There are several common theses in favor of the food delivery business in Bangladesh. One, a growing urban population with dual-income families scarce of time and in need of support for household chores. This is exactly what a food-tech company CEO told us a few years ago: “We are seeing a rapid change in family dynamics across the board. An increasing number of women are working today. The number of nuclear families is on the rise making it difficult for families where both husband and wife work full time-to cook and manage food. All these changes are contributing to a growing demand for ready-made food and take-out culture.”
Second, there is a thesis in overall consumer tech space mostly put forward by pure software companies such as Facebook and Google where the core product is free and the companies make money from advertising. The model evolved later when consumer tech companies that are not search-engines or a social network and thus could not give their core product for free but they started off by offering deep discounts. Companies like Uber made this model so popular that it has become a norm in many consumer business verticals. The expectation is simple. Many of these tech-driven consumer services such as ride-hailing and food delivery businesses are new to consumers and require a behavioral change in order to make it into the habits of consumers. If you offer discounts and free goodies more consumers will use the product and get hooked and eventually will continue using the products even when there are no discounts.
Third, the core value proposition many on-demand food delivery companies offer is convenience. The assumption is that inconvenience is a critical problem for a lot of people in Bangladesh. There is a lot of traffic, people don’t want or don’t have the luxury to go out and buy food or eat out. Hence, they would opt-in for on-demand food delivery services.
Fourth, food delivery companies usually earn money in the form of commissions from restaurants and delivery charges from customers. There are expenses too. In Dhaka, most food delivery companies so far struggled to make restaurant partners pay a commission. There are restaurant partners who are more than happy to give a cut in exchange for sales but the most popular ones are far from willing to do so. Since these restaurants have already enough orders, they seldom care for orders from these food delivery companies. The play here for food delivery companies is simple: they want to build aggregators. They want to aggregate demands and control a large number of orders, which means once they send a large number of orders to the restaurants, restaurants will not have any other option than complying with the demands of these platforms. However, it has not happened as yet.
While food delivery is one of the fast-evolving consumer tech verticals in Bangladesh, there are fundamental questions regarding the logical foundation of food delivery thesis in the context of Bangladesh. While food delivery is probably here to stay, its existing model needs to address some fundamental questions.
One critical flaw in the current food delivery thesis, particularly in the context of Bangladesh, is convenience as a core value proposition. Convenience is important but for a very small set of customers in Dhaka. If you consider it as a regular value proposition, it is more so. It has limited use in most markets outside Dhaka. In fact, in Dhaka, most people are not in need of convenience. The geographic setting is different in Dhaka than many western markets where the idea of food delivery first originated. Many locals call Dhaka the city of restaurants. There are restaurants in every other street. That being said, people do need food delivery service but that’s quite irregular demand if it is only for convenience. The potential market size is likely to remain limited, in its current form, where most food delivery companies taut convenience as their core value proposition.
In order to have a sizable market and sustainable growth, food delivery companies have to go beyond convenience as a value proposition and offer more meaningful value propositions such as price and service.
At the same time, food delivery companies have to tap into more critical needs of consumers such as office meals or regular household meals. This will not happen unless food delivery companies move into a different type of meal service over what they now serve. Food quality and price should match. One potential solution could be cloud kitchens aimed at offering quality food for office and home meals. A few companies are trying to take this gap with varying degrees of success.
Third, a large number of digital customers are known as bounty hunters. They order when there are discounts and stop buying when incentives are no longer there. Digital consumer tech companies are to blame for this reality, to some extent. In many ways, deep discounting as a growth strategy has changed consumer behavior but not in favor of what these consumer tech companies assumed in the first place. Food delivery is not a social network or search engine, it is basically a food business. There are behavioral changes that need to happen for people to order online but a search engine thesis where the core product itself is free does not work for food delivery. Price is an important incentive for most customers. But that is not discounts and offers rather a more consistent low price. Instead of one-off discounts, food delivery companies need to come up with ways to offer a consistently low price to customers outside of discounts.
From The State of Online Food Delivery in Bangladesh at The Beginning of 2020: “there are exciting projections about the size of global as well as local food delivery markets. Although the business model of food delivery struggles across markets due to its heavy discounting nature, it is true that these companies are changing how we dine out and eat, albeit slowly in Dhaka.
There are ways to reduce losses in the delivery business. Many food delivery companies such as DoorDash in the US are now expanding to all types of delivery. Uber is, in fact, opening up to the idea. Pathao tried that model in Dhaka once and eventually folded the initiative. The other popular model many food delivery companies are using is could kitchen, restaurants that prepare food only for the food delivery services, which could help reduce cost on manufacturing allowing delivery companies to offer competitive prices to customers.”
It appears that there are likely two paths forward for food delivery companies. One, becoming delivery companies of everything. Second, become food companies where you have cloud kitchens and everything in between and you offer excellent and exclusive food at a great price.