Food delivery race set to last throughout 2019

With the market in its infancy, most if not all food delivery companies are operating in the red to gain market share, Photo: Le Toan

At 2pm in Ho Chi Minh City’s District 1, Phuc Long Coffee & Tea House is one of the busiest coffee shops in the neighbourhood. The staff is busy handling orders not only for sit-in customers but mainly for delivery men who will take the plastic cups of iced tea and coffee to thirsty office workers.

These young men with scooters and smartphones are guided by the algorithms of Vietnam’s online food delivery services. While still in its infancy in Vietnam, food delivery is one of the fastest-growing segments of the national e-commerce market that has attracted large players like Foody’s Now, Grab’s GrabFood, Go-Viet’s Go-Food, and Takeaway’s Vietnammm.

According to the latest study about out-of-home food and beverage (F&B) consumption by market research firm Kantar Worldpanel Vietnam, delivery is emerging as a new channel of F&B orders for Vietnamese consumers to consume away from home, especially among the working age group who seek for greater convenience in every aspect of their lives.

The study revealed that delivery now accounts for nearly 10 per cent of the total value of the out-of-home F&B market, and will continue growing their importance in the next few years and into the future, alongside with the exponential development of e-commerce in key cities in the Vietnamese market. Seeing its huge potential, more players will keep an eye on it, making the competition fiercer.

According to GrabFood, Vietnam is its second fastest growing market for food delivery, trailing behind only Indonesia. GrabFood has grown 20-fold since its official launch in Vietnam in June 2018. Meanwhile, the Vietnamese subsidiary Go-Viet of Indonesia’s Go-Jek also jumped on the bandwagon by launching Go-Food in late November.

Competition

Nguyen Huy Hoang, commercial director of Kantar Worldpanel Vietnam, told VIR that as more players are expected to jump into the game, the competition in the online food delivery market will continue being tough in 2019 and the years to come.

Most recently, Vietnamese startup Lala has been knocked out by intensive competition after one year of operation. Lala came online in late 2017 with the backing of Scommerce Group and its brother Ahamove with 10,000 shippers.

According to the latest announcement on its website, there is a high chance that Lala will focus on providing online business solutions for restaurants after quitting food delivery to customers. The move implies that Lala has failed to compete against its rivals GrabFood, Go-Food, and Now (formerly Delivery Now).

Lala may share the same fate with Foodpanda, which closed down due to financial problems during its three-year run in Vietnam. Foodpanda sold its local business to domestic rival Vietnammm in late 2015 to focus on more developed markets.

Julien Brun, managing partner of CEL Consulting, which provides specialised consulting and testing services, told VIR that the competition in last mile delivery, food or not, is similar to delivery for e-commerce. Initially, there are a lot of small- and medium-sized players and only a handful of significant ones. As the market keeps growing, the challenge is to stay in the game and continue growing, ideally faster than the market itself.

According to Brun, the main target of these companies for the first two or four years is to capture market share at all cost. This means none of these food delivery companies are profitable. They mostly burn cash to gain a larger foothold.

“In 2019 the competition over customers will be fierce, and being profitable will not be the primary objective. As the market is shaping and players do anything to grow, this is the time when consumers can get the best deals. Once the market is stable with a limited number of players, prices will necessarily start to rise,” he said.

Price war

Indeed, to snag users to use their food delivery services, GrabFood and Go-Food have proffered countless promotions to customers, like a 50 per cent discount programme and free delivery within five kilometres.

Meanwhile, Now and other players have been running attractive promotions, but the number of discounts is smaller than that of GrabFood and Go-Viet.

Explaining the math behind these discounts, the expert from CEL Consulting said that delivery companies may make VND1,000-5,000 ($0.04-0.2) gross profit per delivery. Subtracting the marketing expenses and overheads, food delivery providers quickly fall into the red. This means that every time a company delivers to customers, the customers pay for a part of the delivery cost, while the company’s investors shoulder the rest.

To make profit, customers would have to pay probably 20-50 times as much for delivery.

Overall, as long as investors believe in the growth potential and the future profitability of the business, they will continue pumping money into delivery companies. However, it is important to consider that in case of an economic downturn, these companies will have a very hard time staying in business.

In Brun’s view, the Vietnamese food delivery segment has great potential, which is obvious to a great many players. However, food delivery in Vietnam may also run into limitations as customers can find food anywhere very easily and at easily affordable prices.

“Food delivery in Vietnam may also run into limitations. Combining food delivery and general delivery, such as groceries and office supply, is probably the best way to increase delivery volumes across multiple categories and thus remaining competitive. It is interesting to look at who are going to remain in business and who are going to acquire whom in 2019,” he added.

Key focus areas

In addition to pricing, delivery speed also plays a vital role in the competition. The latest research by integrated market research company GCOMM Vietnam revealed that there are five important criteria for customers to choose a food delivery service, with fast delivery speed topping the list with 65 per cent of the votes.

Le Minh Phuong, research director at GCOMM Vietnam, said that delivery speed is the key factor to conquer the heart of customers. Companies with a larger number of shippers will definitely gain an edge in the contest.

On the same note, Hoang of Kantar Worldpanel Vietnam suggested that food delivery companies should expand their partnership network with F&B vendors and shippers for consumers to get anything they desire faster.

In addition to offering appealing promotion progammes, they should invest in loyalty programmes like point rewards to retain current customers and increase their loyalty.

He noted that more research needs to be done to apply and adapt new technologies quickly in order to enhance customer experience (booking, tracking, rating, payment) as well as to develop new functions and offerings to fulfill consumer demand.

Besides growth opportunities, he also pointed out some challenges that key players need to take into consideration. One of the challenges is the high marketing and promotion expenses and management costs for shippers and the F&B partner network, leading to a long-term prospect of earning a return on the investment.

Moreover, delivery companies need to compete not only with each other, but with F&B chains which have their own shipping services.