business of convenience.

They rack up discounts to compete, but how do they make money?

Today, we cover:

• Business Model

• Inevitable Diversification

Business Model

Food aggregators have minimal upfront capex and working capital.

Where do they fall short?

Customer acquisition: A race towards peak convenience

Here are the economics of the average $30 order:

• Food aggregators take 25% off the top ($7.5)

• Delivery fee ($2)

• Service fee ($2)

• Tips if any help cover minimum wage and work well for aggregators

• A food aggregator has $11.5 to pay delivery partners the minimum wage and make money.

This is without adding in corporate overheads and discounts.

As a result, aggregators have to bundle orders to complete orders from restaurants in a certain radius at once; people have to wait a bit longer.

But, it's the main method to gain operational leverage.

Price inelasticity for convenience can only last for so long.

Enter diversification.

Inevitable Diversification

As shown above, margins are just too slim.

Here’s how they inevitably diversify:

1. Advertising fees - Restaurants pay to be seen and compete with others.

2. Warehousing - Example: DashMart. Too low margins in delivery, they move upstream to make margin on products themselves.

3. Subscriptions - Bring in revenues upfront.

4. Data and Analytics - Consumer purchase habits.

All this to drive more volumes, lower customer acquisition and prioritize operating leverage.

How is there room to gain market share?

Longer term, acquisitions might just be the best way to get more volume and synergize costs.

See you next week.