Foodora's exit from Australia highlights how the disruptors are being brought to heel

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  • Increasing pressure on food delivery services to pay a wage, rather than fees, to delivery workers.
  • IBISWorld forecasts the industry will face increased regulation on worker rights.
  • The industry analysts say takeaway food industry revenue growth is expected to be just 0.7% a year over the next five years.

The exit of Foodora, a German business, from Australia after just three years highlights how the food delivery sector is dependent on cheap labour.

Concerns over pay and conditions for delivery drivers has grown over the past five years and Foodora is being sued by the Fair Work Ombudsman over the contractor status of the people who get the food to the customers.

Analysis by IBISWorld shows this contractor status is vital to third-party operators.

“It means these companies do not need to provide award wages, superannuation or benefits such as long service leave,” says Senior Industry Analyst, Andrew Ledovskikh.

“Without the ability to employ these drivers as contractors, many third-party delivery operators would see their business model become unprofitable. This would see some operators collapse, while others would have to severely increase service charges to partner businesses.”

IBISWorld forecasts the industry will face increased regulation on worker rights as the so-called gig economy becomes larger and more people are affected in Australia.

“Over the next five years, the status of these workers will likely be defined through test court cases and decisive government policy. If these decisions don’t go the way of third-party delivery operators, it is very likely that the outlook for these companies will weaken,” says Ledovskikh.

The Transport Workers’ Union says the departure of Foodora from Australia is a move to avoid responsibility for paying its riders millions of dollars in back pay as a result of wage theft.

The union says a survey of riders shows three out of every four riders is paid below minimum rates.

“Ever since they arrived in Australia Foodora, like other food delivery companies, has denied its riders fair rates, superannuation, workers compensation, annual leave, the right to collectively bargain and even forces them to work shifts for no pay at all,” it says.

“It is a disgrace that it has given them notice of just one week of ‘normal’ work. These people have rent, bills and tuition fees to pay.”

Online food-delivery services have been a major innovation in Australia’s $20 billion fast food and takeaway industry.

Companies such as Domino’s, which have invested heavily into online delivery services and innovative features such as driver tracking, have long outperformed the industry, according to IBISWorld.

The start of third-party delivery operators was met with great enthusiasm by investors. Menulog was acquired for $855 million by British delivery service Just Eat in May 2015, a 371 multiple of its EBITDA.

The business model was simple. The company provided an online advertising and order platform for small stores. Menulog attracted consumers who were looking for somewhere they could compare multiple fast food options.

In August 2016, Uber Eats launched in Melbourne and Sydney and by October it spread to most areas of Australia.

“The difference in Uber Eats’ model was that it provided delivery. Menulog was limited by the fact it could only provide services to stores with existing delivery staff and services,” says Ledovskikh at IBISWorld.

By March this year, Just Eat cut the value of Menulog by 40%, a goodwill impairment to account for the cost of Menulog launching its own delivery service.

“When third-party services first launched, many small store owners jumped on because it gave them a competitive advantage against the store down the street, and provided them with better access to customers a suburb or two away,” says Ledovskikh.

However, once every store on the street has the service, that competitive advantage erodes, and suddenly they are paying 5%, 10% or 15% of gross sales to Menulog or Uber Eats.

The takeaway food industry has already become increasingly competitive as consumer tastes have changed. Many smaller traditional chicken, pizza, and fish and chips shops have struggled.

The large players have also not been immune. Pizza Hut has struggled to both make a profit and compete with rival Domino’s.

“Pizza Hut jumped onto the Menulog service to try and boost its market share, after failing to do so via its own platform,” says Ledovskikh.

“Meanwhile, Red Rooster franchisees have complained in a submission to the Franchising Inquiry, alleging that the rollout of delivery services has cannibalised in-store sales and hurt profitability.

“Overall, the Fast Food and Takeaway Food Services industry has struggled to maintain profitability levels over the past five years, which is bad news for an industry where many of its players are already running on thin margins.”

IBISWorld says industry revenue growth is expected to be an annualised 0.7% over the next five years.

And consumers are increasingly paying higher prices for fast food and takeaway.

Additional delivery and the third-party commission fees built into the price of the food has meant strong growth in fast food prices paid by consumers, which in many cases goes directly to third-party delivery operators.

“The pressure on third-party operators to ensure large investments pay off, and the possible increased costs to these operators if they lose regulatory battles surrounding contractor delivery drivers, will likely lead to consumers and small businesses facing higher charges over the next five years,” says Ledovskikh.

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