The pre-order market has taken off, is consolidation next?



Australia’s pre-order market, serviced by players like UberEats, Deliveroo and MenuLog, has grown quickly and is highly competitive. We anticipate the market will experience strong, ongoing growth, market concentration via consolidation as well as horizontal integration. Over the next three years we anticipate that the key players will seek to expand both organically and via acquisition, which will increase the scale and scope of the remaining players. This is likely to be a global phenomenon, though it’s recognised that Australia is an attractive market given its early adoption status.



Key Takeaways


/ Over the past 5 years, the rise of pre-order apps in the food industry has shifted the traditional store-based experience online and reinvented the consumer experience. Consumers can now order, pay and collect/have their items delivered, in simple to use apps, at a relatively low cost.

/ The Australian pre-order food market is highly attractive given its size, growth and the early adopter nature of consumers. We estimate that the total value of pre-ordered breakfast, lunch and dinner is around $3.4b with further growth potential as more shopping goes online. Penetration is still low, estimated to be around 7%, which we think can get to 40% - 60% in the medium to longer term.

/ Point of Sale payment solutions are going mobile. Mobile wallets are the future for payments, continuing the long-term trend away from cash. Venture Insights previously undertook a proprietary survey to understand the trend towards a cashless society. This research showed that nearly one-third of respondents use their smartphones at least once a week to pay for a product or service, indicating a growing interest towards digital wallets and mobile payment apps.

/ There are some challenges facing the pre-order market that it will need to resolve over the medium term, though this is unlikely to slow the pace of change. We believe regulatory issues around the treatment of ‘gig-economy’ workers and the global movement to lower waste will be key industry issues and the businesses that solve them will be longer-term winners.

/ The ease of switching apps means those with the strongest consumer brand will ultimately capture more market share. Consolidation is likely to occur over the next two to three years with venue footprint, customer retention programs and frequency of use being the key to competitive sustainability for key players.

/ The biggest threat to the pre-order food and beverage industry is likely to come from large technology companies seeking to dominate all consumer touch points. As recently discussed, together with our UK research partner, Enders Analysis, a ‘super app’ is likely to emerge that enables consumers to make all their purchases from a single platform. In China, WeChat Pay and Alipay have become almost universal for payments across all sectors, including food and beverage.


Introduction


The rise of pre-order foods apps has re-shaped the consumer experience for take-away ordering and moved much of the industry online. This trend is expected to continue as consumers shift more of their spending online and restaurants rely on apps for their pre-order business. This shift in the market has not come without issues, with pain being felt across: payment providers (apps are able to by-pass their systems), workers (gig-economy worker rights have been a key focus for regulators) and, increasingly, the environment (the increased awareness of plastic waste creates a fundamental problem for takeaway providers). The market is also likely to see further consolidation and ultimately even a convergence with other consumer platforms such as Amazon, to create a ‘super app’.


From ‘over-the-counter’ to mobile app-based ordering, for pickup or delivery – Australia’s market is quick to adopt


Over the past 5 years, the rise of online, app-based systems in the food industry has shifted the traditional store-based experience online and reinvented the consumer experience. Customers can now use apps to order, pay and collect or have their items delivered, in most major cities around the world.


Specialty online food delivery companies (e.g. Deliveroo, Delivery Hero) have established an international footprint through M&A and organic growth and multi-national technology companies such as and Uber (i.e. UberEats) have leveraged their skill sets to capture a piece of the lucrative delivery market.


Australians are quick adopters of innovations that create good and drive efficiency. Many global pre-order platforms try to enter the Australian market because of favourable market conditions, transparency and a high-level of adoption of mobile payments.


Figure 1. Australian online food ordering market landscape

Source: Venture Insights Analysis


Pre-ordering apps offer the busy urbanite an effortless experience from order to dinning and we believe that as app-based systems evolve, Australians will increasingly pre-order meals and beverages, driving further growth in the market.


The pre-order food market is large (c. $3.4b) and will grow fast given penetration is only around 7% at present


The Australian pre-order food market is sizable and estimated to be c. 7% of total food and beverage orders which is approximately c. $2.7b of gross order value across fast-food and takeaway markets and restaurants (predominately dinner focussed). We also estimate another $700m of gross order value could come from cafes and coffee shops assuming the market evolves similarly to the dinner market and as consumers expand their use of ordering apps to other areas of consumption. Additional future growth is also likely to be delivered as operators in the coffee/breakfast market (e.g. Skip, Hey You, Ritual) move into the lunch segment.


Figure 2. Approximate Australian pre-order food and beverage market size (A$b)

Source: Venture Insights Analysis, IBIS World and Finders.com.au


We are also starting to see Australian pre-order apps trialing their ordering systems with stadiums, conferences and catering businesses to provide order ahead services at typically busy venues. There is also the potential for these businesses to expand into other areas such as school lunch shop or bars, pubs and nightclubs. Together, these markets could increase the market for pre-order apps significantly with the bars, pubs and nightclubs drink sales estimated at c. $8b[1], alone. In the medium to longer term, we see the penetration rate potentially reaching as much as 40% - 60%.


Cashless payments and the walletless economy


As per our previous reports on mobile payments in Australia and disruption in hospitality, we believe mobile wallets and payments are set to transform the way we pay for things.


Based on Venture Insights’ latest consumer mobile survey, nearly a third of respondents use their smartphones at least once a week to pay for a product or service, indicating a growing interest towards digital wallets and mobile payments apps. However, 42.5% of respondents said that they have never used their mobile to pay for products and services. We believe this is an opportunity for payment app providers to create greater awareness around the benefits and convenience of mobile payments and potentially increase adoption.


With more than A$7.5bn revenue (A$500bn total transaction value) at stake, the overall payments industry in Australia is ripe for disruption. While mobile payments are still growing, increasing adoption is only a matter of time as Australia transitions from a mostly cashless economy to a walletless economy.


Figure 3. Percentage of Cash Payments in Australia by number of transactions (projections from 2019)

Source: Reserve Bank Survey – How Australian's Pay, March 2017, Venture Insights


In the medium term there is the potential for major technology players to launch ‘super apps’ capable of servicing all verticals of consumer spending


A recent report, together with our UK research partner, Enders Analysis, looked at the differences between food ordering apps in China with those in the West. This report showed that in China, the apps that dominated food ordering (e.g. Alibaba and Tencent) were not specialised in food delivery and tended to dominate consumer spending across the board through ‘super apps’ that funnel consumers to retailers. This ‘whole-of-wallet’ model enables Chinese apps to gather more consumer data across a wider variety of purchasing decisions and, ultimately, deliver superior outcomes. In the West however, food ordering apps primarily offer food delivery and typically only target one or two areas of consumer spending. This suggests there is potential for: 1) a move by the large delivery apps into other food areas, or 2) a move by companies such as Amazon into pre-order food markets to capture more consumer spending. Indeed, Amazon recently invested US$575m in Deliveroo and has attracted the attention of UK regulators who are concerned about a potential takeover.


Figure 4. Emergence and consolidation in the Australian online food delivery market



Source: Venture Insights Analysis

Note: Just Eat owns and operates the MenuLog brand in Australia


Key challenges will relate to waste and ‘gig economy’ workers getting a fair deal


The key challenge the industry has faced to date has focussed on delivery drivers (i.e. gig-economy workers). Legislation on the gig-economy is developing slower than the growing number of gig workers and a recent ruling by regulators has created uncertainty around the employee ‘classification’ of delivery riders/drivers (i.e. employees or independent contractors) and the rights of gig workers.


We also expect there to be an increasing focus on environmental issues (e.g. waste) which is currently fundamental to the food delivery business model. On average, Australians use 130 kg of plastic per person each year, of which only 12% is recycled. Government regulations on banning single use plastic usage will force delivery companies to find alternatives to plastic containers and packaging. We believe that businesses that allocate resources to solve these issues will be sustainable and successful in the long run.


Conclusion: lots of growth and more consolidation


The ‘tech’ opportunity in the pre-order market was identified over five years ago and we have now seen the rise of the app-based system and the transition to cashless payment reach mass adoption stage. However, penetration rates remain low which will allow for significant growth over the medium term.


In our view, the convergence between food ordering and general consumer apps is happening and will inevitably accelerate. We believe this will first occur within the pre-order food market but ultimately there is a strong chance that there will be 2-3 ‘super apps’ that dominate the market. In the meantime, all players will be fighting it out in a highly competitive market with the winners likely to come from those that are able to build their brand awareness and overcome the key challenges (waste and worker conditions) in order to be sustainable.


[1] Source: IBIS World Pubs, Bars and Nightclubs in Australia.

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