Asharq Al-awsat English https://aawsat.com/english Middle-east and International News and Opinion from Asharq Al-awsat Newspaper http://feedly.com/icon.svg

Food-Delivery Services Will Struggle to Outrun Inflation

Food-Delivery Services Will Struggle to Outrun Inflation

Sunday, 10 April, 2022 - 05:30

Inflation is coming for consumers’ pricey pandemic habits.


Whether choosing restaurant dinners delivered to their door or at-home meal kits, many Americans have prioritized convenience over cost for the past two years. Food-delivery was a big beneficiary. Some of the top platforms including DoorDash Inc. and Uber Eats enjoyed triple-digit growth rates, supercharged by Covid fears and the suspension of restaurant dining. Similarly, meal-kit provider Blue Apron Holdings Inc. was struggling before the pandemic and considering putting itself up for sale. But when the virus hit, thousands of customers flocked to its service.


Now accelerating inflation, combined with easing fears about eating in restaurants as Covid cases drop, threaten to deflate the delivery boom. Inflation in particular is likely to prompt consumers to re-evaluate their spending and look to trim outlays they deem less than essential. And many could decide that having home delivery multiple times a month or ordering ice cream on the spur of the moment from a fast grocery service like Gorillas could be given up without too much disruption to daily life.


Already, fewer Americans report ordering takeout for delivery, according to the most recent monthly survey of food and beverage habits by Morning Consult. It doesn’t help that these services are getting more expensive. For a start, food inflation will elevate costs at restaurants that use services like Just Eat Takeaway.com NV’s Grubhub for deliveries. The average check across restaurants, takeout and home delivery rose 7% in 2021 compared with 2020, according to data provider NPD Group.


The increase in gasoline prices prompted Uber Technologies Inc. to impose a surcharge on Uber Eats deliveries to ease the pain on drivers, which adds to the cost for consumers. Grubhub also has raised driver pay, which is likely to be reflected in the fees it charges customers. Hello Fresh is tweaking prices in some markets for its meal kits, which already are more expensive than buying groceries or a ready meal that can be popped in the microwave. Last fall, Blue Apron added a flat $9.99 shipping fee to its boxes, and updated its pricing structure in response to higher costs.


What’s more, there are other choices available, such as buying a meal from a value player such as Chipotle Mexican Grill Inc. Morning Consult found that ordering takeout for pickup has remained more stable than other categories


Americans also could simply take a trip to the grocery store. While food retailers face their own cost challenges, they are positioning themselves to benefit from consumers trading down.


Supermarket giant Kroger Co. said it was seeing more people cook at home because it was cheaper than other dining options. It is also one of the companies, alongside Walmart Inc. and Amazon.com Inc.’s Whole Foods, that have been investing in meal kits. Kroger acquired Home Chef in 2018. It now generates $1 billion in annual sales.


Meal delivery and meal kit services do have one feature that could help insulate them from an inflation pullback: People using them tend to be younger and more affluent and thus more able to deal with rising costs. And as budgets are squeezed, some consumers might find that they spend less when having food delivered than when going out to restaurants.


Even so, as Walmart noted last month, in periods of inflation, all income tiers become more price-sensitive.


Discretionary food demand won’t grind to a halt. Hello Fresh is forecasting revenue growth of 20%-26% this year. Rivals Blue Apron Holdings Inc. and Just Eat Takeaway, parent of Seamless in addition to Grubhub, expect percentage growth rates around the mid-teens. Uber’s delivery business, which includes food, grocery and alcohol, posted its first-ever profit during the three months ended in December 2021 on an adjusted earnings before interest, tax, depreciation and amortization basis.


But soaring gas prices and crimped consumers mean life is about to get considerably tougher. Investors are certainly bracing for the worst. Share prices have fallen at least 50% from their pandemic-driven highs.


Companies that rode the wave must now adjust to the new reality. One way to do this is through consolidation. For meal kit providers, being bigger would mean more clout with farmers and food manufacturers. Hello Fresh aims to keep its service relatively affordable. This probably means passing on less inflation than the headline rate. While that will take a toll on margins, as the No. 1 global meal-kit seller, the company’s greater size should limit the impact.


The US delivery market has already consolidated into three major players. But Just Eat Takeaway is looking at strategic options for Grubhub, which lost market share during the pandemic to DoorDash and Uber Eats. Bloomberg News reported in January that Just Eat had indicated to investors that it was open to a sale, but advisers also were pitching a private equity deal or a breakup. For all the delivery companies, there may be opportunities for deals that bolster their offerings in rapid grocery delivery or from entering a new sector entirely, such as delivering medicines.


Investors looking for cracks in the consumer economy could do worse than watch that midweek takeout meal.


Bloomberg


Other opinion articles

Editor Picks

Multimedia