Foodpanda’s quick Japan exit highlights Asia’s delivery wars

Just over a year after entering the Japanese market, Germany’s food delivery group Delivery Hero — known for its Foodpanda brand in Asia — announced it was pulling out, citing increased competition and a shortage of drivers.

The divestment highlights the challenges for food delivery operators in Japan and elsewhere in Asia, where regional players face off against global giants. Though the delivery market is expected to continue to grow, operators are being forced to rethink their growth strategy, with analysts saying more industry consolidation is expected in the coming years.

Delivery Hero entered Japan through its Foodpanda brand in September 2020. Counting on growing demand for food delivery due to the Covid-19 pandemic, the company had expected that the world’s third-largest economy would be an important market for the group and funnelled a lot of resources into setting up operations there.

Foodpanda chief executive Jakob Angele, who leads the company’s Asia-Pacific operations from its Singapore headquarters, stayed in Japan for three months from late 2020 to early 2021 to build the business in the new market. With successful experiences in various markets — from highly developed Singapore and Taiwan to emerging Bangladesh — Foodpanda was confident in its Japan entry. It started off in large cities such as Kobe, Yokohama and Nagoya, with an aim of eventually expanding its fast delivery business beyond food.

But as a latecomer to Japan, the group faced stiff competition.

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Leading the Japanese market are two participants: Uber Technologies and local operator Demae-can, a Tokyo-listed company backed by popular messaging app Line. According to the US operator, Uber’s food delivery service Uber Eats has about 130,000 restaurants and other stores on its Japanese platform. Demae-can announced on December 24 that it had surpassed 100,000 stores. Both services are still investing aggressively to acquire users — Demae-can reported a net loss of ¥20.6bn ($179m) for the fiscal year ended in August.

Foodpanda has not disclosed the number of restaurants on its platform in the country. But its presence has been weaker than the two giants. Of about 3,600 respondents to an online survey conducted in February by Japan’s ICT Research and Consulting, 428 people said they used Demae-can, while 426 people said Uber. Just 34 used Foodpanda.

In addition, Covid-driven demand drew other operators: Uber’s US rival DoorDash entered Japan in June. DoorDash has also expanded after its recent €7bn ($8bn) acquisition of Finland’s Wolt, which had been operating in Japan since March 2020. Chinese ride-hailing giant Didi Chuxing also launched a food delivery business in Osaka in 2020 and has since expanded its service to eight prefectures.

“Since launching the service, the landscape of the Japanese market changed significantly,” a Foodpanda representative in Singapore told Nikkei Asia, after the divestment announcement. “External factors, such as an increased number of players and a shortage of riders, resulted in new ground realities toward the end of this year.”

Foodpanda’s divestment primarily reflects Japan’s competitive delivery market — where smaller operators face difficulties attracting customers and delivery staff. But a similar situation can also be seen in other Asian markets, where US, European and local companies are locked in fierce competition, while marketing costs for acquiring customers and drivers hinder profitability.

In Singapore, for example, Foodpanda and Deliveroo of the UK chase homegrown superapp Grab in a three-way fight. The Indonesian market is more of a battle among Asian companies. Local superapp Gojek’s GoFood and Grab’s GrabFood are the biggest players, but Singaporean tech peer Sea has rapidly expanded its ShopeeFood delivery service in Indonesia over the past year.

Before Foodpanda announced its exit from Japan, industry consolidation in the region was already under way. In July, Gojek sold most of its Thai business, including food delivery, to Malaysia’s AirAsia. Gojek had a 7 per cent share of Thailand’s food delivery market in 2020, falling behind Grab at 50 per cent, Foodpanda at 23 per cent and Line at 20 per cent, according to research by Singaporean consultancy Momentum Works.

The food delivery industry is expected to grow in many markets. For example, in south-east Asia, the total gross merchandise value of the sector is projected to increase to $23bn in 2025 from $12bn in 2021, according to a report released in November by Google, Temasek Holdings and Bain & Co. In Japan, the ICT Research and Consulting’s report showed the market size will grow 38 per cent to ¥682bn from 2020 to 2023.

But Foodpanda’s Japan exit suggests not everyone will necessarily benefit from this growth. “The food delivery platform is eventually a relatively low-margin business that needs to build huge volume and density to be profitable,” Jianggan Li, chief executive of Momentum Works, told Nikkei Asia.

Changing regulatory environments could also affect earnings, prompting operators to rethink growth models. For example, in August, Singapore’s prime minister Lee Hsien Loong expressed concern over delivery workers’ low wages and called for more protection, which would result in higher welfare expenses for platform operators. In some western jurisdictions, there is already a trend towards requiring companies to treat drivers as employees rather than independent contractors. The latter approach helps operators keep costs down but provides fewer protections for drivers.

As battles heat up across Asia, many operators are expanding into grocery delivery and other on-demand fulfilment services.

As it leaves Japan, Foodpanda said it would expand its “quick commerce” grocery delivery service in other markets. “We are constantly identifying new growth opportunities within the region, in different markets, growth areas and new verticals, primarily in the area of quick commerce,” the Foodpanda representative said.

Grab, which is also expanding its GrabMart grocery delivery, announced the acquisition of a Malaysian supermarket chain in December, which would help expand its grocery delivery business.

“Competition remains fierce,” said Li, noting that some operators were well-capitalised. “The challenge for each player, therefore, is how to keep increasing volume and density while at the same time improving the efficiency of operations at all levels. They need to do all these in a highly competitive environment.”

Foodpanda plans to sell its Japan business in the first quarter of 2022. The divestment was a “very difficult decision”, the company said. But there could be more divestments and acquisitions in the region’s food delivery industry.

“I think in a couple of markets, there are more than two large food delivery platforms, not to mention the emerging on-demand groceries start-ups,” Li said. “It is hard to see the market in the medium term to be able to accommodate more profitable players.”

A version of this article was first published by Nikkei Asia on December 27 2021. ©2021 Nikkei Inc. All rights reserved

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