Another Food Delivery App?
Issue 3 (30/01/2021) - Wolt closed a US$530 Million round of funding. Is this just another food delivery app, or is there more than meets the eyes
Welcome to the third issue of Startupology. Today we discuss a company, but more so an industry. Let me know your thoughts and I hope you enjoy!
With Doordash, GrubHub, Uber Eats, among many other smaller ventures satisfying the saturated market of food delivery; you would wonder “There can’t possibly be another one… Like Peter Thiel stated in his book Zero to One, expansion can be achieved either technologically or through globalization (Figure 1). The former means vertical intensive progress, where you innovate to get from 0 to 1. That may be through creating new unseen technologies, bringing a new perspective, or completely changing your industry with your product that is 10x better than current market practices. However, the method of expansion more readily used is horizontal extensive progress, where a company goes from 1 to n. This is through using a similar model that has already been established and changing a few things, either approach, geographic region, or marketing. Every new food delivery app attempts to fill the same void: delivering food. Peter Thiel argues 0 to 1 is where the real breakthroughs are, but markets seem to enjoy 1 to n more simply because it’s easier, it has been done before, and we see results. There’s nothing wrong with either, they are simply two drastically different approaches to entrepreneurship.
More recently, a new venture has secured multiple rounds of funding after operating in dozens of countries already. Chances are that you have not heard of it, but it is breaking barriers in Europe and providing a fantastic service for not only food delivery, but offers many more services as well. It now has expanded to parcels, goods, and other widgets. In an interview, they mentioned the following as their vision:
“The opportunity is to equip brick and mortar stores to compete with Amazon and Alibaba - and be better than them”.
So, what is this company? Who found it? What was their story? After so much suspense, I might as well tell you who they are. Wolt. Founded in 2014 by the CEO of Slush (Slush is a story for a whole different article but I highly encourage you google them), Miki Kuusi is no stranger to startups. They launched in 10 restaurants in 2015 after being founded in Helsinki, Finland but now see activity in more than 23 countries and 120 cities as of 2020. Even though their primary business remains in Europe, they have expanded to the Israeli and Japanese markets too.
What Sets them Apart?
It’s not just a Food Delivery App. They have horizontally expanded to the grocery and retail sector which opens the company to virtually any good that can be shipped. This expansion falls in line with many other companies in the same business, especially during the pandemic. There is no doubt that the delivery market has prospered in 2020, where the major stakeholders like Jeff Bezos who saw his wealth burgeon over US$75 billion in mere months. Amazon’s stock has increased by more than 60% according to Forbes where their price targets per share have increased to US$3,800 by Goldman Sachs and Jeffries. Other stakeholders in the business want a piece of the pie and therefore we have seen expansions within these primarily food delivery companies into different types of deliveries. This mentality also falls in line with giving the resources to brick and mortar stores to compete with industry incumbents like Amazon and Alibaba.
Okay, cool, they are doing what almost half of the tech companies in the US already do. What makes them different? Beyond enabling restaurants and other product oriented brick and mortar stores to deliver their goods, their market is far more difficult compared to the US. Europe, especially Scandinavia and the Baltic countries, where Wolt predominantly operates, pose a significant challenge known as “sphere of influence”. Basically, it becomes a logistical nightmare to “efficiently and sustainably” maneuver in small and challenging markets where locations are far and infrequent. Kuusi elaborates that they sought to build an “optimization-heavy logistics setup for last-mile delivery” where Wolt can even provide the service in very small cities. Wolt makes it profitable to provide a service in sparse cities where the income disparity remains low, the population density that makes achieving critical mass difficult, as well as extensively high labor costs. This logistical achievement has enabled them to expand like wildfire in markets typically hated by delivery tech companies. This is what keeps Wolt ahead of the competition and allows them to continue getting funded.
Why are they Relevant?
The main reason I’m writing about Wolt is that it closed a US$530 million round of funding this month to push their goal to expand beyond restaurant deliveries. In this round, they were primarily backed by Iconiq Growth, but supplementary funding from “Tiger Global, DST, KKR, Prosus, Eqt Growth and Coatue” was provided. This is the largest round of funding for Wolt, which has now totaled US$ 856 million according to TechCrunch. Their finances seem similar to that of many other tech companies, with moderate financials but glowing future projections as they have tripled their revenue to US$330 “against a net loss of just US$38 million” as mentioned eloquently by co-founder and CEO Miki Kuusi.
The future prospects of this app, as aforementioned, remain incredibly bold. Wolt continues to expand into delivering and ordering all sorts of goods, in the aspirations to become “the everything app”. I find this to be not only inspiring, but somewhat hilarious as it is awfully similar to Brad Stone’s book titled ‘the everything store” - a book about Amazon (which I highly recommend as a read).
“We believe that the future of how people buy Nike shoes is a few taps on Wolt and some 30 minutes later you get any pair of shoes brought to your door. This is what we strive to make into a reality with our team at Wolt”
Future Expectations of Delivery
Instead of same day delivery, can you imagine same hour delivery? The new meta of this ecommerce plagued world is time and efficiency and if Wolt could achieve this notion of same hour delivery, it would attract every single customer to their platform, simply for the time. People are willing to pay a premium if that delivery time can be cut from 24 hours to 1 hour.
However, this will not come easy. For any company, including industry incumbents to achieve this, such as Amazon, on such a vast level will be difficult. Food delivery apps can achieve 30-40 minute delivery times because of proximity and higher delivery fees which incentivises individuals to make the trip for you. However, scaling this feature nationwide, whether that is the USA, or various countries in Europe will prove virtually impossible. I see the following as the most important and difficult factors in achieving this:
High Network Effect Requirements
Deliveries are difficult and unprofitable if you make less deliveries each round. The idea is that as a truck makes one round of a city, it drops off dozens if not hundreds of parcels to various houses along the way. Therefore, companies cannot optimize a delivery such as that like Uber Eats or Doordash because these goods tend to travel nationwide and are delivered in masses.
If their parcel to truck ratio isn’t above a certain threshold, they make losses on the delivery costs. Therefore, as a means to make delivery more efficient, it is difficult to make hourly deliveries. Although Wolt states they have a superior logistical tool that provides efficient, seamless, and specific information regarding delivery and organization, it will take a grand feat to not only make hourly deliveries, but also same day deliveries.
Ground Transportation to Cut Costs
America is Huge. The world? Even bigger. Not everything can be flown from country to country or state to state. If you buy a shirt from NYC expecting it to arrive in your home in Houston, it might be ambitious to expect same day delivery. Some of the transportation at Amazon is grounded, implying that your shirt cannot be flown in a 2 hour flight, but rather travels a grueling 18 hour drive. This is a way to cut the costs, and therefore, reduce the prices for the consumer. Amazon believes in affordability, and has gotten incredibly efficient with delivery times already.
The Selection vs Speed Dilemma
I’m going to propose the selection vs speed dilemma. Simply, companies invest in offering a wider selection of goods in an ecommerce market over cutting delivery time. Customer satisfaction is a function of price, customer choice, quality and delivery time as seen below. Now this may just be a fictional function that I made up without any mathematical backing yet, but I firmly believe that it holds true.
Companies such as Amazon have perfected the price, customer choice, and quality of the product and remain at the forefront in terms of delivery time. Their goal of “Customer Obsession” pushes them to believe that further expanding on the quality and customer choice is the key to customer satisfaction. However, Wolt sees the market differently, they want to leverage the delivery time to be impeccable and convenient. However, my question is, can they really perfect delivery time without losing customer choice, quality, or price.
Final Remarks
Wolt entered an incredibly competitive market and maintains an ambitious mission. They have successfully put the groundwork in Europe to flourish and continue to raise successful rounds of funding. The issue however, remains twofold. How do they become the everything app? And more interestingly, what happens when Wolt directly competes with Uber, Doordash, or even Amazon in the United States.
Please note that these are my interpretations of the company and industry as a whole. Please do not make any investing decision based on this newsletter.
Lovely read.