Meal delivery shouldn’t be a luxury

McKinsey: Delivery Hero is a pioneer in the meal delivery space. What factors, capabilities, and strategic decisions have contributed to its success? What were the turning points, if any?

Niklas Östberg: One of the key strengths of Delivery Hero was always our willingness to take risks and innovate. Many of our brands were part of the first wave of online marketplaces that digitalized the phone-based meal ordering process, enabled by an online menu. The next stage of evolution was to take end-to-end ownership of the delivery experience. This was a tough and capital-intensive transition, but it was worth it. Our current model brings a better customer experience and stronger long-term economics, in line with our vision: “Always delivering an amazing experience—fast, easy and to your doorstep.”

We started out with meal delivery and added grocery delivery as a second pillar of our business. In the future, we will expand our offering to additional categories, some of which we are already testing, such as health and beauty. While we acknowledge that each category has its own rules, we are confident we can bring the capabilities that helped us win in meal and grocery delivery to bear in new categories, such as building a large customer base, using data to understand customer demands, and establishing efficient logistics networks for delivery.

Grocery delivery is such an important growth driver for us.

Niklas Östberg, CEO, Delivery Hero

McKinsey: How important will grocery delivery be for your business in 2024?

Niklas Östberg: We believe that the absolute growth in grocery delivery will be slightly higher in 2024 than it was in 2023, and it will be a growth engine for us as customer adoption of our service keeps growing. Because of this, we focus on improving the customer experience in this area with more choice, more affordability, and higher reliability of delivery.

McKinsey: How do you see the different segments of your market evolving?

Niklas Östberg: There is still substantial room for growth in meal delivery. We know this from comparing customer penetration in our most mature markets with penetration in markets we have entered only recently. This is why we will keep investing in meal delivery.

In the grocery space, the future will be omnichannel, where customers shop online—much more than today—and visit physical stores for a different experience. We’re betting on quick commerce because we believe this will become the largest share of online grocery, and we see this in just how fast we’ve grown this business over the past four years and how much our customers love it. What matters to them is choice, so our own stores, Dmarts, now have more than 4,000 items on offer. Many of them are offering more than 6,000. And through our marketplace model, our traditional grocery-retail partners already provide an assortment on our apps that is almost identical to what customers find in stores.

McKinsey: You said that choice is very important for customers. What about prices?

Niklas Östberg: We are acutely aware of the importance of affordability for both meal and grocery delivery, and I believe our offerings are priced very attractively, given the convenience we provide. We already offer subscription programs in which customers can benefit from attractive discounts on both items and delivery fees. Also, many restaurants and consumer brands are keen to appear on our platform to achieve visibility, and they are prepared to grant very attractive conditions that we can pass on to our customers in the form of discounts.

It may sound paradoxical, but the single biggest driver of profitability in our industry is still growth.

McKinsey: What will be the biggest challenges for meal delivery companies in the next three to five years? How will Delivery Hero prepare to tackle these?

Niklas Östberg: In the current environment of economic and political uncertainty with high inflation, high interest rates, and geopolitical risks, the key challenge is to find ways to create an affordable customer offering. Meal delivery shouldn’t be a luxury. To ensure affordability, we work hard to build an efficient ecosystem through data and technology, and we reinvest the savings this efficiency generates into our customer offering.

Another challenge is the need to keep innovating. Ours is a young and dynamic industry, and we need to make sure we stay at the forefront of how it is changing and adapt our business model accordingly. One question we are focusing on is what delivery technologies will look like in five years. To prepare for any future changes, we conduct pilot tests and engage in partnerships with pioneers.

McKinsey: Reaching profitability is one of the keys to success in your industry, and many players struggle with it. In your view, what are the key levers needed to reach profitability in the delivery space for 2024 and beyond?

Niklas Östberg: It may sound paradoxical, but the single biggest driver of profitability in our industry is still growth. Our fixed costs don’t really increase, so any sales growth improves the bottom line. As far as variable costs are concerned, customer acquisition and the actual delivery are the biggest line items in the profit and loss statement. We know from the data in our most mature markets that there is still a lot of potential to improve efficiency in both areas. As the business grows, the share of sales allocated to marketing can be reduced. And as increasing volume enables us to weave denser delivery networks, delivery cost goes down.

Our aspiration is to be the driving force behind all changes that bring better service, even if that comes at some short-term expense.

McKinsey: What role do partnerships, such as with consumer packaged goods manufacturers [CPGs] and retailers, play for Delivery Hero?

Niklas Östberg: These partnerships are essential. For CPGs, we can be an important growth channel because of the convenience we offer to customers. We are also an attractive advertising partner for manufacturers, given the trove of data we have on customer interest and demand. And the income we derive from retail media advertising helps us improve profitability and maintain an affordable customer proposition.

We are also committed to good partnerships with retailers. In fact, we already generate more sales through retail partners on our platforms than we do through our own stores, and we also see more growth there going forward. For these partnerships, we focus primarily on using data to help retailers grow and succeed on the platform. In addition, we offer technology solutions for seamless order fulfillment.

Retail partnerships also enhance the offerings in Dmarts—for example, by including the private label brands of our retail partners in our assortment. And some stores operate fully under a partner’s brand using our fulfillment capabilities.

The shift of sales to online channels is inevitable, so I encourage everyone to embrace it.

McKinsey: What advice would you give to CEOs in traditional retail?

Niklas Östberg: The shift of sales to online channels is inevitable, so I encourage everyone to embrace it. We want to help traditional retailers unlock those online channels with our marketplace model and tech capabilities, and I look forward to expanding our relationships with traditional retailers in the years to come.

McKinsey: What is your most important learning from your journey with Delivery Hero?

Niklas Östberg: You can never stand still. Delivery Hero is a young company, and we have already shaped and mastered several transformations. So the value of keeping an open mind, upholding an entrepreneurial spirit, and being able to change course quickly cannot be overstated. Our aspiration is to be the driving force behind all changes that bring better service, even if that comes at some short-term expense.

McKinsey: What legacy do you want to leave behind with Delivery Hero?

Niklas Östberg: Two things are very important for me. One, that we build a truly successful business, and that can be done only if we attract and retain amazing people. I want to leave behind a company that offers an attractive environment for the best people in the world.

Two, I believe doing business makes sense only if we also look beyond the things that can be measured in euros and cents. I want us to be mindful of the environment and the communities we operate in, mitigating any potential adverse impacts and making a positive contribution. This is why we started investing in sustainability years ago, and I hope that Delivery Hero will be recognized as a company that truly cares.

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