Explore Morgan Stanley research to learn how much we project the total U.S. food delivery market could grow and who could will benefit from it.
Pizza delivery is a little like cellphone service. If there isn’t any, you’re probably somewhere remote. In the U.S., pizza accounts for some 60% of the online food delivery market. Sometimes, it's the only food delivery option available—especially in suburban and rural areas. But what if all food could be ordered and delivered as easily?
The pizza paradigm—order on-demand and get fast, reliable, inexpensive or free delivery—is arriving for a broader palate and bigger geographic range. More restaurant chains are gearing up to fulfill online deliveries, and a handful of startups are aggregating orders online, while courier services ferry an ever-wider assortment of food to consumers.
“We are in the early days of a potentially significant shift in access to delivery, as various mobile internet-enabled businesses begin to scale and offer unprecedented variety, speed and convenience to the consumer," says John Glass, Morgan Stanley’s U.S. restaurant analyst. In a recent report, “What If All Food Could Be Delivered as Easily as Pizza?” Morgan Stanley Research projects that the total U.S. food delivery market could grow to as much as $210 billion over the long term, from around $11 billion today.
Who benefits from this market growth? Chain restaurants and third-party enablers will likely share in those gains, but not equally, as each tries to position for some level of dominance. If third-party aggregators and delivery services pull ahead, restaurant chains could lose control of the consumer experience, much in the way that airlines and hotels have lost bookings to online travel agencies. On the other hand, the chains may be better at creating scale and cost efficiencies. Either way, consumers can look forward to grazing on the greater selection of food delivered to wherever they happen to be.
"While food delivery has been around for generations, its availability has historically been limited to urban markets where there has been enough density and demand, or to a single category—pizza," says Glass. Recently, Morgan Stanley surveyed* more than 5,000 consumers for their views on food delivery and found that around a third of the population orders delivery food that isn’t pizza, and at a lower frequency. But takeout food is popular; nearly 60% of U.S. consumers have ordered food to-go from a restaurant in the past six months. “Demand for takeout is consistent across urban, suburban and rural markets,” notes Glass. “That's at least a hint that there could be pent-up demand for delivery service."
While the largest chain pizza restaurants have robust online ordering platforms that handle more than half of their sales, many other types of chain restaurants are only just entering the delivery market. Although the chains may seek to emulate "big pizza," online third-party aggregators—which either transport meals ordered through their platforms or route orders to restaurants for delivery—could stand in their way. They have only penetrated less than 2% of total restaurant sales, according to the report, but have the potential to become far larger players.
"Most of these new enterprises have been in business less than five years," says Morgan Stanley Internet Analyst Brian Nowak. "As with any emerging sales channel, consumers may not have enough experience with online order and delivery to fully appreciate the service."
Should customers come around, a significant market awaits. At nearly $500 billion a year in revenues, the restaurant industry is one of the largest in retail. Of this, food eaten off premise carves out $210 billion, including the $30 billion delivery market, of which $11 billion is online. Exclude pizza, however, and online delivery’s slice shrinks to $4 billion. That translates to just 2% of the total addressable market, compared with eCommerce (10% penetration) and online travel (40% penetration). Glass and Nowak believe that, longer-term, online delivery could make a play for that $210 billion off-premise slice of the bigger pie, including drive-through fast-food and other quick-service options.
Relationships between aggregators and major chain restaurants haven't fully formed, but the nature of those ties will shape the future of online food delivery. Partnerships between the two could rapidly increase online delivery and expand the market for both parties—an outcome Morgan Stanley sees as the most likely—but other outcomes are possible.
"If third-party delivery aggregators control the market, volume grows but chains lose the consumer and cede some control on price," says Glass. "If chain restaurants build out their own delivery networks similar to the existing pizza-delivery market and consumers take, they could dominate online orders, and aggregators may not gain much steam." Another potential outcome: Not much changes, and the third parties fail to secure critical participation from the chains.
The ramp up of online food delivery faces some challenges. The biggest impediment is cost, given the high current pricing for couriers. While Millennials seem willing to spend on convenience, broader adoption may require lower fees or other creative approaches, for example, a one-time-fee membership model to encourage higher volume usage. Alternatively, chain restaurants may need to underwrite a portion of that delivery cost over time. As that occurs, some restaurants may choose to investigate establishing their own delivery networks. "Ultimately, restaurants may need to split the cost of delivery with the consumer, and as long as it is incremental, there's room in the margin structure to support it," says Glass.
Another caveat to consider: Not all foods deliver as well as pizza, which can withstand the sometimes prolonged journey from oven to table. Some other foods that seem to fare well on the delivery route: Asian, Italian, and sandwiches. Other categories—burgers and fries, for example, which get soggy quickly—don't fare as well. That said, “Consumers intuitively know this when ordering, and this is reflected in their responses to our survey in lower delivery demand in these categories,” Glass notes.
Moreover, packaging technology continues to evolve, perhaps making delivery in some of these more challenging categories more viable in the near future.
Says Glass: “We've seen with retail, travel and transportation, technology can and does change consumer patterns when access is easier and cheaper. Ultimately delivery may end up expanding restaurant demand, not just shift share within it.”