Foodpanda says no price war despite fee, minimum order waivers

July 29, 2019 13:55
Arun Makhija, Foodpanda's CEO in Hong Kong, said the startup is entering the grocery delivery service market in the city. Photo: HKEJ

Since late June, food delivery service provider Foodpanda has waived the minimum order value requirement and delivery fees in a move to further penetrate the local market.

“Competition on price in this avenue is a bit interesting because we’re the first to actually go in this direction, in terms of having no delivery fee and no minimum order value,” Arun Makhija, the startup's chief executive in Hong Kong, told EJ Insight in an exclusive interview.

“[But] we are rather competing on value here, as opposed to trying to get into any price war.”

Foodpanda has grown to over 5,000 partner restaurants in the city, since its creation in 2014. The on-demand food delivery service has recently dropped delivery fees and minimum order value to as low as zero, to kick-start a series of promotions and flash deals in the summer season.

However, Makhija dismissed claims that it is starting a "price war" in the sector.

“I don’t see it as a price war, because we're not doing this because of competition… and we haven’t seen local players mirror each other in terms of pricing moves,” he said.

Foodpanda’s archrival in the local market, Deliveroo, launched in April a subscription service that offers unlimited free delivery for a fee of HK$98 per month.

Makhija said the firm has not felt “anything significant on our side” mainly because Foodpanda has already been charging zero delivery fees during off-peak hours. 

“I think our customer base has already had a mindset of not really paying delivery fees as a habit."

Makhija said the new price strategy is to make the platform more accessible for everyone in Hong Kong, noting that the business has been playing in a niche premium segment, focusing on "corporate, affluent, and the CBD [central business district]" clients.

Meanwhile, about 50 percent of the city’s population has not tried food delivery service, and an estimated 80 percent of current food ordering transactions are still being conducted over the phone directly to the local eateries.

Waiving the minimum order value and delivery fee is the firm’s way to “remove all barriers for Hong Kong people to try us”.

“There is a lack of awareness about what we are doing among many of the New Territories areas,” he said, and that has inspired the team to focus marketing messages on how easy it is to use Foodpanda’s services.

In a recent marketing campaign, the company spent an eight-digit budget on outdoor ads and TV commercials, among other promotional vehicles.

More partners, carriers

Foodpanda is currently “in investment mode”, according to Makhija. Besides the marketing campaign, Foodpanda is expanding its array of partner restaurants, targeting to have about 10,000 restaurants aboard its platform by the end of the year, from 5,000 partners at present. Over the past three months, the firm has increased its delivery fleet by 50 percent to over 1,200 carriers, and is still adding “hundreds per week”.

Despite engaging in a hiring spree, Foodpanda has not increased wages too much in the past couple of years. Makhija said the local market, while competitive, is not “an irrational, ugly, competitive environment, which is what we can see in markets where players are providing subsidies and discounts at completely irrational levels”.

However, intense competition can be seen in other markets around the globe. In China, for example, Alibaba’s and Tencent-backed Meituan-Dianping (03690.HK) have been offering discounts to attract users. Both players are burning cash at an increasingly rapid rate, with Meituan posting a net loss of 1.4 billion yuan (US$203 million) in the first quarter of 2019.

In general, online food ordering platforms generate income through commissions on orders from restaurants, advertisement services for restaurants, delivery service fees, and third-party advertisement services, among other sources.

For Foodpanda, “the revenue that we generate is from the restaurant itself, and we see that as the sustainable model [for the company] moving forward”, Makhija said.

“I think you can’t even start to think about profitability before you have the scale,” he said when asked about the company's profit model. “The profitability of this business comes from operational efficiencies and driving down the cost per order.”

Shorter trips

A sufficiently large-scale order number is a prerequisite for optimizing cost efficiency, he said, as seen in the major cities in mainland China. In Beijing alone, more than 1.8 million food delivery orders are placed every day, according to market research in 2018.

With a high level of food order density, Foodpanda’s machine-learning algorithms can plan the best delivery routes for its carriers, shortening the distance of trips and significantly increasing the number of orders that can be executed over a specific period of time, he said.

Foodpanda was acquired by Delivery Hero in 2016, and the latter became a public listed company in Germany a year later.

There are food delivery services in the group that are operating profitably in markets like the Middle East and Turkey. “They’re able to do that because they have the scale,” Makhija said.

He also revealed that the company is also dipping its foot in the local grocery delivery business, leveraging on its carrier fleet. “It is launched already in Hong Kong, but it’s just a test, like a beta version.”

Foodpanda’s latest move comes after Singapore-based food and grocery delivery startup Honestbee froze operations in Hong Kong in late April amid a severe cash crunch.

Makhija explained that the new service is just about “increasing the relevance of our offering to customers," rather than finding profitable business aligned with food delivery.

The grocery delivery service is planned to move from beta to live this year, he said.

“We really want to stay focused on being able to provide customers anything they need, in a very short amount of time. That’s what I want to provide, which is why we’re entering the grocery [delivery] space,” Makhija said. “We are really the logistics technology expert, so why don’t we utilize that across the board?”

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EJ Insight writer