Restaurants and grocers are experimenting with various methods of grocery and meal delivery to customers’ homes and offices, in part because these industries are not experiencing significant growth in foot traffic.
Venture capital firms invested $5 billion into meal and grocery delivery services in 2018 alone, a four-fold increase from 2017. Some meal and grocery delivery services are even listed on public stock exchanges, while more are in the IPO pipeline.
This article identifies leading grocery and meal delivery services, as well as the risks they face.
Third-Party Restaurant Delivery Services
Currently, third-party services handle the majority of online restaurant orders and are expected to continue to deliver the majority of meals through 2022. With more than ten third-party services to choose from, restaurants must do their due diligence when selecting third-party service partner.
Grubhub delivers meals for KFC, Taco Bell, and more than 105,000 restaurants in over 2,000 cities across America and London. Valued at $7 billion, it is both the oldest and largest third-party service in gross food sales with nearly 18 million active diners and 435,900 combined “daily average grubs” in 2018. As of February 15, 2019, the Company had approximately 2,722 full-time equivalent employees.
DoorDash delivers for The Cheesecake Factory, PF Chang’s, Taco Bell, Jack in the Box, Baby Blues BBQ, and California Pizza Kitchen. It is valued at $7 billion and is available in all 50 states.
Uber Eats connects drivers, restaurants, and customers for meal delivery within 15 minutes. It operates nationally for fast food chain McDonald’s and many others.
Postmates delivers groceries and alcohol within an hour in major cities across the country. Customers can pay $7.99 per month (billed annually at $95.88) for a year of free delivery with Postmates Unlimited.
Caviar offers delivery services along the East and West coasts, as well as Texas, Pennsylvania, Illinois and other states. Caviar is part of Square’s tools for businesses.
Instacart delivers groceries within one hour from leading grocers like Safeway, Publix, ALDI, Costco, Kroger, Wegmans, Petco and more. It is the largest independent third-party service serves, yet still operates at a loss on nearly $2 billion in sales in 2017 according to a Wall Street Journal report.
Restaurants with In-House Delivery Teams
While hiring drivers and creating new order-taking technology may be too costly for some restaurants, others have had more success in delivering meals themselves.
Panera handles deliveries in most cities without the assistance of a third-party service after spending more than $100 million over the course of six years to perfect its online ordering and delivery process. The decision was not profitable for the first three years, but the investment has paid off since 2016. In fact, Panera derives 10% to 15% of its sales from delivery in those markets that offer the service. It also noticed that offering a delivery option attracts new customers who would not otherwise eat in-store. The delivery service is particularly successful at Panera because many online orders are for large groups, which offset the cost of delivery.
Texas Roadhouse ended its delivery option across its more than 500 restaurants after customers made it clear that delivery negatively impacted food quality and resulted in price increases that were too expensive to bear. The restaurant chain conducted tests with two different third-party services in 2018.
Other restaurants use a mixed system that may save the restaurant 10% to 15% in commission fees by allowing customers to place orders on their own mobile applications while deliveries are outsourced to third-party services.
Online grocery sales were $17 billion in 2017 and are expected to grow to about $86 billion by 2022.
To begin offering delivery options, grocers often make major investments to redesign stores, install necessary equipment, and alter parking lots.
In 2017, Amazon purchased Whole Foods and began offering grocery delivery across those stores in an effort to compete with other supermarkets. Amazon also plans to open new stores, apart from Whole Foods, in many major cities.
Other companies like Kroger, Target, and Walmart saw their profit margins dip after spending billions on acquisitions and investments to break into the grocery delivery market.
Walmart uses multiple third-party services to deliver its groceries and has an additional e-commerce site called Jet.com, which took in $3.3 billion in 2016. While the company expects delivery sales to grow, it expects losses from e-commerce to also grow this year.
About half of all grocery deliveries are handled by third-party services, including Instacart and Shipt. Customers order their groceries from one of the participating grocers in their area, and the third-party services hire drivers to pick up the food from the grocer and deliver it to the customer’s homes.
Grocers pay about $10 per delivery but only recoup about $8, considering only 1% of 2,874 consumers in a recent survey were willing to pay the full cost of grocery delivery.
Risks in the Food Delivery Industry
Restaurants, grocers and delivery services face a variety of risks inherent in the meal delivery business. A few of the leading risks are identified below.
An independent contractor driver network forms the workforce for many industry participants. The status of the drivers as independent contractors, rather than employees, is facing legal challenges. A reclassification of drivers as employees could harm the financial performance of many companies.
Cybersecurity is a risk factor, as the technology platform of an industry participant could be subject to multiple forms of hacking or malware.
Privacy risks exist with the customer data that is stored in vast databases managed by restaurants, grocers, and ride-sharing companies.
Foodborne illnesses are always a potential threat as the movement of meals present risks from sourcing, food storage, preparation, packaging, and delivery.
Trademark and copyright infringement claims are a potential threat for as delivery companies compile, manage, and present third party data online.
Personal injuries related to accidents caused by drivers in the delivery network represent a significant risk.
The frequency and volume of liability claims is expected to grow along with the industry.
Panel Counsel Opportunities in the Meal Delivery Sector
As the delivery of meals and groceries continues to expand, insurance defense law firms will want to consider the following actions:
- Prepare a target prospect list of delivery-related companies that operate in your geographic area. These firms are growing rapidly and represent a significant source for new panel counsel appointments.
- Demonstrate your law firm’s understanding of the risks inherent in the grocery and meal delivery market by writing articles, making speeches, and publishing client alerts on the topic. By becoming recognized as an expert in this field, you will start to attract new business.
- Use your website and LinkedIn social media profile to post articles about risks faced in the grocery and meal delivery.
- Attend industry conferences where you can get to meet claims and legal executives involved in grocery and meal delivery services. The National Retail and Restaurant Defense Association (“NRRDA”) is one example.
Many of these grocery and meal delivery companies will retain a significant self-insured retention (“SIR”) in order to manage their insurance costs. See our related article titled, “Lyft Insurance Strategy Revealed in IPO Filing.”
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This article is provided for educational purposes only. It is not to be interpreted as legal advice or an opinion in regard to any topic discussed. The article should not be used as a substitute for legal advice from a licensed attorney in your state. Every situation is different and circumstances vary widely depending on the governing state law, policy provisions, and related considerations.
Some of the information in this article is based on reports from The Wall Street Journal, SEC filings, and other industry sources.