Online food delivery surged during the height of the COVID-19 pandemic, as governments around the world ordered people to stay at home. Since then, equity valuations for food-delivery companies—which allow customers to order restaurant-made meals online through an application or website—have dropped around 70%, as investors have shifted away from unprofitable tech companies and rising interest rates negatively affected valuations. Despite the significant cooldown, however, Morgan Stanley Research analysts expect the global food-delivery sector to heat up.
“We expect growth to pick up to 14% next year, with average annual revenue growth at that level through the next five years, especially driven by demand in Asia and the Middle East,” says Miriam Josiah, head of Morgan Stanley Research’s European Internet Services. “That would result in the market growing to $810 billion by 2027, up from $424 billion today.”
Sizing the Pie
After expanding by roughly 50% in 2020 and 2021, growth in the global food-delivery sector normalized to 4.1% in 2022, and that trend has continued into 2023 because of inflation and other pressures on consumers. While growth is unlikely to return to peak-pandemic levels, there are a few reasons to be optimistic about sector.
First, food-delivery companies throughout the world are on track to see earnings before interest, taxes, depreciation and amortization (EBITDA) become profitable in 2023 and 2024, thanks to more efficient operations and economies of scale. The top delivery companies should fare especially well, outpacing startups as the market becomes increasingly concentrated around the largest operators.
Second, there is more room to grow, as the sector has tapped only about 18% of the global market of internet users. “The sector’s market reach lags behind overall ecommerce, which had 22% penetration in 2022. However, we forecast online food-delivery sales growth will be faster over the next five years, to achieve 23% penetration by 2026 versus 26% for ecommerce,” says Josiah. “As companies attract new users who are spending more and making more frequent orders, we think profits will follow.”
Josiah says investors should focus on five factors to help determine the pace of growth and profitability and identify the best regions and companies for opportunity:
Urban density, which means greater room for reach and growth potential
Change in demographics that can support consumption growth, including greater participation of women in the workforce
High fragmentation of the food-services market, which presents more opportunity for aggregator platforms, while the presence of fewer chains offers greater pricing power
Favorable regulatory policies regarding gig workers and commission rates charged to restaurants
Markets where a small number of food-delivery players carry share
Based on these indicators, Asia is likely to fuel international expansion, with up to 18% average annual revenue growth through 2027, buoyed by China (20% CAGR), India (18% CAGR) and Japan (17% CAGR). The Middle East is also expected to return to pre-COVID levels of growth with 13.5% average annual revenue growth through 2027. Conversely, growth rates in Western Europe, North America and Australia are expected to drop to single digits over the next five years.
Costs and Pricing in Focus
Regulation, particularly as it applies to pay and protections for gig workers delivering online food orders, could increase costs for consumers. That could in turn affect growth, margins and capital reinvestments.
“The platforms that are able to pass on delivery costs to consumers without seeing a hit to demand are likely to have the least margin pressure,” says Josiah.
However, the macroeconomic headwinds that have affected consumer and business spending could help drive consolidation, giving dominant players with more access to resources and capital an advantage in achieving steady returns.
“Until recently, easy capital availability has undoubtedly been a key driver of the outsized growth in food delivery,” says Josiah. “In a more capital-constrained environment, we expect platforms to offer more rational pricing for customers, which should lead to slower growth but better economics thanks to less discounting and incentives.”
For more insights and analysis on the global food-delivery sector, ask your Morgan Stanley Representative or Financial Advisor for the full report “Global Food Delivery: Still Appetite for Growth” (May 23, 2023).