Food Delivery

Not much time was given to ask background questions, straightaway went to profit analysis. I divided profit/order to revenue/order and costs/order, first went to analyze the revenue

C: The revenue streams for this business can be divided into revenue earned via orders and advertisements on app/websites

I: Yes, but you may ignore the advertisement part. Revenue earned per order is 20%/order. 

C: Ok, I would have to analyze the average order size. So, it is important to understand the customers being targeted by the company here. 

I: What customers segments do you think?

C: I think customers can be divided into three categories, families, couples and people living alone. Because we are targeting metropolitan cities first, so people living alone would be a large chunk of our customers

I: Yes, I agree, for now consider, family and individual

C: Ok, average size of a household in an urban area can be taken as 4, right?

I: Yes.

C: So, I would like to take my family as an example. I belong to middle class family of 4. This automatically gives an average order value between upper class and lower class. 

I: Is there any other factor which is relevant here?

C: The frequency of ordering food can be taken as one factor. A family will order a smaller number of times as compared to the individual living alone. 

I: Right, how will you find out the frequency.

C: As I was taking my family’s example. We order 1 time a week. While when I was living alone, I used to order on an average twice a week. Can I move with this assumption?

I: Okay

C: To calculate order size. The order size used to vary if I am ordering snacks or a proper meal. So, on an average my order used to be around Rs. 300. If I consider a family of 4, I can think of 300x4= Rs 1200 as the order size.

I: Yes, for ease of calculations take it Rs.1000.

C: Okay, so the average order size after considering the frequency of ordering food online, is coming out be Rs 533.33, which is approx. Rs. 500. So, 20% of Rs 500 is Rs. 100

I: Right, any other factor that could be considered.

C: There would also be delivery charges, like now a days Covid charges are taken in addition for safety and sanitation.

I: Right, so take your average order value to be Rs 125. Now think of costs.

C: I would like to divide costs into fixed and variable. First, I would start by analyzing the fixed component.

I: Ignore the fixed, as it is a food delivery company, much of the costs can be clubbed into variable.

C: Before analyzing the variable costs/order, I would like to understand the structure company would follow while hiring delivery people. Would the company provide the vehicles such as a bike? Would the fuel costs included in the salary or would it be given in addition? Would they be given salary based on orders delivered?

I: The salary of a delivery man is Rs 25k/month (fuel costs etc. included), ignore the vehicle costs/EMI etc. And the salary is not dependent on the orders delivered.

C: Since this cost is monthly and not per order, we have to check how much our delivery man costs us per order.

I: How will you do that?

C: I will calculate the number of orders delivered by the person per day.

I: Okay.

C: Next, I did the calculations on the orders received by the restaurant in peak ( 6hrs)  and non-peak (6hrs)  hours, and how many delivery men would be required to deliver those depending on the distance between the restaurant and the destination. I considered time as one constraint for the delivery men. And reached at an approximate 10 order/day, which means Rs 100/order (considering he works 25 days in one month).

C: Other variable costs such as app maintenance, marketing costs, additional discount coupons are also borne by the company.

I: Yes, consider discount per order as 5%.

C: So, 5% of Rs 500 is Rs 25. Are there any other costs?

I: No.

C: So, the total costs are coming out to be Rs.125, which is a break even.

I: Now the company is breaking even/order. How can company make profits here? Your final recommendations?

C: Since the revenue earned per order would be same for all the competitors in India. The costs here are posing an issue. We need to reduce the costs. Since it is a new company, it would have to give good discount coupons to attract the crowd. So, that may not be reduced. We can work on the high costs of Rs 100/order as taken up by the delivery man. 

I: The salary is as per the market. Our competitors are giving same salary.

C: So, then we will have to increase the number of orders, a delivery man delivers/day. 

I: How can you increase it?

C: We can follow the structure of Uber/Ola shared cabs. The way it works as per route optimization, time reduction and maximum efficiency. 

I: Yes, I think we can close the case.