DELIVERY
Thinking outside the box Founder of theDelivery.World, consultant Peter Backman analyses the conundrum of raising profit margins under inflationary cost pressures. VALUE PROPOSITION Amidst the acronyms that litter the delivery sector – GTV, GOV, GMV – one is of particular interest: AOV. Average Order Value is the average amount that consumers spend when placing an order. This is a sign of the strength of the market. Where costs are, broadly, fixed like most manufacturing, the more orders, the more profit per order. So, make a million automobiles and profits, at the single automobile level, rise. Selling prices can also be reduced – judiciously so that the initial profit level is maintained. For restaurant delivery, in which each order costs roughly the same to produce, reducing price means cutting profit. To be profitable, it must be increasing its AOV. What can we learn from these companies about the evolution of the AOV metric? Not all of them reveal it. In fact, few do, but three in the top six do. And so do Domino’s Pizza which, although not in the identical market as the three delivery companies, is a useful bellwether because it too is intimately involved in delivery (as well as takeout). That means we have data from DoorDash, Just Eat Takeaway and Deliveroo, plus Domino’s. These companies represent 22% of global restaurant delivery (34% outside China) and can shine a useful torch on what’s going on. But the results reveal something awkward. Since the market upsurge that began with the onset of Covid-19, AOVs for these businesses – from the first nine months of 2020 to the same period in 2023 – have increased by 3.7% CAGR. There were periods of more rapid growth in AOV – notably the early lockdown stages of 2020, when the increase was around 9%. There was another spike a year ago, when the jump in the second half of 2022 was 6.7% compared with 2021. The broad picture is one of slow growth in AOV with some spikes. They may be able to spin stories about ‘protecting the customer through keeping prices stable’, but the reality is that delivery companies and restaurants are generating fewer dollars per order than they were two and three years ago because inflation is increasing, but AOV isn’t. Focusing on AOV provides a picture of operations as opposed to sales. In the absence of significant growth in AOV, most of the heavy lifting was provided by increased 44 P&P_Dec23_219_p44-45_Delivery_G AB.indd 44
transactions. In other words, customers ordered more meals but paid the same per order. That’s a sign of a competitive market – and it would be positive if most costs were fixed. But as we’ve noted, they are more likely to be variable. So, profits remain under pressure no matter how much volumes – that is numbers of meals and orders – go up. But that is not the end of the affair. Take inflation. It’s currently running at about 4.5% in the US and 2.9% in the Euro area – it reached a global average annual high of over 8% last year, and 4.7% in 2021. Make allowance for inflation and the real growth in AOV since 2020 has been negative – the average value of a delivered restaurant order has fallen globally by at least -2% since the onset of Covid, and probably more. Investors are pressuring restaurant delivery companies to become profitable; right now, the profitability of restaurant delivery companies is negative – as a class they’re loss making on traditional measures of profitability. Accordingly, delivery companies are on the hunt for ways to claw their way to profitability. They have a number of levers which boil down to two basic categories: increase revenue or reduce costs, meaning greater efficiency. So, what can be done? INCREASE REVENUE Ways to increase revenue include getting customers to order more whenever they use a delivery company – but as we’ve seen, AOV remains stubborn. This is despite action to load costs onto the basic menu price making it more expensive. We examined this in the last issue of theDelivery.World and concluded that customer charges are being increased by 40-50% over the basic menu price, and perhaps by as much as 70%. The fact that AOV isn’t increasing highlights that this is not working – customers are responding to increased charges by reducing what they spend. This may be a complicated dance though. An individual existing customer may pay the increased charge, but new customers may not; instead, they may opt for lower-priced alternatives. The AOV remains unmoved, even though it may increase in some restaurants or on some orders. www.pizzapastamagazine.co.uk 13/12/2023 13:05