[Lee Jong-woo's Economic Reading] Rapid Expansion of Food Delivery Market... Acceleration of Integration and Partnerships Including Fresh Food Immediate Delivery

Food and Beverage Delivery Doubles Growth for 2 Consecutive Years
Active Mergers and Acquisitions in Global Delivery Market
Expansion from Food and Beverage to Product Delivery
Establishment of Yogiyo Store Following B Mart
Government Supports Small Businesses with 'Gonggukitchen' Shared Kitchens

In December last year, the German company Delivery Hero acquired Baedal Minjok for $4 billion, equivalent to 4.8 trillion won. At the time, there was skepticism about why a German company would spend so much money to acquire a single delivery app, but recent figures have shown that it was justified.

Last year, the food delivery service market, including chicken and pizza, reached 9.7365 trillion won, an 85% increase compared to 2018. In 2018, the market size had already grown by 93% compared to the previous year, meaning it nearly doubled for two consecutive years. This year, the novel coronavirus disease (COVID-19) further accelerated growth. According to a survey by Mobile Index, a mobile big data platform, the number of monthly delivery app users in August increased by 25% compared to July. The average monthly app usage time per person also rose from 1.03 hours to 1.28 hours. Because growth is so rapid, it was judged that acquiring the company for nearly 5 trillion won would not result in a loss. Recently, the global delivery market has seen active mergers and acquisitions (M&A) centered around a few leading companies. This is a measure to reduce costs such as advertising expenses and to increase market dominance to block new competitors. Considering these follow-up effects, it is advantageous to grow in size through M&A.

The delivery market is expanding mainly in the food and beverage sector. A few years ago, restaurants had their own delivery personnel. Although this was costly and caused quality issues, there was no alternative system, so it was unavoidable. Now, more restaurants rely on delivery companies that own two-wheeled vehicles. Thanks to this change, food service transactions, which accounted for only 3.8% of total online transactions in January 2018, increased nearly threefold to 10.5% by April this year.

The expansion of the delivery market is not unique to Korea. For example, in the United States, Uber, famous for its ride-sharing service, recorded $3 billion in ride-sharing revenue in the second quarter, while its food delivery revenue doubled compared to the same period last year, reaching $7 billion. The number of affiliated stores also increased to 500,000. Facebook is also entering the delivery business by building a service through Facebook and Instagram that enables shopping, payment, delivery, and tracking. The Dutch company Just Eat Takeaway, which acquired the UK's largest delivery company Just Eat, saw its sales increase by 270% in the first half of the year, achieving a profit of 27 million euros for the first time.

What will the delivery industry look like in the future? Consumers are already receiving satisfactory services through dawn delivery offered by companies such as Coupang's Rocket Delivery and SSG.com's SSG Delivery. One might think there is no further demand for delivery, but more convenient delivery services are likely to emerge. The form will be as follows: currently, delivery apps simply pick up food from nearby restaurants and deliver it to customers, but this delivery model will expand to include fresh food and other products. This will reduce delivery times for many products to 30 minutes or at most one hour. Similar services are already being offered; for example, 'B Mart' sells products directly purchased by Baedal Minjok in a similar format, and Yogiyo is planning to establish 'Yogiyo Store' in partnership with major retailers.

For this service, a location is needed where products can be picked up and delivered to consumers, just as food is picked up from restaurants and delivered. Collecting goods from scattered production factories and delivering them to consumers is unrealistic due to time and cost. Therefore, delivery companies are seeking partnerships with large offline supermarkets that have physical bases. Large supermarkets have good accessibility, a wide range of product categories, and sufficient inventory to meet any demand. For example, if delivery company A partners with E-Mart, which has 29 stores in Seoul, the delivery company can quickly pick up goods from a nearby E-Mart and deliver them to customers. This benefits E-Mart by increasing sales and benefits the delivery company by earning commissions. Although no company currently operates in this way, it is highly likely that the first company will emerge in the near future.

Currently, self-employed individuals in Korea are facing many difficulties. Due to excessive competition, the average monthly sales peaked at 38.7 million won in the first half of 2016 and have continuously declined to around 33 million won last year. Meanwhile, loans increased from 110 trillion won in 2008 to 270 trillion won recently. Last year, the annual loan growth rate even reached 16%. Various cost-cutting measures are necessary, and the delivery industry can serve as a mediator to improve the profits of self-employed individuals.

For this reason, the government is also supporting the delivery industry as part of its small business policies. A representative example is the 'shared kitchen' system, where multiple businesses share a single kitchen space. If this system takes root, individual businesses will not need to own separate spaces for cooking and sales, reducing startup costs. For example, opening a 10-pyeong (approximately 33 square meters) snack bar independently requires at least 100 million won for rent, interior, kitchen equipment, and delivery agency fees, but replacing it with a 4-pyeong (approximately 13 square meters) shared kitchen excluding the storefront costs only about 20% of the original expenses. Delivering food made this way through delivery services further reduces costs. If this business model becomes established, small-scale merchants will be able to enter large commercial districts that were previously difficult for small operators to access. Moreover, if companies accurately analyze delivery app user data and provide it to affiliated stores, the effect will be even greater. Since all user behaviors from registration to ordering can be tracked, scientific business management using data becomes possible.

Until now, food and beverages were the most sluggish sector in e-commerce. Last year, delivery through e-commerce accounted for 45% of total sales in home appliances, 31% in clothing, but only 15% in groceries. This was due to consumers' inability to trust the freshness of groceries. However, with the increase in delivery demand due to COVID-19, this misunderstanding has been dispelled. As consumers' psychological burden has been removed, demand for delivery services is expected to continue even after COVID-19 disappears.