Just over a year after entering the Japanese market, German food delivery group Delivery Hero (known for its Foodpanda brand in Asia) announced its withdrawal, citing increased competition and a shortage of drivers.
The divestment highlights the challenges faced by food delivery operators in Japan and other parts of Asia, where regional players have to confront global giants. Although the delivery market is expected to continue to grow, operators are being forced to reconsider their growth strategies, and analysts said that more industry consolidation is expected in the next few years.
Delivery Hero entered Japan through its Foodpanda brand in September 2020. Relying on the growing demand for food delivery caused by the Covid-19 pandemic, the company had predicted that the world’s third largest economy would become an important market for the group and provided a large amount of capital resources for conducting business there.
Foodpanda CEO Jakob Angele leads the company’s Asia Pacific operations at the Singapore headquarters. He stayed in Japan for three months from the end of 2020 to the beginning of 2021 to establish business in new markets. With its successful experience in various markets-from highly developed Singapore and Taiwan to the emerging Bangladesh-Foodpanda is confident in entering Japan. It started in big cities such as Kobe, Yokohama, and Nagoya, and aimed to eventually expand its fast delivery business beyond food.
But as a latecomer to Japan, the group faces fierce competition.
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Leading the Japanese market are two players: Uber Technology and the local operator Demae-can, a Tokyo-listed company backed by the popular messaging app Line. According to the US operator, Uber Eats, Uber’s food delivery service, has approximately 130,000 restaurants and other stores on its Japanese platform. Demae-can announced on December 24 that its number of stores has exceeded 100,000. These two services are still actively investing to acquire users-Demae-can reported a net loss of 20.6 billion yen (US$179 million) for the fiscal year ending in August.
Foodpanda has not disclosed the number of restaurants in the country on its platform. But its existence has been weaker than the two giants. In an online survey conducted by Japan’s ICT Research and Consulting in February, out of approximately 3,600 respondents, 428 said they used Demae-can, while 426 said they used Uber. Only 34 people have used Foodpanda.
In addition, Covid-driven demand has attracted other operators: Uber’s US competitor, DoorDash, entered Japan in June. DoorDash also expanded after its recent acquisition of Finnish Wolt, which has been operating in Japan since March 2020, for 7 billion euros ($8 billion). Chinese ride-hailing giant Didi Chuxing also launched a takeaway business in Osaka in 2020 and has since expanded its business. Serving eight prefectures.
“Since the launch of this service, the pattern of the Japanese market has undergone major changes,” Foodpanda’s representative in Singapore told Nikkei Asia after the divestment announcement. “External factors, such as an increase in the number of players and a shortage of riders, have led to a new ground reality at the end of the year.”
Foodpanda’s divestment mainly reflects Japan’s fiercely competitive delivery market-small operators are facing difficulties in attracting customers and delivery personnel. However, similar situations can be seen in other Asian markets. The United States, Europe, and local companies are caught in fierce competition, and the marketing cost of acquiring customers and drivers hinders profitability.
For example, in Singapore, Foodpanda and Deliveroo of the United Kingdom are chasing the local super app Grab in a three-way battle. The Indonesian market is more like a contest between Asian companies. Local super apps Gojek’s GoFood and Grab’s GrabFood are the biggest players, but Singaporean technology peer Sea has rapidly expanded its ShopeeFood delivery service in Indonesia in the past year.
Before Foodpanda announced its withdrawal from Japan, industry consolidation in the region was already underway. In July, Gojek sold most of its Thai operations (including food delivery) to Malaysia’s AirAsia. According to research by Singapore consulting firm Momentum Works, Gojek’s share of the Thai food delivery market in 2020 is 7%, lagging behind Grab’s 50%, Foodpanda’s 23% and Line’s 20%.
The food distribution industry is expected to grow in many markets. For example, according to a November report released by Google, Temasek Holdings, and Bain & Company, in Southeast Asia, the total value of goods in this industry is expected to increase from US$12 billion in 2021 to US$23 billion in 2025. According to a report by ICT Research and Consulting in Japan, from 2020 to 2023, the market size will increase by 38% to 682 billion yen.
But Foodpanda’s exit from Japan shows that not everyone will necessarily benefit from this growth. “The food delivery platform is ultimately a relatively low-margin business, requiring huge volume and density to be profitable,” Momentum Works CEO Li Jianggan told Nikkei Asia.
The changing regulatory environment may also affect revenue, prompting operators to reconsider their growth model. For example, in August, Singapore’s Prime Minister Lee Hsien Loong expressed concern about the underemployment of express employees and called for greater protection, which will result in higher welfare costs for platform operators. In some Western jurisdictions, there has been a trend that requires companies to treat drivers as employees rather than independent contractors. The latter method helps operators reduce costs, but provides less protection for drivers.
As the fighting intensifies across Asia, many operators are expanding into grocery delivery and other on-demand fulfillment services.
When leaving Japan, Foodpanda said it would expand its “fast business” grocery delivery service in other markets. “We are constantly looking for new growth opportunities in this region, different markets, growth areas and new verticals, mainly in the fast business area,” said a Foodpanda representative.
Grab is also expanding its GrabMart grocery delivery business, and in December announced the acquisition of a Malaysian supermarket chain, which will help expand its grocery delivery business.
“Competition is still fierce,” Li said, noting that some operators are well-capitalized. “Therefore, the challenge for each participant is how to improve the efficiency of operations at all levels while maintaining increased numbers and density. They need to complete all of these tasks in a highly competitive environment.”
Foodpanda plans to sell its Japanese operations in the first quarter of 2022. The company said that the divestment was a “very difficult decision.” However, there may be more divestitures and acquisitions in the food distribution industry in the region.
“I think there are more than two large food delivery platforms in several markets, not to mention emerging on-demand grocery startups,” Li said. “In the medium term, it is difficult to see that the market can accommodate more profitable participants.”
A version of this article First published by Nikkei Asia on December 27, 2021. ©2021 Nikkei Inc. All rights reserved