Baidu is seeking capital for an on-demand meal delivery service
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Chinese web services company Baidu is looking to raise as much as $500 million in new funding for its on-demand meal delivery division Waimai, reports Bloomberg.
While previous fundraising rounds valued Waimai at $2.5 billion, the company faces intense competition in China, which is likely being exacerbated by an overall deceleration in meal delivery funding around the world. Waimai should look to Baidu's extensive search capabilities, as well as the growing market for online-to-offline (O2O) services, as a way to reach its fundraising goal.
Baidu faces a lot of competition in reaching its fundraising goal:
Ele.me already controls the market: As of August 2015, China's on-demand meal delivery market was being dominated by Ele.me, accounting for 40% of the total market, while Baidu accounted for just 9% according to Forbes. Moreover, Ele.me received a monumental $1.25 billion investment from e-commerce giant Alibaba.
Amazon Prime just launched in China: Earlier this month, Amazon launched its Prime membership program in China. While it currently does not offer restaurant delivery, the rapid expansion of Amazon Restaurants could spur the company on to launch it in major cities in China, as well, giving Amazon a stronger foothold in the country's total e-commerce market.
Meal delivery funding is slowing down: While meal delivery startups around the world raised nearly $4 billion in funding in 2015, this is expected to drop to $918 million by the end of this year, according to CB Insights. As investors become more selective in the crowded meal delivery space, Waimai's margin for error is small considering how far it lags behind competitors.
Waimai could leverage two key factors to showcase its value to investors:
Baidu's search engine: Baidu currently operates China's most widely-used search engine, giving it a lot of power in lifting visibility for local establishments. This search engine's value could spur more merchant partnerships, which ultimately could boost Waimai's order volume.
The demand for O2O services is growing: O2O services connect online browsers with offline transactions, such as ordering food from a restaurant and going to the establishment to pick it up. In China, this market is quickly growing — in 2015, the O2O market reached nearly $50 billion, growing 38% year-over-year (YoY), according toiResearch Consulting Group. This is expected to reach $92 billion by 2018, highlighting a significant opportunity for Waimai to capitalize on this growing market and increase its sales.
Pizza chains have long dominated meal delivery, but digital platforms are now enabling the entire restaurant industry to plug into online delivery. In the dominant on-demand meal delivery model, platforms like Grubhub serve as a middleman that connect people to food using the scalability of the internet.
Although some industry leaders are processing hundreds of millions, even billions, in annual food sales volume already, they're a drop in the bucket in terms of the total addressable market (TAM) for food delivery, which is valued at $210 billion, according to Morgan Stanley Research estimates.
Companies are adopting diverse business models in the market to deliver these meals; some, like Postmates, are focused on the logistics of delivering food, while end-to-end providers like Sprig cook, facilitate ordering, and deliver the food themselves. Ultimately, order-focused platforms like Grubhub/Seamless and Eat24 appear to hold the strongest positions in the market. The former controlled an estimated 59% of total order volume in 2015, while Eat24 held an estimated 7% share. Moreover, Grubhub/Seamless could pose a threat to the logistics companies DoorDash and Postmates if it pushes further into proprietary delivery services, especially in markets its competitors haven't expanded to yet.
Despite varying advantages and disadvantages, all stakeholders will have to navigate some challenges in the market, including cooling deal volume, consumer resistance to delivery fees, potential industry consolidation, and downward pressure on take rates, which measure the revenue a company actually earns out of the volume they process.
Evan Bakker, senior research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed report for on-demand meal delivery that sizes the market for on-demand meal delivery, outlines the main business models, assesses which key players are in the best and worst position in the market, and also analyzes the underlying risks that all stakeholders will have to navigate.
Here are some of the key takeaways:
There is a massive unfulfilled market opportunity. As of 2015, about $210 billion worth of food is ordered for delivery or takeout on an annual basis in the US, according to Morgan Stanley Research. But two of the industry leaders, Grubhub/Seamless and Eat24, generated a combined $2.6 billion in food sales last year. This means the market is underpenetrated but massive, which will incentivize continued competition and, potentially, an influx of new entrants.
There are three main business models that companies adopt. The dominant business model so far has been platform aggregators whose primary function is to support online orders. These include Grubhub/Seamless and Eat24, which control a combined 66% share of the market so far. Other models include delivery-focused logistics models and full-service models in which companies cook the food themselves.
There are a number of risks that all players in the ecosystem will have to navigate. SpoonRocket, a once promising full-service delivery provider, shut down earlier this year in the face of insufficient capital and intensified competition. This, along with cooling deal volume, could signal upcoming consolidation in the industry. Other risk factors include consumer resistance to delivery fees and lowering take rates, which measure the revenue a company actually earns out of the volume they process.
Overviews the on-demand meal delivery market and quantifies the opportunity for expansion.
Explains the three main business models meal delivery companies adopt.
Runs through the main competitors in the market and assesses which are in the best position to succeed.
Identifies the underlying market risks and how they might disproportionately affect certain types of competitors.
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