On one work-filled Tuesday in September, Gabriel Marega, a 28-year-old self-employed Nairobi-based photographer took the time-honoured concept of ‘staying hungry’ quite literally.
Marega had been hunched over a laptop all day as he worked hard editing a bunch of pictures, pausing only to drink some water or use the toilet. It was almost 4 pm when the hunger pangs became unbearable and he realised he hadn’t eaten all day.
Normally, the fridge, the kitchen, or the ‘outdoors’ should come to mind. But for today’s population of young, working urban-dwellers in Kenya, that’s the cue to whip out a phone. With a few quick clicks on the Jumia Food app, Marega’s meal was on the way.
Once he dug into the pack upon receiving the meal, Marega was mildly humoured by the discovery of the restaurant’s note stashed inside the paper bag. Amid contact numbers, the note read: “Order straight from the kitchen. We deliver!” Apparently, he wasn’t the only one staying hungry.
“For a moment, it felt like Jumia Food delivering their own death note and I found it amusing,” Marega says.
“I tried it and it’s the same price as Jumia Food, looks like they are doing it to claim the commissions they pay to the apps and also take delivery fees,” he adds.
Of course, it’s odd that a restaurant would secretly slip ‘reach-us-direct’ notes into customer orders sourced from the food delivery apps they (the restaurants) have an arrangement with. But it can be explained on the basis of ‘small business trying to survive.’
“Small diners go rogue and try to operate on their own as apps take significant commissions 15-30 percent. So depending on the product, this could really eat into margins,” explains Soud Hyder, Startup Advisor and Technology Editor at Mwango Capital
Between this and that other time a pizzeria owner profited off of ‘Pizza arbitrage’ after finding that Doordash – which had never contacted him – was offering his pizza at much cheaper prices than he offered in-store, it appears the duel to deliver dinner to doorsteps can quickly devolve into the hunger games.
A hot ticket in Kenya
One of the first players in the then-lukewarm but now-effervescent food delivery app business in Kenya was the Rocket Internet-backed company, HelloFood.
Although it struggled and was ultimately shuttered circa 2015, it may have sowed the seeds for the eventual rise of food delivery apps in Kenyan cities, as well as the frenetic pace of competition sweeping the space at present.
“I mostly use Jumia Food and Bolt Food. As for Uber Eats, I’m 50/50 about it because their discounts are good but I have some issues with their customer care agents and I find their service charge annoying at times. The other one is Glovo, I haven’t used it so I can’t say anything about it,” shares Nicole Baliach, Associate Online Engagement for Badili Africa.
Last year, the Jumia Kenya Food Index 2020 report ranked Kenya as the leading country in Africa for online food delivery. The report indicated the estimated market size for online food and beverage in Kenya to be KES 1.8 Bn (USD 16.02 Mn), and it’s projected to hit KES 3.8 Bn (USD 33.8 Mn) by 2024.
Kenya – Map Of Main Road Links & Major Cities
Image Source: Fitch Solutions
Over the past year especially, in the wake of movement restrictions triggered by the pandemic, areas like Nairobi, Mombasa. Kisumu, and Nakuru have witnessed a surge in the usage of on-demand food platforms, so much so that the one time strictly city-only service is starting to penetrate peri-urban towns. Plus it’s triggered a new wave of interest in the on-demand grocery delivery business; something that the apps themselves and even brick-and-mortar retail chains like Tuskys and Carrefour all seem keen on.
“We have seen more players coming in because of the demand, especially when the pandemic hit. These apps offer convenience allowing customers to order food from various restaurants as per their required time and desired location. It’s all about convenience and accessibility,” says Nixon Kanali, Tech Editor at TechTrendsKE.
Driven by strong fundamentals which include a relatively large youth, urban population, increasing disposable incomes, and growing levels of internet and smartphone penetration – as well as a decent urban road network, a reliable mobile money payment system, and the ubiquity of motorbike transport – Kenya’s very own food delivery app wars appear to be heating up.
The food delivery ‘app-ocalypse’
It’s a common sight now for swathes of delivery riders with their branded swag and box-strapped motorbikes to cluster around various parts of town, as it is common to find them whizz past vehicles and meander through chaotic traffic to deliver just in time.
Image Source: Mwango Capital
“The [Kenyan food delivery] market is very competitive, and ranks well ahead of other African peers. The sector is expected to outpace overall consumption-led GDP growth, given convenience offering to a growing consumer base. And ongoing subsidy programmes drive affordability which increases the proportion of the population that is able to use the food delivery apps. This is boosting adoption,” says Nahashon Karumbo, an Analyst at a boutique advisory firm.
Between Jumia Food, Uber Eats, Bolt Food, and Glovo – and their deep pockets and technological capabilities – the competition for a meaningful share of the Kenyan market is steaming. But unlike most contests, this one might be missing real winners, while probably serving up a few pyrrhic victories at best.
As Kenya’s on-demand food scene is still relatively nascent and underdeveloped despite progress made, much of the focus seems to be centered around simply making people cultivate a preference for ordering food online by not only offering convenience but also keeping the prices low, albeit artificially at times.
“On Jumia Food, Uber Eats, and Bolt Food, you are more likely to get offers and discounts that are only found in-app; you won’t get it when you physically visit those restaurants,” says Baliach, who regularly orders food online, typically after hopping between two or three apps and comparing offers.
“You can find vendors on the app with meals as cheap as KES 200.00 (USD 1.78) and as high as KES 2.5 K (USD 22.25). The minimum delivery fee is usually between KES 100.00 (USD 0.89) to KES 200.00 (USD 1.78) depending on your location. I would say it usually makes more sense for me on a financial and convenience level to order online than physically go to the restaurant if I just want a quick meal,” she adds.
But there’s a catch
However, what willing customers like Baliach are shielded from is the concept that they are probably not paying the true economic cost of their newfangled ‘online food’ habit, and some other entity is subsidising the cost to keep them interested.
This is all happening in the midst of razor-thin margins that leave vendors and riders barely satisfied while also bleeding the app platforms themselves as they compete on price.
For example, in the U.S., Grubhub lost USD 33 Mn in Q1 2020; Doordash reportedly lost a staggering USD 450 Mn in 2019; Uber Eats spent USD 1.2 Bn to make USD 734 Mn in Q4 2019 – basically losing USD 461 Mn in one quarter.
“Backed by tons of venture capital, the current model seems to be anchored on the pursuit of growth at all costs, in the belief that economies of scale will lower CACs exponentially even as ARRs/ARPUs grow,” reckons Karumbo.
“Although buzzwords like disruption are used to mask this, it’s usually about pouring in money to drive competitors out of business or buy them out eventually and end up owning the entire ecosystem which would give them the latitude to finally remove the subsidies, adjust prices, and maximize on profits,” he argues.
It’s kind of a long game where the favoured strategy is ‘losing money on every transaction in the now in the hopes of possibly making it up on volume in the future.’
A popular mental model that is often tied to these businesses is that they are vying for pole position in a developing market, at which point they can jack up prices to a level where they will be profitable. That is, in the future, restaurants and customers will pay even more in commissions and delivery fees, and the app platforms will make some actual money.
And who’s to say restaurants and customers will be okay with paying out bigger sums and not find alternatives anyway? (Kenya’s competing platforms – Jumia Food, Bolt Food, Glovo, and Uber Eats – did not respond to requests for comments as of press time).
Of course, given high initial Customer Acquisition Costs (CACs), as well as affordability and price being the main differentiator in the marketplace, there is significant incentive for delivery apps to be the first to reach scale or achieve market dominance. This way, they possess the market density necessary to neutralise the competition and make the unit economics more sustainable.
Nevertheless, this has led to a catch-22 situation where restaurants feel squeezed by the fees charged by delivery services (so much so that they try to circumvent the apps, as in the earlier example with Marega).
And yet the delivery services themselves manage to keep losing money, the riders grumble about insufficient compensation and benefits, and the customers become less willing to order every time they are asked to pay a bit more (at a price that bit closer to the true economic cost of having their food delivered).
It all seems like a ‘lose-lose-lose’ situation at times. How come billions of dollars are changing hands in millions of business transactions but no one is really winning?
A worthwhile pursuit or a race to the bottom?
Occurrences like the one described earlier, which had a Jumia Food vendor slipping ‘reach-us-direct’ notes into food packs ironically delivered by Jumia Food, is representative of how unsightly the underbelly of the food delivery business can get.
In leading markets like the U.S. where restaurateurs came to rely on food delivery apps for much of their revenue due to a suspension of in-person dining amid the pandemic, platforms like Grubhub, Uber Eats, Postmates, and Doordash came under fire for charging high app commissions and delivery fees. The individuals making the deliveries for those platforms also caused an uproar over compensation and a tipping system that “robs” them.
While these issues are nowhere near as pronounced in Kenya as they are developed markets, the warning signs are there. In September, a small group of Jumia Food riders are believed to have protested in Nairobi along James Gichuru road.
“Not sure why they protested but rider benefits and compensation are long-standing issues across the globe. Mobility and logistics tech platforms are under pressure to increase contribution margin. Most of them like Jumia Food are three-sided marketplaces and they prefer to be competitive on the consumer front which then results in squeezing vendors and riders,” explains Hyder.
“The underlying issue is these copy-paste emergent business models need to be heavily localised for the developing world. Case in point, certains parts of OECD have universal healthcare guaranteed. In our context the average boda-boda (motorcycle) rider will need to price the risk of an accident or losses in his daily wage or expectation,” he adds.
Vincent Moseti, a delivery agent for Jumia Food in Nairobi told WeeTracker that he earns around KES 1 K per day though paid weekly, and costs associated with fuel, maintenance, and welfare are not catered for.
“The work is only rewarding when you can get more orders and can make more trips,” he says.
Fast food, slow money
In Kenya’s food delivery scene, the three-sided model appears to be favoured. It’s an asset-light model that works such that the app platforms sign up riders or partners who have their own bikes and equipment, eliminating the costs that would have been incurred in building a fleet.
“Outsourced cost is about USD 1.00 for up to 8 KM, unit economics become tricky for distances greater than 8 KM. So third-party logistics tech apps mostly work on a hub-and-spoke model for less than 8 KM and aggregation for greater than 8 KM,” Hyder states.
Furthermore, riders’ earnings are tied to the number of deliveries they make. The apps sign up as many restaurant vendors as possible in strategic locations, charging the restaurants a commission of 15-30 percent on each order processed, as well as a delivery fee that is typically passed on to the customer.
The problem with the entire arrangement is there’s a certain ‘fast food, slow money’ dynamic to it: much more money is spent making much less money for an extended period.
For instance; if a diner sells a meal at KES 400.00 (USD 3.56) inclusive of the standard 25 percent commission on the app, the diner nets KES 300.00 and the app makes KES 100.00. The same app platform has to pay its rider around KES 200.00 for the delivery. That is losing right out of the gate and coupled with staggering overheads, it does seem like a race to the bottom at times.
But if millions of customers are ordering millions of meals via the app, then the numbers add up and suddenly it all looks like good business. To achieve that kind of scale, it all comes down to which platforms can afford to lose as much money as is required long enough to outdo the others, or which ones can sustain the burn, scale the fastest, and attain market dominance even if it means buying out or joining forces with the competition.
Experts reckon Kenya’s ongoing food delivery app wars is likely to spur aggressive M&A (mergers and acquisitions) activity in the near future, and possibly spark a reimagining of the model that would give prominence to cloud/dark kitchens and also treat delivery as, not just some external appendage, but part of a holistic food business model and infrastructure.
