Glovo and its Restaurants - Is It Good For Restaurants?

  • Almost all of the negative public attention that has recently been plaguing Glovo has been focused on the exploitation of their riders. This a welcome change of perspective but it also leaves out a significant part of the story: the restaurants that “collaborate” with Glovo. This is key because restaurants are the real revenue stream for the company, not the 1,90€ the clients are charged as a delivery fee.

Paul Iano
2019ko uztailaren 11
Glovo can be like crack cocaine, according to a restaurant owner who talked with the New Yorker. (Dos Por Dos / Kauldi Iriondo)

Glovo makes its real money by charging a fee to the restaurants with whom it has a contractual “collaboration”: 22 – 30% of the value of the food being delivered. If you order hamburgers worth 40€ from a local restaurant, Glovo will be paid between 8,80 and 12,00€. While a restaurant must give Glovo a portion of its income on delivery orders, it will still profit according to the company’s argument, because of the rise in total orders. To sell this narrative, the company sends local businesses emails advertisements containing “random” examples of other restaurants’ sales, showing as much as 190% growth in orders from one month to another. Glovo is suggesting that it is adding orders to the restraint’s existing business, essentially for free – and is willing to share the profits.  Effectively, the restaurant is led to believe it will sell more while keeping its rent, labor, and insurance costs the same.

However, the accuracy of these claims are hard to pin down, especially in the notoriously tricky financial calculus of the restaurant industry. Glovo’s argument implies that, after its own 30% fee is subtracted, the restaurant will have made a 70% profit margin on an order that would not have otherwise existed. This attractive argument is deeply misleading. It does not take into account ingredients, labor, rent, or any of the other costs associated with running a restaurant. All told, a restaurant typically can expect to make between 6% and 22% profit on a normal meal. When considering a 6-22% net profit margin in the restaurant business, a 30% cut for Glovo begins to sound like a losing proposition.

Yet, this simple math is disingenuous as well, because a single Glovo order will not raise the rent or the labor costs for a restaurant – but more Glovo orders will. A more complex, but more accurate assessment indicates that working with an online order platform slowly eats away at the core business that truly makes a restaurant its money – serving customers who actually come to the restaurant to eat. Instead of focusing on the real value they already provide, Glovo shifts the a restaurant’s focus towards a service that would actually lose them money if it were their entire revenue-stream:  fulfilling online orders.

This can only be verified by examining established restaurants that have been using a Glovo-like service for a significant amount of time. In an in-depth article from the New Yorker, the owner of a local restaurant explained that “calculating an order’s exact profitability is tricky” but that during the three-year period in which they shifted towards online delivery, their over-all profit margin shrunk by a third. According to her, “We know for a fact that as delivery increases, our profitability decreases...I think we are losing money on delivery orders, or, best-case scenario, breaking even.”

As time goes on and these services expand, it is hard to believe that they will not result in people placing more orders from home, and eating out  in restaurants less often. A Morgan Stanley study showed that 43% of delivery patrons were replacing a sit-down restaurant meal with their delivery order. In other words, as Glovo becomes more popular, it cannibalizes at least some of the main revenue stream of local restaurants, forcing the owners to move to Glovo’s platform and pay a 30% fee for customers that would have walked into their building beforehand and paid full price.

If this sounds slightly like blackmail, that’s because it is. In fact, it’s called monopolistic business tactics. By inserting themselves as a necessary in-between for businesses and their clients, Glovo is in an advantageous position where it has leverage over both. In business, leverage means profit.

Some who argue in favor of the on-demand delivery market state that business must respond to consumer demand, insisting that this is an inevitable part of economic change. Apart from ignoring the huge amount of advertising money that is invested in changing “consumer demand,” these arguments miss the true structural change.

Consider that Glovo’s next move has been to ignore the suspicious or unwilling traditional restaurants, and begin to build out its own “dark kitchens” and “SuperGlovo” supermarkets that are only open to orders through their application. In the case of the dark kitchens, Glovo rents out space to chefs, so that what once might have become an independent local restaurant is now a dimly lit kitchen, completely dependent on Glovo for its physical space and its customers. Yet, they take on the financial risk if they cannot make money running a restaurant while completely controlled by a “data company”.

This takes the social interaction of going out in public to eat in a group and turns it into an isolated and lifeless act that you do from your couch. It’s not a food industry that most of us would like to participate in, and conveniently it is a complete and fully-operational system created and controlled by Glovo.

In every sector that Glovo has a hand in, the company attempts to make all other economic actors as dependent on them as possible, while still maintaining enough distance to avoid taking on the financial risk. This strategy is just as dangerous to restaurant owners as it is to the riders.

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The best example of this monopolistic behavior can be seen in the company’s recent actions in Egypt. Delivery Hero, a competing delivery service, bought 16% of Glovo’s stock and gained the ability to influence their strategic decisions. According to internal sources, Glovo had become an industry leader in Egypt before abruptly closing shop, and an investigation by the Egyptian Competition Authority revealed that the two companies had made an agreement to divide the delivery market to ensure a monopoly.

The “innovator” in this old, but newly-disguised business practice is Uber. Though most are unaware, Uber has consistently lost money every year it has existed, only maintaining itself with over $20 billion in investor capital. The reason why Uber’s investors tolerated over $14 billion in losses over the last four years was because their strategy is to eliminate all possible competitors by driving down the price of a taxi ride to rock bottom. The only time the business became less unprofitable was in 2018, only possible by lowering driver take-home pay below minimum wage, resulting in a third of Uber drivers in 2018 actually losing money while working for the company.

Uber’s real strategy was always to subsidize growth until they gained global dominance of urban car services, giving it monopolistic power. This is also the strategy of Glovo. It is the only possible strategy for a service that produces no value and has no assets.

Seen from a distance, this system is morbidly similar to colonialism in its day. Glovo is on a global moral crusade to improve the lives of others – in ways they never asked for – using the company’s superior knowledge – now called algorithms and big data – to take complex, robust local economies with the potential for future success and restructure them into a deliberately dependent mono-culture that extracts wealth for foreign interests, all sustained by the use of slave labor. If you take away its modern technological shine, Glovo begins to look an awful lot like the East India Trading Company.

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Considering the constraining and expensive nature of Glovo’s proposition for restaurants, it is reasonable to question why anyone would sign up to “collaborate”. The truth is that a part of Glovo’s service is appealing to a real need on the part of restaurants. As one local owner told me, “Would I like it if they [Glovo] paid the riders more? If they were cheaper [for the restaurant]? Of course I’d like it, but I also can’t afford to have my own delivery driver for one delivery one day and ten deliveries the next.” For this nascent family-run restaurant, trying to manage a complicated and fledgling operation in a rapidly changing marketplace, Glovo “works pretty well” to solve the real problem of hiring a full time driver to respond to an uncertain demand for deliveries.

While most restaurants in my city that currently use Glovo are at least begrudgingly happy with the service, some don’t like the trade-off. Restaurant owners who declined to sign up have expressed that the 22 - 30% fee is too much to swallow, the long waits are upsetting, the service has been uncertain and sometimes malfunctioning, or that they simply find it impossible to accept such a high level of dependence on another company. In one instance, when a Glovo rider showed up at their restaurant with an “Anything” order and the owner refused to serve them, the client simply called up the restaurant and ordered it the old-fashioned way. Given that, why bother paying Glovo a 30% fee?

The truth is that for a certain segment of the restaurant industry the service can make sense, at the very least as a temporary fix for a low but growing level of deliveries that don’t warrant a full-time delivery driver. For other companies like McDonalds, who can use their size to negotiate a large discount from Glovo, the math can make sense. But for many, the complicated and uncertain calculus of identifying costs and their associated profits in the restaurant industry make it easy for Glovo to obfuscate the true costs that the restaurant is taking on, making it seem like a better deal than it is. All the while, the restaurant finds itself more and more reliant on an expensive service that they hoped would one day become unnecessary. As one restaurant owner told the New Yorker, delivery is “like crack cocaine”: an income stream that his business had become dependent upon but that might ultimately be running it into the ground.

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