Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 359

Apps and ‘dark kitchens’ are changing food delivery

In 2004, Matt Maloney and Mike Evans were working in Chicago as web developers for appartment.com, a platform that allows people to find rental flats online. The pair often worked late enough to order takeaway. Maloney recalled in 2014:

We were frustrated by the lack of dinner options as well as the pain in the ass of calling restaurants and reading our credit cards. That's when I heard the screeching wheels in my head: Why wasn't there something like (appartment.com) for food delivery?”

So appeared Grubhub, which now boasts 24 million regular users who can order from 300,000 restaurants in 4,000 US cities and London.

Grubhub is part of the world’s booming online-food-delivery industry that is expected to record global sales worth US$136 billion in 2020, a 27% increase from 2019. Altogether platforms have 1.2 billion patrons who like the convenience, speed, vast choices offered, ratings, reviews, recommendations and ease of paying via an app – especially of late when food delivery was one of the few luxuries people could enjoy during the lockdown phase of the coronavirus pandemic.

Platforms have proliferated because they think they can deliver meals to homes faster and cheaper than can restaurants, especially as they gather more data on diners. The industry’s emergence has given rise to ‘dark’ or ‘ghost’ kitchens or ‘virtual restaurants’, the name for commercial premises that prepare meals for platforms. Even as they are targeted for disruption, food providers can see advantages in cooperating with platforms. They offer restaurants a cost-effective route to an online presence, widen their customer reach, provide them with data on their patrons and deliver orders in a streamlined fashion.

So spectacularly has online-food delivery taken hold that UBS in 2018 issued a report titled, “Is the kitchen dead?” that judged food delivery as a “mega trend” that might make home cooking a rare practice by 2030. For this to be true, however, the food-delivery industry will need to sort the tough economics that govern the industry so the food preparers can flourish as much as the dominant platforms are bound to thrive.

Running a restaurant has always been a low-margin activity, even in buoyant economic times, because it is hampered by poor economies of scale (when higher output lowers fixed costs per unit of production). Cooked meals are hard to mass-produce efficiently because different ingredients need to be on hand, components and dishes have various cooking times and meals are typically made just in time to be consumed.

The appearance of platforms only made running a restaurant tougher. Any online orders are subject to a platform commission that can range from 15% to 35% and be raised at any time. Other drawbacks for eateries include that platforms can alter their algorithms at whim to shut out restaurants. Platforms are gaining the customer relationship, can force restaurants to discount and, sometimes, make them bear the costs of deliveries gone wrong. On top of that, delivery fees limit what restaurants can charge diners. To no one’s surprise, restaurant margins are falling to the point where many eateries are uneconomical.

Even as they grind down restaurants, established platforms in many countries (but less so China) are struggling to overcome some weaknesses of their economic model.

The first is that the food platforms rely on restaurants that are inefficient at producing à la carte meals. Dark kitchens, to be sure, have helped boost the efficiency of cooking for online delivery but only to a point.

A second challenge is that delivery has poor economies of scale because each order is different and has a unique delivery address.

A third pitfall of the platform model is the food-delivery industry has low ‘barriers to entry’, hence all the fresh, often loss-leading, rivals chasing the industry’s riches.

Other chinks are that platforms have no hold over their users, which means they must constantly promote themselves, and food delivery relies on gig labour but giganomics is coming under scrutiny for paying workers poorly.

The result is that an industry shakeout has started. Some money-losing platforms have vanished while others are in mergers and takeovers to ensure they are among the survivors that dominate this promising industry. Perhaps the biggest question to be settled is how the tussle within the industry between eateries and aggregators will play out so that both can find sustainable frameworks. The likely outcome for the industry is that a few prominent platforms have so many users they can operate a high-volume, low-fees model that allows restaurants to be profitable enough. But there is much to play out in the meantime.

Just to clarify, food delivery is an old concept. For all the gains of online ordering, ordering by phone is still a big segment. Many eateries will survive without much of a platform presence because people will still want to dine out. The barriers to entry protecting the platforms might rise once the industry has consolidated. The established food platforms are already profitable enough. It’s just that the tight margins for many food-delivery businesses reflect the challenging economics underpinning an industry that might only be at the start of the restructuring needed to become viable over the longer term.

 

Michael Collins is an Investment Specialist at Magellan Asset Management, a sponsor of Firstlinks. This article is for general information purposes only, not investment advice. For the full version of this article and to view sources, go to: https://www.magellangroup.com.au/insights/.

For more articles and papers from Magellan, please click here.

 

  •   26 May 2020
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Australia is heading for its third Omicron wave

Australia's baby boom filling some of the immigration losses

Four simple strategies deliver long-term investing comfort

banner

Most viewed in recent weeks

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

Planning

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved. 

Superannuation

How much super should you have?

Average super balances are one of the most misleading benchmarks. They ignore your goals, spending and future needs, creating a false sense of security. Here is how I calculate exactly where I need to be at every decade.

Retirement

Retiring from work is easy, retiring into life is harder

Most people spend decades planning how to retire. Far fewer plan for what comes next. The biggest retirement challenge isn't always financial, and it often catches even the most prepared retirees completely off guard.

Shares

Right asset class, wrong index: the trap in Australian small caps

Most Australian portfolios are concentrated in large caps, with relatively little exposure to smaller companies. But what if the biggest risk isn't the economy, interest rates or valuations? For many, the risk is hidden in plain sight. 

Property

Are these assets the missing piece in Australian portfolios?

Many investors remain concentrated in shares, cash and property. Despite their popularity among institutional investors, real assets remain underrepresented in many SMSF portfolios. Could they be the missing piece?

Investment strategies

The biggest risk that buy-and-hold investors ignore

Investors spend decades learning how to stay invested, yet few have a plan for getting out. When a financial goal has a hard deadline, a worked example shows why a fixed derisking schedule should outrank buy-and-hold discipline.

Investment strategies

How passive investing is driving the decline of active fund alpha

Why have active managers struggled as passive investing has surged? Research suggests that flows into index funds and ETFs are creating structural headwinds, penalising the stock-picking strategies that once generated alpha.  

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.