DELIVERANCE

Recently Amazon invested over £500 million in the restaurant delivery company Deliveroo. This sparked off a few thoughts in my mind about the ever-changing and dynamic nature of the retail business.

Firstly, a little background on Deliveroo.

It was founded in 2013 and was one of the first companies to develop a takeaway app that uses its own couriers, rather than the previous practice of restaurants delivering to customers themselves. Over the past five years it has proved to be one of the fastest growing businesses in this sector of the retail food business. It quickly expanded its business operations by setting up its own standalone kitchens (called “dark kitchens”) where their chefs prepare a range of different dishes which are then delivered by couriers. These “riders” are not directly employed by Deliveroo. Instead they are paid per delivery. Deliveries are expected to be made within a fifteen minutes to thirty minutes window.

The company operates within around five hundred cities world-wide and in fourteen countries. Like its counterpart and competitor Uber, it has been heavily criticised for the way it manages and pays its riders. It is a typical example of the way in which the “gig economy” has transformed the business models of many businesses. The focus here is on outsourcing the elements of the value proposition, with an overall objective of keeping the costs down as much as possible.

Despite the objective of managing costs, Deliveroo recently posted figures which show that it has increased its operating expenses and recorded losses of around £180 million.

Therefore the concept of partnering has attractions for a company like Deliveroo as it tries to stem these losses and acquire capital to inject into new aspects of its business model.

For instance recently it as established a new concept based on combining delivery kitchens and food markets in Hong Kong.

It was one of the first companies to build bricks and mortar kitchens, where several restaurants cook food for delivery. This concept has been copied by many competitors.

Speaking of rivals, its main competitors in the UK market are Just Eat and Uber Eats. The former is the dominant player in this fast-growing market.

This concept of “dark kitchens” and food delivery has certainly “caught a wave” in recent years. Due to a combination of a number of factors such as recession, austerity, lack of growth in real incomes, time-poor customers and so on, people in the United Kingdom have reduced the number of times in which they “eat out” in restaurants.

This has impacted across all categories of restaurants in the food retail sector.

As I began to write this blog it was announced that Jamie Oliver’s restaurant operations had gone into administration. This is worth further investigation from our point of view as he has been one of the most successful entrepreneurs in this business over the past twenty years.

Discovered by the BBC programme: the Naked Chef, in the later 1990’s, he became an iconic figure on TV and his recipes generated a lot of publicity. In 2002 he opened up the “Fifteen” restaurants. In 2008 he introduced “Jamie’s Italian” chain of restaurants. He expanded internationally and used franchising to expand his business. His stated goal was to “positively disrupt the mid-market dining segment of the restaurant business.

In May 2019 twenty-two restaurants in the UK closed and went into administration with the loss of over 1,000 jobs.

What went wrong?

Some commentators put forward the view that he expanded too much and over-extended the business. Others argued that the restaurants were too large in size. With reduced staff, delays were occurring in servicing the tables and ratings dropped on social media platforms.

To be fair, other similar restaurant chains struggled. These included Strada, down to three restaurants, Caluccio’s, which closed over one-third of its operations.

Byron, Café Rouge and Prezzo are also experiencing difficulties.

If we buy into the notion that the food restaurant business is fickle: some experts say that they have a five-year life cycle, before they become stale, then it is perhaps not surprising that even successful ones will inevitably fail.

To this we must add (as mentioned earlier) the changing consumption patterns of people – no longer prepared to eat out as frequently as before.

As we have seen across other sectors in retailing. Dark kitchens and delivery processes reduce the costs that are normally incurred by traditional restaurants in terms of rental and leasing arrangements that are often prohibitively expensive. Staffing costs are also much reduced under this model.

This leads us back to where we began this blog: Amazon’s investment in Deliveroo.

What is the driving force behind this investment?

We should note that Amazon entered this space in in 2015, when it opened up Amazon Restaurants. It closed in 2018 because of difficulties in differentiating itself from Just Eat, Deliveroo and Uber Eats.

Clearly there is scope here for synergy between Amazon and Deliveroo in terms of integrating their respective value propositions. Amazon brings it technological and IT competencies to the party. Deliveroo has established a vast ranger of riders – currently delivering food, but in the future (in light of this partnership) could also deliver many of the staple items sold by Amazon. As Amazon Prime grows then this could be neatly fitted into the Deliveroo process.

The Deliveroo model is largely based on the concept of convenience: a theme which resonates strongly with the current generation of customers.

Amazon’s investment is part of an overall investment round initiated by Deliveroo which is expected to general over £1 billion. This investment will be used to grow its technology base and expand its reach by tying in with more restaurants and developing its  “deliver-only” kitchens called Editions.

A prominent UK politician has criticised this partnership – arguing that Amazon only wants to get access to Deliveroo’s technology and data. He further argues that this is symptomatic of Amazon: an obsession with tracking people and using micro-targeted messages. He has labelled this phenomenon as “surveillance capitalism”.

What are we to make of this partnership?

Firstly it further threatens the traditional food restaurant business model. The high costs associated with running such businesses are reduced.

Secondly it reinforces the notion that many restaurants have relatively short life cycles and even the most successful ones in the mid-dining segment can struggle and fail.

Thirdly it confirms the perception that Amazon is spreading its tentacles into almost every sphere if people’s lives.

This partnering move is arguably a good one for Amazon. It failed when it established its own operations. This approach allows it to have a “foothold” in this fast-growing segment. It also benefits from the competencies of Deliveroo in this area.

This “gig economy” proposition of Deliveroo arguably might struggle in the future as the fickleness of customer may mean that a new business model developed by an entrepreneurial operation may replace this current “flavour of the month”.

Let’s see.

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