HomeLatest newsHome delivery will continue to keep investors waiting

Home delivery will continue to keep investors waiting

Published on

- Advertisement -

Labor costs make the profitability of the sector unfeasible; a solution would be the use of robots

investors in startups they are subsidizing consumers’ cravings for wine and ice cream. Businesses trying to get these products to their doorstep in 15 minutes or less face a rather difficult task. Even more difficult is to make a profit.

The coronavirus pandemic gave life to a high-speed food delivery model that always seemed marginal. The Turkish Getir tripled its valuation, to 6,500 million euros, in one year. The German Gorillas, founded last year, is now worth 1.8 billion after an investment of its compatriot Delivery Hero, of 28 billion.

- Advertisement -

Traditional supermarkets are also investing. British chain Asda is expanding its one-hour delivery services, while other supermarkets are partnering with companies like Deliveroo and Uber Technologies.

For consumers, speed is expensive. A typical order includes a delivery fee of 2 pounds (2.36 euros) plus a 5% surcharge on supermarket prices for basic items such as bread or milk. Thus, the larger the order, the more profitable it will be. By sourcing food at wholesale prices, delivery companies can take about 7 pounds out of an average order of 20, based on a 35% profit margin.

The problem is labor. To fill an order, companies need a warehouse porter and a delivery driver. Together, they cost around £ 20 (€ 24) per hour. Therefore, to break even in the above scenario, they need to complete an order every 20 minutes. For the startups, the cost of attracting new customers or keeping existing ones, for example by handing out coupons for free delivery, worsens the chances of making a profit. Bain analysts estimate that a 17-pound order is an operating loss of 24 at a startup.

Economies of scale should solve this problem. If the driver and operator place four orders per hour, their cost per order drops to £ 5. Persuading customers to opt for premium items, such as alcohol or steaks, can also lead to higher profit margins. That said, Bain estimates that the average order of £ 35 will yield a measly 7% operating profit at best, on which investors still have to pay interest and taxes.

- Advertisement -

So why are they giving away so much money for so little reward? One possible solution is for there to be more robots, either in the form of warehouse automation or delivery drones. If fast delivery companies can put expensive humans on the shelves, investors could finally get something worthwhile.

- Advertisement -

Latest articles

China will “reborn” in chip industry after US restrictions, says Huawei

Eric Xu, rotating president of Huawei, believes that the Chinese semiconductor industry will be...

iPhone 15 Pro will include glove-sensitive buttons with customizable sensitivity adjustment

The news about the next star device from Apple, the iPhone 15 Pro continues...

More like this