UNITED STATES—In the COVID era, “dining in” is the new “dining out.” Soon after states put lockdown orders into effect, on-demand delivery apps transformed from a convenient feature to an essential service for restauranteurs.
Unsurprisingly, companies like Uber Eats have experienced tremendous growth in the past few months. A recent review of credit card transactions suggests Americans spent 70 percent more on food delivery apps this March versus 2019. Analysts also say US customers are ordering about 25 percent more food during COVID-19 compared with last year.
Despite this massive surge in demand for mobile meals, investors don’t seem to have an “appetite” for this sector. As the S&P 500 rose to all-time highs in the summer, stocks like GrubHub remain slightly down year-on-year.
One reason economists might not want to take a “bite” on food delivery stocks might have to do with COVID-related discounts. For instance, companies like Postmates announced they are temporarily suspending commissions in populated areas like LA and San Francisco. Even though more Americans are spending on food delivery, these discounts might cut into companies’ profits.
Delivery Driver Classification
Another issue hanging over the food delivery sector has to do with how companies classify their employees. This issue is incredibly tense in California, where attorneys have already accused Uber and Lyft of improper labor practices per the state’s AB-5.
In a nutshell, AB-5 requires companies like Uber to treat their drivers as employees rather than independent contractors. Some representatives, including San Francisco’s District Attorney Chesa Boudin, also claim companies like DoorDash need to give their workers full-employee benefits.
Most likely, we won’t have clarity on this legal issue until the November election when Californians vote on Proposition 22. Put together by Lyft and Uber, Prop 22 will define rideshare drivers as “independent contractors” and provide them a modified benefits scheme. If this proposal fails to pass, it might force food delivery employers to offer employees more comprehensive protections.
Another issue facing delivery apps is that they are competing in an ever-saturated market. With competition from UberEats, Doordash, Postmates, GrubHub, and other meal delivery drivers, there are only so many customers and many options to meet their demand.
This is why we are starting to see some merging of delivery customers, like the recent UberEats acquisition of Postmates. The details of this 2.5B deal will be unrolled later this year.
Additionally, restaurants are investing in unique app technologies. Companies like Papa John’s and Domino’s have successfully created their own delivery services to eliminate the “middle man.” If more restaurants invest in this feature, it could reduce the demand for third-party services.
Rise in Accidents
There has been a significant increase in motor vehicle accidents across California that involve TNC drivers who are logged into a TNC app at the time of an accident. Lawsuits against these companies may indeed slow them down or lead to additional restrictions from regulators. Attorneys are targeting delivery drivers involved in wrecks as well.
Despite all of these hurdles, it’s safe to assume delivery services will remain a staple in the post-COVID world. As more people join the “work from home” trend, restaurant owners can’t rely on foot traffic as in the past. But as the “new normal” sets in, delivery companies will have to stay sharp if they want to stay relevant.