One of the things I love about my job is I get to make predictions. Lots of them. Fortunately for me, people don’t seem to remember the predictions you get wrong. But I think it’s worth going back and looking at both the wins and the losses in an attempt to sharpen future projections, take a victory lap, and (equally frequently) admit defeat.
Last year, I made five big predictions: 1) my kids won’t go to college, 2) food delivery services will consolidate, 3) most auto dealers will go out of business by 2025, 4) airlines will see a significant reduction in traffic, and 5) in the next three years, a tech person will lead a major bank. Time will tell how spot-on I am with most of these, but the one I really went all-in on this year was consolidation in the food delivery market. (Spoiler alert: #predictionfail)
FIGHTING FOR THE SAME LUNCH
The food delivery market is a knife fight. Grubhub, Postmates, Uber Eats, and DoorDash are constantly competing for the same customers with little-to-no competitive distinction between them, sparking steep discounts to stay competitive and negative profits. Which wasn’t a problem, until the market woke up and realized that no profits are actually a bad thing. As a result, Grubhub stock was down nearly 40 percent as of Q4 2019.
In other words: Just a few months ago, the situation was untenable. It was an industry almost certain to collapse. So I was feeling pretttttty good about that prediction. The only way all of these players could survive, much less thrive, is if something completely crazy happened. Literally every restaurant in the world would have to shut their doors and switch exclusively to delivery…
So, yeah — that happened. And now the delivery space is blowing up, and I have to admit: I got this one wrong. To put it presidentially, “bigly.”
But even though I got it wrong, I sort of got it right (keeping the presidential theme here). Instead of practicing what I preach in my book (shameless plug) I was thinking about the industry through the lens of constants: I was still leaning on the soon-to-be false constant that people would continue to go to restaurants, thinking that wouldn’t/couldn’t change.
And while I was right in the sense that something major would shift in that industry, instead of breaking the wrong way (my prediction), it broke the right way for them. I believe the pandemic, which induced a situation where everyone needed to eat food at home all the time, was the only way they could survive. It took the most extreme scenario possible for them to stay in business and not consolidate. But, against all odds, it happened…
DELIVERY BOOM — OR EVENTUAL BUST?
In quarantine at my house, we’ve hit peak delivery. Food, booze, kids’ toys, booze. Everything that keeps us alive is now being delivered. But will this delivery service boom-time hold? Or is it just a temporary delay to an inevitable collapse and consolidation? Whether or not the delivery explosion is here to stay, it has reshaped the restaurant industry. Large restaurants aren’t going to open anytime soon, and customers have acclimated to the improved pickup/delivery options. And yet, eventual consolidation is still highly likely.
Delivery itself is not a particularly innovative or new concept. The pizza industry pioneered the delivery model around 60 years ago. These food delivery startups have done a great job of digitizing the ordering process and making a wider variety of food available for customers, but we’ve hit a tipping point where the breadth of choice is too overwhelming.
Aside from more choice and a switch from phone orders to apps, overall innovation is lacking and the industry pain points are vast. Uber Eats and Postmates attempted a subscription model to drive customer loyalty, but that’s not enough to cement either of them as a clear leader in this space, and Uber Eats is a consistent financial strain on Uber (they laid off over 3,700 people yesterday). Restaurants hate the system, as they’re forced to pay 20-30% of each ticket, cutting into their already slim margins. And while consumers enjoy the convenience, the delivery experience itself isn’t great. The food often arrives soggy, cold, messy, and with varying degrees of accuracy. Some of this has shifted during these extreme times, but the fundamentals haven’t changed. It’s not a great business for any of the stakeholders.
The delivery services’ Achilles’ heel and the biggest driver of eventual consolidation stems from the fact that they claim to be convenience-based disruptors, but are in fact intermediaries looking to create a toll booth inside the restaurant industry. That is a hard position to defend over time, particularly when there is a lack of follow-on innovation that differentiates or creates a unique value proposition. Without a competitive moat to safeguard against replication and disruption, it’s still a virtual knife fight — one that will cost hundreds of millions in advertising to maintain. And for those companies still seeking new rounds of investment, the swift decline of WeWork put a damper on the “growth at all costs” model, and even before the coronavirus struck, investment capital was drying up fast for these types of companies. With profit-shrinking price-slashing as their only competitive advantage, can any of them secure a new round of investment? Consolidation seems like a more likely alternative once this temporary delivery bonanza ends.
CONSTANTS, THEY ARE A-CHANGING
Far beyond delivery services, this unique moment is testing all sorts of constants within the restaurant industry, from robotic pizza (that didn’t go so well) to the staying power of fake meat. Until now, we’ve largely believed restaurants are primarily for dining in with a fixed menu of prepared food. But sometimes people need sustenance of a different sort, which is why local Austin restaurant, El Arroyo, started offering their crowd-pleasing margaritas for takeout — an act that is satisfying customers and keeping them in business during these trying times. Or take Austin sushi restaurant Uchiko: we’ve partnered with them to create a tasting menu to enjoy with friends via Zoom from home, and as a bonus, the chef joins your virtual party and teaches you how to cook the entrée. Or on a national scale, Panera is leveraging their supply chain resources and expertise to broaden their offering to groceries during this time.
While not all of these innovations and trends will hold, operating in forced survival mode is pushing the industry further toward what I believe will be the future of restaurants: More automation and personalization, dynamically changing menus, greater attention to full experiences beyond food-as-usual AND the ability to get food delivered wherever you want it. So while the coronavirus has led to a surge in delivery and proven me wrong in the short term, I believe that, in the long term, delivery aggregators still face the same issues they did pre-pandemic.
In Embracing Irrationality, I talk a lot about false constants. Restaurants, like many other industries, have been hit particularly hard due to the pandemic — but also, due to an over-reliance on false constants: thinking people will always physically come in for food, or me thinking that the restaurant industry just couldn’t change so drastically overnight. COVID-19 has proven that false constants are more real than ever. And the consequences of relying on them are catastrophic.
Until next time,
Ben
p.s. In Embracing Irrationality, I offer a detailed account of the “future of restaurants” workshop we ran at T3, specifically as it relates to testing constants and applying my formula for irrationality to various industries. Purchase it or donate to charity by paying what you want to download a copy today.
Previously posted on t-3.com/thinking.