How Grab can charge 30% of menu prices and food and beverage businesses can still hypothetically make more money despite a single digit profit margin

In this time of Singapore's Coronavirus Circuit Breaker (CCB), Grab's "exorbitant" fee of 30% of the order total are getting many people worked up.

Grab responded that the order total was not pure profit, and the majority of it went to the delivery rider and much of the rest went to pay various expenses. This got a snarky takedown (which I saw many people sharing), including the awful claim that customers tip deliver riders instead (Tipping is a terrible idea since you give workers an unpredictable income and let employers not take responsibility for paying them. Plus it's awkward for everyone).

I pointed out that Grab had provided actual numbers (original post), according to which of a total bill of $21.60 paid by a customer, only $1 would go to Grab.

After some extravagant handwaving about how these numbers could not be trusted (with no proof, of course), I was told that it was "literally contradictory" for food and beverage (F&B) merchants to typically have a low single digit margin at best but for them to be able to make money with food delivery services charging 10% or more of the sticker price as service fees.

So I came up with a worked example to illustrate how this could be.

For simplicity, let us assume a merchant's costs only consist of rent, labour and (food) ingredients. He does not engage in advertising, is not paying off any business loans and does not have utility bills to pay.

Let us consider the base scenario where Grab is not offering food delivery for a particular F&B merchant and serves dine in and take out customers.

His accounting looks like the following:

Rent: $500
Labour: $250
Ingredients: $200
Total Cost: $950
Revenue: $1,000
Customers: 100
Average Revenue Per Customer (ARPC): $10
Profit $: $50
Profit %: 5%

Now let us consider a scenario where Grab has entered the picture and is charging 30% of revenue in service fees.

For simplicity let us assume that there is no drop in business from pre-existing customers and he gets 50 new customers who pay the same to get his food delivered via Grab as they would pay dining at the establishment).

The F&B merchant's accounting now looks like this:

Rent: $500 (this does not change unless the business from Grab is so big that the merchant needs to move to new premises - which would be a good thing)
Labour: $300 (with more business, he now needs to hire more staff or pay them to work longer)
Ingredients: $300 (with more sales of food with Grab exposing him to new customers, ingredient costs naturally go up)
Total Cost: $1,100

Revenue from old customers: $1,000
Old customers: 100
ARPC for old customers: $10

Bill of new customers: $500
New customers: 50
Merchant revenue from new customers after Grab's 30% cut: $350
ARPC for new customers: $7

ARPC for all customers (after Grab's 30% cut): $9
Total Revenue: $1,500
Profit $: $400
Profit %: 26%

We can see that although Grab charges 30% of the sticker price in fees and the merchant's old profit margin was 5%, with Grab his profit dollars and margin have both risen.

The real problem with delivery is not the fees - but if offering food on delivery cannibalises a merchant's existing customers. Because then even if the same customers are paying the same price for their food, the merchant is earning less from them.

If merchants are afraid of cannibalisation, they can always choose not to offer their food on Grab. Or jack up the menu price for delivery by ~30% to cover the Grab cut. But then the prisoners' dilemma comes into play (your competitors can choose to offer their food on a delivery app, and eat into your business).


Related:

The Millennial Lifestyle Is About to Get More Expensive - The Atlantic

"If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year. If you use Lime scooters to bop around the city, download Wag to walk your dog, and sign up for Blue Apron to make a meal, that’s three more brands that have never recorded a dime in earnings, or have seen their valuations fall by more than 50 percent...

To maximize customer growth they have strategically—or at least “strategically”—throttled their prices, in effect providing a massive consumer subsidy. You might call it the Millennial Lifestyle Sponsorship, in which consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base. With each Uber ride, WeWork membership, and hand-delivered dinner, the typical consumer has been getting a sweetheart deal...

The idea that companies like Uber and WeWork and DoorDash don’t make a profit might come as a shock to the many people who spend a fair amount of their take-home pay each month on ride-hailing, shared office space, or meal delivery...

For years, corporate promises rose as profits fell. What’s coming next is the promise-profit convergence. Talk of global conquest will abate. Prices will rise—for scooters, for Uber, for Lyft, for food delivery, and more. And the great consumer subsidy will get squeezed. Eating out and eating in, ride-hailing and office-sharing, all of it will get a little more expensive. It was a good deal while it lasted."