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Anonymous

Former Head of Sales at Just Eat, Spain 

Just Eat & Online Food Delivery in Spain

Former Head of Operations, Deliveroo Editions, Middle East

Deliveroo & Dark Kitchens

Former Director at Deliveroo

Online Food Delivery in France: Deliveroo, UberEats, & Gorillas

Former Head of Enterprise Sales, EMEA, Uber Eats

Online Food Delivery: Spain Labor Law & Market Structure Changes

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:20} Phil what was your role and responsibilities when you were at Just Eat?

{audio:0:00:26} I arrived at Just Eat just after the business had done a successful IPO and grew revenue by 20%. It had grown profits even faster but encountered several strategic questions. One was the arrival of effective competition in the UK in the form of Deliveroo and Uber Eats and secondly, whether or not to become a delivery provider and a marketplace aggregator. This needed serious attention because the business had not required a big strategy process before as it had been simple.

{audio:0:01:23} Take the original Danish model, roll it out in the UK, sign loads of restaurants, saturate the market and try repeat that in other countries. I was brought in to create a strategy discussion and analysis which delved self-critically into these emerging issues. I also ran a commercial finance team to ensure that any big decisions we arrived at were mirrored in shorter term financial decisions and projects which we would decide to invest in. I tried to close the gap between traditional and strategic finance. That was my existence at Just Eat in what was a tremendously interesting and quite challenging two-year period.

{audio:0:02:13} Did you segment Just Eat by cities, suburban and rural areas?

{audio:0:02:27} Initially we did not, but that is not to say the business was not analytical. It was, but in different dimensions. The idea was to sign over 90% of the takeaway restaurants with no distinction between urban or suburban. After filtering out the smaller populations, the job was to analyze every zone in the same way and to get the right cuisine mix and proportions of the local population aware of and interacting with Just Eat. We would revisit smaller districts to top up on the quality of the supply and the breadth of the cuisine mix.

{audio:0:03:21} Only later, when the delivery question emerged, did the business look at locations where the original marketplace business was the right approach, versus those where, in order to protect or win market share, you needed to implant a delivery business as well. That was the way the analysis was done. Other segmentation at play was the difference between new and existing customers. The business would address a restaurant differently, according to whether it was a new restaurant which had to be given special prominence during its first few periods on the platform, versus established restaurants.There was also a group of well-looked after restaurants which were the highest performers who would attract special treatment. If a restaurant wanted to pay for extra marketing support, that was also part of the Just Eat model.

{audio:0:04:32} In Q1 2021 Just Eat UK, 33% of total orders were delivery. Were those mostly London big city urban area restaurants?

{audio:0:04:56} Yes, although it is starting to fan out beyond the top 20 cities and into cities which lie somewhere between half a million and a couple hundred thousand. Beyond that, there are some dense parts of even smaller cities where a delivery service would make sense. Just Eat is not averse to being location specific within a city, about where it puts its delivery capability.

{audio:0:05:29} How do you think order volume for delivery and marketplace orders increase in future?

{audio:0:05:52} It will still be a selective deployment of delivery for Just Eat. Deliveroo's most recent numbers suggests the boost we got from Covid will endure. There has been different research on this but the consensus, until now, has been that half the Covid boost will remain. The long-term boost will lean more towards delivery services than traditional marketplace, nevertheless Just Eat has to protect its marketplace legacy which is the most profitable part.

{audio:0:06:44} Certain traditional areas which are sometimes off the radar of opinion formers in the South of the country, Midland and Northern areas are very high performing for Just Eat. Those parts of the country will grow by 10% or more over the next three to five years. In addition to pure delivery, it will also come from some of the marketplace hot spots.

{audio:0:07:20} How would you segment those marketplace orders?

{audio:0:07:42} The further into the North and Midlands, the higher the marketplace content, although the center of Nottingham, Birmingham, Manchester, Newcastle, Leeds and Sheffield are exceptions to that. Most of London will soon be majority delivery but, bear in mind, London is less than a third of Just Eat's overall order volume.

{audio:0:08:23} How much growth is there in the Midlands or Northern areas for Just Eat?

{audio:0:08:31} Before Covid, those areas would be hard-pressed to have over 10% order growth. Covid has brought in the older generation and more fast food restaurants doing some delivery. Those areas have a longer runway in the part of the cycle where they are above 10%. Towns and cities larger than 100,000 have a good chance of having over 10% growth in three years.

{audio:0:09:18} Just Eat Takeaway have seen an increase in marketplace restaurants over the past year; I am not sure if those were mainly from London or those hot spots. Was there spare supply which did not come onto Just Eat while you were there in 2017?

{audio:0:09:41} Yes, there was. Universal truths in 2017 were subsequently proven not to be so. One of those truths was high street fast food quick service restaurants had no desire to offer takeaway, therefore stick to those takeaways who already want to do their own delivery. What has happened since is that, in order to be viable, many walk in only fast food restaurants are drifting into delivery. England has 40,000 traditional takeaway and 20,000 fast food restaurants, many of which will seriously think about delivery or have already joined Just Eat.

{audio:0:10:53} Do you mean fast food restaurants like the take away Chinese and Indian?

{audio:0:10:59} I am talking about small walk in restaurants with a few tables that traditionally would not be interested in delivery, but now would be.

{audio:0:11:47} But would they be more marketplace or delivery restaurants?

{audio:0:11:51} They could be either. The core frequent business of either a takeaway or a walk in business is within a few streets of itself. If they do their own delivery, they will generate high efficiencies because they only have to walk a few streets to deliver the food. When a platform aggregator brings demand from several kilometers away, you experience longer delivery times. Some of these businesses will be able to model through and do their own delivery using the marketplace platform, without needing to pay extra for a delivery service.

{audio:0:12:43} How would you describe the typical marketplace restaurant that was on Just Eat in 2017 and 2018, in terms of size, orders, location and employees?

{audio:0:12:56} Well-established restaurants would have 10,000 orders a year or 200 a week, which is higher than the overall Just Eat average. They would make 200,000 a year in revenue, with only a 5% to 10% margin, and share territory with half a dozen local restaurants. Therefore, a Just Eat customer would choose between that restaurant and six others. When you look at the presentations Just Eat made several years ago, you had this repertoire where a customer would use about six different restaurants a year, across two or three different cuisine types. That is the arena a typical Just Eat Takeaway restaurant would be in.

{audio:0:13:52} Half of them would be collection business, and even the delivery business would typically be shared between Just Eat and the takeaway's own website. Today you are also sharing the platform business with Just Eat, Deliveroo and Uber Eats. These businesses are small but they have several options as to where they get their demand from.

{audio:0:14:23} Is the delivery typically run by a family member?

{audio:0:14:28} Yes; it is quite cliché but there is a lot of multitasking and casual labor, which is a rational thing to do, especially where a lot of your delivery is only a couple of streets away. When I talk to restaurants about how many deliveries per hour they achieve in their core non-platform business, it is much higher than the two drops per hour you get from the platforms.

{audio:0:15:02} Largely the proximity. Your core business is likely to be, in many cases, only a few streets away, when you can quickly get in and out with those orders. Whereas with the delivery platform, you have to receive the order, prepare the food, organize delivery transport to get out 2km or even further. That simply removes your efficiency. Platforms are great for takeaway restaurants but they are marginal incremental business, not the core.

{audio:0:15:41} Are they a cheaper way to drive orders which are further from the restaurant?

{audio:0:15:50} Yes, and many independent takeaways will get a further 25% to 50% on top of their core business. Some businesses go the dark kitchen route and are 100% platform, which is a good strategy, but still a relatively rare one to adopt.

{audio:0:16:19} At what point do the economics become tough? If Just Eat generate 20%, 30% or 40% of your volume?

{audio:0:16:36} That depends if they are interested in absolute profit or profit margin. It works from an absolute added profit point of view, up to at least 50% incremental business. In the 200,000 restaurant we spoke about before, you could generate another 50,000 in revenue, but once you have taken off the food and platform costs, you will only keep 16,000 to 20,000 of that as incremental profit. It will get tougher the more dependent you are on the platform.

{audio:0:17:22} I thought it would be higher than that with a food COGS roughly 25% per order value?

{audio:0:17:29} Out of the extra 50,000 revenue, the food ingredients will cost 20,000.

{audio:0:17:38} That is higher than I expected; I thought food had higher gross margins?

{audio:0:17:45} No, even in the core business without a delivery commission, it would be rare to make more than 10% margin, largely due to the ingredients and equipment costs.

{audio:0:17:59} Worst case scenario, 20,000 for food and ingredients and 5,000 to 7,000 for Just Eat?

{audio:0:18:09} Yes, plus extra to pay your own delivery hybrid staff or a Just Eat delivery service. Put those into the equation and you get a below 20,000 revenue boost hitting the bottom line.

{audio:0:18:27} How do you see restaurants changing the way they work with Just Eat?

{audio:0:18:32} There are several things independent restaurants are doing. They use ecommerce technology to become more sophisticated in the way they generate online orders, and less dependent on a single aggregator platform; not so much the new orders and new customers, but more the follow up business with customers that they actually share with the platforms. Traditionally, you would get a flyer through your door at the same time as you made your first ever Just Eat order from your local restaurant and that would encourage you to go direct. That always happened but their web presence is getting much more sophisticated.

{audio:0:19:30} A direct website from an independent restaurant is not as modern and user friendly as a Just Eat ordering page, but it is catching up to that quality. Technology is emerging where a restaurant can manage its relationship between Just Eat and the other two platforms, so it can spread orders around and take itself on and offline if they have enough direct orders during peak times. There is also technology around the receipt and processing of the order, the point-of-sale software and many different types of technology which hang off that. Businesses can do a better job of processing both their own and platform orders, avoid that dreaded bad first order experience which would result in a customer choosing a different restaurant the next time, even if it was no fault of that restaurant that the order went wrong.

{audio:0:20:38} Are smaller takeaways looking to go direct to customers, like Chipotle and Shake Shack already do in the US?

{audio:0:20:49} Yes, that is happening and that desire is not new. I remember local groups of restaurants trying to create an independent network of order aggregation and fulfillment. It never worked at the time because it was hard to create the right technology platform to do it. The technology to make that work better is much more evident these days. The platforms know that and are working with these complementary technologies. They know that restaurants will always want some direct business, so rather than fighting it they facilitate them and perhaps end up with a revenue share on that.

{audio:0:21:47} An example is Deliveroo's white label delivery offer, where they do the delivery for you in the background and charge a low commission.

{audio:0:22:00} Could that limit the marketplace order volume growth for Just Eat over the next 10 years if they get smarter with ecommerce and go direct to customers?

{audio:0:22:14} Yes, it could do, but it is an old challenge which is now more worthy of attention. Only half of customers make a second order during their first year on the platform. That is why new customer adds are not bigger and why frequency has not grown faster than it has. It is a constant issue but ecommerce tools are making it more worthy of attention by the platforms.

{audio:0:22:53} What was the number you saw in terms of retention or repeat orders?

{audio:0:23:01} Only half of new customers make a second order within one year of their first. Once that customer makes their second order, the habit starts to form which opens the door to the long-term cohorts these platforms talk about, where if you get beyond that first year, you start to move towards the pattern of making 10 to 12 orders per year. The majority of long-term surviving customers have that frequency.

{audio:0:23:39} That’s the cohort chart that Just Eat shows, with 13 to 15 orders per year for converted customers who have already formed the habit?

{audio:0:23:53} It is a blend between customers at one end, who have only made one order and gone off and might have to be reacquired in future, all the way through to habitual customers who order once a week.

{audio:0:24:21} Is there a high churn at the top of the funnel?

{audio:0:24:25} Yes, but for longer term cohorts, the churn goes down to 10% for customers who have been there more than a year, and much lower for customers who have been there longer.

{audio:0:24:41} Why is that churn so high in the first year?

{audio:0:24:46} If you only make your first order halfway through the year, it is unlikely you will get to two. In a minority of cases, that first order will have a problem associated with it. It might be late, early, have the wrong food in it, or the food might be in poor condition. When those problems occur, it severely reduces the repeat rate for the customers who experienced that. The third factor which has emerged recently, is that customers are more likely to experiment with platforms other than the one who first introduced them to online ordering.

{audio:0:25:49} Could they simply use all three simultaneously?

{audio:0:25:51} Yes; they could spread their frequency out between all three players.

{audio:0:25:54} What is the biggest risk to marketplace profitability for Just Eat?

{audio:0:26:11} The relationships Just Eat has with restaurant chains are solid, but if they end up generating a lot of volume in a relationship where the commercials are wrong or the SLAs require extra resource in order for Just Eat to consistently meet them, that could send the unit profitability of those relationships in the wrong direction. That was one of the initial fears with Just Eat when it started experimenting with relationships with casual dining chains. In order to kick off a relationship, some of the commercials were quite exploratory and some of the SLAs were difficult to meet, so that could be an issue.

{audio:0:27:11} Another issue we have seen in the US and Asia is a new type of regulatory involvement in the market. Traditionally, regulators have been involved in order to opine on consolidation transactions and they either rule them out or attach conditions. In the US, Europe and the UK, competition authorities are doing micro surveillance of the terms and conditions which are applied to restaurants. There have been commission rate fee caps in both the States and South Korea. A public sponsored app has recently been launched in South Korea to give people a chance to order without the restaurants having to pay a high fee. Control over fees could be a problem.

{audio:0:27:59} In the US and Asia, platforms recoup some of the lost money either through the delivery fee charged to a customer, or to make it necessary for restaurants to buy marketing services in order to get prominence on the website. There is also the constant issue of restaurants finding ways to avoid having to pay high commission rates.

{audio:0:28:41} The core take rate for Just Eat marketplace is 16% with advertising; how do you see that evolving?

{audio:0:28:52} Despite what I have just said, there is still a limitation given the level of competition, not only in the UK but elsewhere. If you are creating a situation where in order to do well, a restaurant has to pay the equivalent of another five percentage points of commission, that restaurant is more likely to look at a white label relationship with Deliveroo or Uber Eats. Even though Just Eats is well-placed to offer ancillary services, they have become increasingly careful about over promoting them. This transition happened as Just Eat went from high revenue and profit growth, rising commission rates and weak competition, to where all those things have changed. I see a real conundrum about the pace at which Just Eat monetizes all 30,000 restaurants and 12 million customers in the UK as well.

{audio:0:30:00} Fast forward three years and all three players will still be in the market, wanting to do different things with their restaurants and customers and maybe Just Eat will decide to be more of a service and supply chain supplier to restaurants, whereas Deliveroo could go more the route of a food innovator.

{audio:0:30:26} Do Deliveroo and Uber compete with Just Eat in suburban areas?

{audio:0:30:35} Deliveroo and Uber Eats barely have significant restaurant counts in their marketplace business, nor are they generating a significant volume of orders.

{audio:0:30:53} They do not have the demand in the small towns or suburban areas so what is the big risk for Just Eat’s legacy marketplace?

{audio:0:31:12} The risk is they overplay delivery and divert customers to less profitable chains. Just Eat will manage it well but they have to stay vigilant to that risk. A lot of research has been done to ensure that when you put a Burger King into a catchment area, you don't simply create Burger King addicts who ignore the rest of the Just Eat marketplace. The research proved that the opposite happens; you create customers who buy Burger King or KFC, but also explore and become repertoire customers and buy from six different restaurants a year. One risk is that dine in becomes less of a feature of life compared with pre-Covid.

{audio:0:32:11} Customers start to want to use platforms for a broader range of occasions. Just Eat was traditionally associated with a late-night impulse buy or a promised family treat every fortnight or a month, and cornered the market in that. As things evolve, people do dine in a lot more there are different types of occasions which Just Eat are not associated with, especially an occasion where you have visitors from elsewhere and you want to show them the best takeaway in your local area.

{audio:0:32:48} Are those the Chinese or Indian takeaways in the mind of UK consumers?

{audio:0:32:53} Yes, and Deliveroo has been very good at capturing emerging esoteric cuisines. They have gone further and faster in healthy options and have many more niche cuisines. Japanese is one example where Deliveroo is more associated with that than Just Eat.

{audio:0:33:16} Just Eat UK aims to run delivery at breakeven to protect the core marketplace restaurant profitability. What are risks in protecting their crown jewel of Chinese or Indian takeaways doing their own delivery, paying Just Eat a 15% take rate?

{audio:0:34:07} The risk is that it does not grow fast and those customers stick with their habits and do not increase their frequency. In most cases, customers will wither away, so one risk is that they do not replace with new occasions and cuisines as people's tastes evolve.

{audio:0:34:39} That means slower order volume growth than the marketplace business, and you have pressure from takeaways moving directly online or offering discounts. There are 20,000 new dine in restaurants coming online to do delivery, but Just Eat are offering delivery for them rather than a marketplace?

{audio:0:35:12} Yes, and this is a change in mindset. Five years ago, a burger cafe would never want to be a delivery business so we would not even target them. Today, it is difficult for one of those businesses to plot out a long-term future without having a delivery option.

{audio:0:35:32} Just Eat UK did 250 million orders in 2021, 33% of which was delivery, leaving 170 million for the marketplace. If that doubles in 10 years, at a growth rate of 10% a year, that is a business with a 16% take rate equating to 1.6 billion net revenue, only from marketplace, or 640 million EBITDA; do those numbers seem crazy?

{audio:0:36:48} In order to achieve that you need a consistently high level of brand marketing. Deliveroo and Uber Eats are all over the place in terms of out of home advertising and on TV. Just Eat is trying to match that as you can see from the Euros, and they have rightly spent a lot of time thinking about the extra expenditure on delivery capacity which is needed. Almost the same order of magnitude is the rise in brand marketing required. I reckon Deliveroo, Uber Eats and Just Eat spend over $200 million a year in the UK on brand marketing.

{audio:0:37:44} The other difficulty is delivery fees, which are currently being used tactically in order to launch delivery in certain areas. Delivery fees will not go away, because investors want a fixed return on every delivery order, as opposed to it being a risk of variable driver cost. Delivery fees will drift down so that is a problem. The underlying commission rates are being held at the moment but with the mix towards white label offerings and the notion that regulators are in surveillance mode, Deliveroo and Uber Eats have nothing to lose by dropping their marketplace commissions. All of those point to a gradual drift down in commission rates.

{audio:0:38:40} If we assume Uber and Deliveroo do not have demand in stronghold areas for Just Eat, in small towns with five restaurants, does it even matter?

{audio:0:38:57} Uber Eats and Deliveroo are not making significant inroads into marketplace, but two or three percentage points of commission rate could change that equation. Independent restaurants are getting more sophisticated in managing their relationships with aggregators and direct customers. It could nibble away at the leverage you get from volume growth, but this also happens in all ecommerce markets. In return for massive volumes, the prices that were originally associated with some of these businesses can only go one direction; down. People pay almost nothing today to build websites compared to what they used to.

{audio:0:40:04} What flat rate does Just Eat charge without advertising or marketing fees?

{audio:0:40:44} In the UK, it is typically 30% for delivery.

{audio:0:40:48} Is there 2% to 3% on top for advertising?

{audio:0:40:51} A quarter of restaurants take it up and it works out to another 4%

{audio:0:41:02} Will restaurants be angry if they compete against Burger King or KFC rather than their friendly restaurant down the road?

{audio:0:41:12} The programmatic marketing which goes into Google Ads or Facebook, in order to draw people off search engines, will get much more difficult for all these platforms. The returns on that expenditure will become less reliable. Both Apple and Google are restricting the ability of ecommerce companies to drop cookies and follow customers around the internet in order to re-market to them. Over the next two years that will go away, so Just Eat and others are either going to have much lower returns on investment from the high amounts of money they put into that machine, or they will have to find a new way of acquiring customers.

{audio:0:41:58} On the marketplace side, the question is the overall order volume growth from those core old takeaway restaurants and some pricing or take rate pressure – if and when we do see some competition from Uber or Deliveroo – otherwise you have a big business in 10 years?

{audio:0:42:33} Deliveroo made its presence felt in London through clever branding and PR. Just Eat's first response was to look at the brand awareness they were missing out on and felt if they could counteract the last mile visibility Deliveroo had, that would bring the market share back in places like London. Only later did it become apparent that delivery, for both independent restaurants and chains, was a service which was beneficial to them rather than a gimmick that was part of attracting new restaurants. That was one reason for the delay.

{audio:0:43:25} The other reason was, at that time, Just Eat investors were used to rapid revenue growth and even more rapid profit growth. If you created an open-ended relationship with a restaurant chain and the delivery idea took off, you could lose a lot of money and severely dent the marketplace EBITDA. That was a reason to go more slowly at first. The third reason was not immediately apparent, but Just Eat's core customers wanted to buy from restaurant chains on the platform, and only the presence of a delivery service would bring the chains onto the Just Eat platform. Just Eat had to ensure they could do this without losing money, while also attracting brands which the chains would want to be associated with.

{audio:0:44:27} Just Eat was clever in 2016 and 2017 by refreshing its brand and making it diverse and more inclusive so that chains would want to be associated with it. The final thing which took some time to work out was if delivery could be used to protect the marketplace business as opposed to cannibalize it. The research was painstaking but came out with a solid answer, which has been borne out since. If you put a KFC into a delivery zone, not only does it bring in some new customers, albeit often at a loss, it generates another three or four repertoire purchases elsewhere on the platform amongst marketplace restaurants. You are trading off a loss or breakeven order for three subsequent highly profitable orders, so Just Eat needed to work that out before committing, whereas takeaway.com might have made a quicker decision.

{audio:0:45:35} Could anything change that customer behavior of KFC acting as a customer acquisition tool so they can spend on other restaurants on the platform? For example, once KFC has its own channel or is on all of platforms, how does the customer behavior change?

{audio:0:46:10} In many cases, you have a captive audience for these chains, even though on a national level you might be sharing KFC with Deliveroo and Uber Eats. These chains tend to chop up their estate by placing their South East restaurants on Deliveroo and Midlands on Just Eat. There is an opportunity to capture the customer behavior in a certain region and try to leverage it and get that flow through the rest of the offering. There will not be competition in a sense that if a customer wants KFC, they can choose which platform to get it from.

{audio:0:46:53} But most of the big chains will probably have their own platforms?

{audio:0:46:57} In many cases, they opt for white label delivery solutions from the main players.

{audio:0:47:07} Which could be fueled by Deliveroo, Uber or Just Eat?

{audio:0:47:11} Yes. Currently, the chains do not want to create their own in-house logistics operation.

{audio:0:47:21} Will the average Chinese takeaway, who uses a family member for delivery, ever be incentivized to use a white label service supplied by Just Eat?

{audio:0:47:41} Just Eat have avoided that so far because they have a lot to lose by doing that. They have six percentage points of margin at risk, as a white label goes down to 7% commission. Grubhub, which is now under takeaway.com's ownership, have launched that in the States. The tradeoff for the extra volume coming into the market is that it might be fulfilled at lower margins.

{audio:0:48:25} Restaurants still need to drive demand and fulfill orders, so the white label option can work for Shake Shack and KFC, but the average Chinese takeaway has a brand in their local area. How do they make the decision of doing delivery themselves?

{audio:0:48:57} There is a mixture. Some of them do not want the hassle of trying to attract walk in trade and will choose the 100% online route, largely through a dark kitchen approach. For others, the mainstay of their business is their location, store front and passing trade, and will fill the gaps in capacity with platform inspired trade. Those are the two ends of the spectrum. Many Chinese restaurants, more so than other cuisines, decide on neither of those and have flyers all over the place, build their own website and have a business which does not grow fast but is very profitable.