Tech

Grab says its food business could push the company to profitability

Key Points
  • Ride-hailing company Grab is betting on its growing food delivery business to drive growth and profitability in the long term, according to the regional head of GrabFood, Kell Jay Lim.
  • Grab's food business received a fillip when the company acquired Uber's Southeast Asia business that includes UberEats.
  • The nascent food delivery market in the region has tremendous potential for growth, analysts told CNBC.
  • But in relatively mature markets like the United States and Western Europe, predatory pricing and cutthroat competition are limiting profitability.
Indonesia Grab bike riders waiting for passengers in Jakarta.
Afif C. Kusuma | iStock Editorial | Getty Images

Ride-hailing company Grab is betting on its growing food delivery business to drive growth and profitability in the long term, a senior executive at the company told CNBC.

"We've seen tremendous growth in our food business," Kell Jay Lim, co-chief of staff to the CEO and regional head of GrabFood, told CNBC. "We did have pockets of food delivery businesses throughout Southeast Asia already, but not across the region."

Grab's food business started in 2016, but expanded broadly across Southeast Asia last year after the start-up acquired Uber's regional operations that included UberEats. The service was available in two Indonesian cities at the start of 2018 but is currently present in more than 200 cities mostly across Indonesia, and also in Thailand, Malaysia, Singapore, Philippines, and Vietnam.

The company says its gross merchandise volume for the food business grew 900% on-year in June 2019 from a relatively small base. GMV is a commonly tracked metric by e-commerce companies that measures the total sales dollar value of goods sold on their platforms.

For the same period, delivery volume grew seven times, according to Grab. Overall, GrabFood accounts for around 20% of Grab's total GMV at the moment, compared to less than 5% in 2018.

Lim explained that the "room for growth is still tremendous" in Southeast Asia, where food delivery is still at a nascent stage compared to markets such as China and the United States.

We have over 200,000 merchants on our platform across the region, we want to show the relevant ones to the relevant people.
Kell Jay Lim
Regional Head, GrabFood

Performances of food delivery companies are tracked by various measures including profitability, GMVs, the total number of merchants on their platforms, order volumes, app downloads, and the so-called rider utilization rate, which refers to the total number of orders a ride can deliver in an hour.

Grab declined to disclose some of those numbers, but Lim said the company monitors its rider utilization rate "very, very closely because that is a very key metric in terms of profitability." He added that the company is investing in products that will help Grab drive up its rider utilization rate and make operations more efficient.

Going mainstream in Southeast Asia

Food delivery is not a new concept — what's changed is the way it's now being done. Previously, customers used to call restaurants directly to place their orders. Now, all of that is carried out on a mobile app or online, with a variety of choices available.

In Southeast Asia, food delivery apps have gone mainstream in a relatively short time, and those companies operate based on speed, convenience, and choice, according to Chandan Joshi, global emerging markets leader for consumer industries at EY.

Those apps were previously used by 10% to 20% of the population in urban cities across the region. They are now being used by more than 50% of the population, according to Joshi who said that indicates there's much more room for growth in the market.

We do see that the food industry has better margins than ride-hailing (and) we believe that the food business is going to really fuel our growth and get us to profitability in the long run.
Kell Jay Lim
Regional Head, GrabFood

Having a variety of food merchants on its platform and using data analytics and artificial intelligence to personalize restaurant recommendations in different markets are important considerations for Grab, Lim said.

"Based on what your order behavior was, we then show the relevant merchants," he added. "We have over 200,000 merchants on our platform across the region, we want to show the relevant ones to the relevant people."

Grab declined to disclose the aggregate number of orders that are placed on its app. But, the company said, it processes around 300,000 daily orders in Vietnam, and about four million orders were placed in Thailand between January and April this year.

Indonesian start-up Gojek — which competes with Grab in ride-hailing, food delivery, and payments — told CNBC that in the last eight months, the size of its food business across the region has doubled. The company claims it is "servicing more than 50 million orders a month" from 400,000 merchants in three countries.

Path to profitability

Swiss investment bank UBS predicted in June last year that the global online food delivery market could grow more than tenfold in the next decade — from $35 billion in 2018 to around $365 billion by 2030. The report said that more home-cooked meals will be replaced by deliveries from restaurants or central kitchens.

"Food delivery is becoming a replacement for food that is cooked at home," said EY's Joshi.

For its part, GrabFood's Southeast Asia rivals include Gojek, as well as established players such as Foodpanda and U.K.-based Deliveroo, which have been around for around 6 years or longer. To be clear, competition varies across different markets in Southeast Asia — for example, Indonesia is a big battleground for Grab and Gojek.

"You suddenly have a real food delivery fight on your hands. Understandably so, because food has a ton of money to be made. The margins are pretty high," Florian Hoppe, who co-leads Bain & Company's digital practice in Asia Pacific, told CNBC. He explained that the marginal cost of delivering — for example, one extra pizza — is minimal for a restaurant since the kitchen is already running. That allows food delivery companies to potentially structure a deal that gives them more commissions and better margins.

I don't think it's a winner-takes-all because it's way too big for that. I think the models will start to differ quite a bit.
Florian Hoppe
Bain & Company

GrabFood's Lim agreed. "We do see that the food industry has better margins than ride-hailing," he said. "We believe that the food business is going to really fuel our growth and get us to profitability in the long run."

However, many of these food delivery companies are not as established yet despite their longstanding presence in the region, according to EY's Joshi. That's because the market is still growing, and that leaves room for other players to compete for market share. It explains why there's massive interest from venture capital firms that are pumping in huge amounts of money into the space, he added.

Cutthroat competition

Mature food delivery markets in the United States and across Western Europe paint a grim picture of cutthroat competition between companies, which in turn hinders their overall profitability.

Predatory pricing is used widely to drive out the competition and firms often take on losses to offer deals and discounts, Sarwant Singh, head of mobility and visionary innovation group at Frost & Sullivan, wrote in a recent op-ed.

As a result of slashing prices, food delivery companies struggle to make profits due to high rates of cash burn — despite massive revenues and investment, Singh wrote. That's driven some of them to shut down their business while others are merging to take on the competition.

In Southeast Asia, the market is at an early stage of development since most of the region's retail spending is still being done offline. Companies have more room to carve out market share at the moment instead of relying on lowering prices to stay ahead.

Still, start-ups such as Grab and Gojek have an advantage over food delivery-only players. That's because they have multiple sources of revenue in other areas such as transportation, logistics and payments.

Drivers for GrabFood line up to collect orders at a Pisang Goreng Bu Nanik store in Jakarta, Indonesia.
Dimas Ardian | Bloomberg | Getty Images

Localization strategies play a big part in helping companies dominate each market too.

A common practice gaining traction is the concept of cloud kitchens — or shared kitchen spaces — that are being set up by delivery companies. Restaurants can lease additional space at a relatively low cost in one of the cloud kitchens to fulfill an influx of orders received through delivery apps. For its part, Grab said it currently has 10 cloud kitchens in Indonesia, with plans to build more in the country and across the region by the end of the year.

Southeast Asia has a large population of more than 600 million people and a growing middle class that's coming online. The total retail spend in the region is about $600 billion, of which more than half — or $350 billion — is spent on groceries and food, according to Bain's Hoppe.

Unlike ride-hailing, where the region has two dominant players in Grab and Gojek, the food delivery space is still evolving. "What shape it finally takes is hard to predict," Hoppe said. "But, I don't think it's a winner-takes-all because it's way too big for that. I think the models will start to differ quite a bit."

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