After 13 years in paid employment, Olagoke Balogun teamed up with his wife, Abimbola, to launch So Fresh, a healthy food brand, in 2010. He had gotten the idea for the business while accompanying his wife to the market, where he was unimpressed by its unhygienic state.
Two years after launching So Fresh in Mainland Lagos, the team discovered that there was a bigger customer base that either lived or worked on the Island. Initially, those customers dropped by the store after work, but after a while, So Fresh began offering deliveries.
"We started deliveries by ourselves. We'd get one or two orders a day from the Island, and then I would jump in my car to deliver them. That was the start of deliveries for us," Balogun shares.
Within a year, deliveries had become a major part of the business, allowing them to reach customers who were far from their outlets.
In 2013, they decided to outsource delivery functions to City Chops, a now-defunct food delivery pioneer.
The partnership with City Chops would only last for two years before the startup shutdown, and for a brief period, they were back to handling their own deliveries. So Fresh would later join Jumia Foods but now handles its deliveries through Glovo and Chowdeck.
Factors influencing the rise of food delivery startups
Food is an essential part of Nigerian culture. Wedding ceremonies, funerals, and naming ceremonies — if there's an occasion to gather people, you can be certain there would be food.
In addition to being a key part of the culture, Nigerians also spend huge amounts of money on food. According to the Consumption Expenditure Pattern report, they spent ₦4.6 trillion eating out in 2019, while nearly 60% of the average Nigerian's income is spent on food.
Much of that expenditure passes through food delivery platforms that have become a mainstay in major Nigerian cities and are driven by increased eCommerce activities and a more effective digital payment ecosystem.
Written by Omoruyi Edoigiawerie, a seasoned startup attorney with over a decade of experience. Learn more.
Give it a try, you can unsubscribe anytime. Privacy Policy.
The COVID-19 pandemic ushered in new possibilities or reinforced certain trends. You didn't have to spend hours commuting when you could join on a virtual call. The food delivery industry was one of the industries that saw a boost during the pandemic; revenues in the sector are expected to reach $42.5 billion by 2025.
In Nigeria, it would birth one of the fastest-growing startups on the continent, Chowdeck.
After getting a COVID-19 diagnosis in 2020, Aluko, then a software engineer at Paystack, attempted to get food, but given it was the Christmas holidays, most food vendors were closed.
While he found a solution for his hunger, the thought stayed with him. When he visited Dubai the next year, he was blown away by the lightning-fast delivery services and decided to replicate that experience in Nigeria.
In 2021, he teamed up with Olumide Ojo and Lanre Yusuf to start Chowdeck. The Y Combinator-backed startup now has over 600,000 users and makes over 40,000 deliveries daily.
Aluko's experience is not unique. Taiwo Akinropo is the Co-founder and CEO of Heyfood, another Y Combinator-backed startup headquartered in the south-western city of Ibadan. When he and his co-founder could not find a platform to deliver meals from their favourite restaurants, they spent a year building one themselves.
Solving personal frustrations is not the only motivation for these entrepreneurs. Chidi Okoro, Operating Partner & Head of West Africa at Alta Semper Capital, notes that entrepreneurs in the food delivery sector are attracted to the opportunity to serve a fast-growing market.
According to Statista, Nigeria's online food delivery market is expected to reach $4.8 billion by 2029, growing 14.12% annually between 2014 and 2029. Meanwhile, the low barrier to entry contributes to increased activity in the sector.
In addition, having the largest population of Internet-savvy youths on the continent is a major boost for entrepreneurs considering ventures in the space.
Nigeria's food delivery landscape
The food delivery business is essentially a marketplace model with four major players: food delivery companies, vendors (restaurants), customers, and delivery riders.
Food delivery companies
Food delivery companies are the stars of the show and provide a central platform where vendors and customers interact. They also provide the technology that helps to aggregate and route orders to vendors and delivery riders.
The value proposition for these companies lies in their ability to provide food vendors with more orders than they would have previously gotten while taking away the need to run logistics.
For their troubles, they charge vendors between 15% and 30% commission while customers cover the delivery fee. In the industry's early days, cheaper delivery fees were used for customer acquisition, but newer players are keen to avoid the mistakes of previous players. Food delivery companies also generate revenue from service fees charged to customers.
Vendors
Food vendors are an important piece of the food delivery puzzle. So Fresh offered delivery services before joining food delivery platforms, but that meant they had to develop logistics capabilities.
With food delivery companies, they can focus on the areas they excel at: preparing the food that customers love. Joining food delivery platforms also helps them reach a larger audience than they previously did, although it could potentially lead to increased competition further down the line.
Customers
The primary appeals of food delivery for customers are speed and convenience. With busy lifestyles in Nigeria's urban centres, many people find it challenging to cook or dine out regularly.
Delivery services address this need, making it easy to access meals from a wide range of restaurants. Negative experiences, like delayed deliveries, incorrect orders, or tampered meals, can significantly impact a platform’s reputation. Therefore, customer satisfaction is central to sustaining growth.
Delivery riders
To get the food to customers, delivery companies and vendors rely on delivery riders. Food delivery riders are attracted to the flexibility the job offers. Income patterns can be influenced by the delivery vehicle used and how many deliveries a driver can fulfil daily.
Driver compensation has been a sticking point for food delivery companies. Unlike in countries like the United States where tipping supplements rider income, Nigerian delivery riders typically earn through a fixed delivery fee usually shared with the platform. Some platforms in Nigeria have introduced incentive programmes, offering bonuses for riders based on completed deliveries or customer ratings, which help improve performance.
Challenges faced by food delivery startups
Food delivery startups face a myriad of challenges that have forced many to question the industry's long-term viability. Here, we take a look at some of the challenges these startups have to deal with.
Infrastructural deficits
The success of food delivery startups is heavily influenced by the infrastructural environment they operate in, and businesses in Nigeria operate in a market with poor infrastructure.
Customers want their food delivered on time and in good shape, but that is tough if the roads are bad or delivery riders have to battle traffic constantly. This is even more important when you consider that the value proposition for many of these startups is in their ability to deliver meals within a specified time frame.
Another infrastructural challenge delivery startups have to battle is the addressing system. Early eCommerce players struggled with address verification problems, and while there have been significant improvements, it remains a challenge for eCommerce players today. Chowdeck reportedly uses OpenStreetMap to enhance its ability to locate customers.
Price-sensitive customers
Nigeria's large population is a major attraction for entrepreneurs and investors, but it tells an incomplete story. The low purchasing power of its residents means that only a tiny segment of the population can afford to patronise food delivery startups. Early food delivery players attracted users with heavily discounted services in the hopes that they could make up for it with large volumes. However, that has not worked out. Jumia Food left Nigeria in 2023, with CEO Francis Dufay later saying the company could not see a path to profitability. Bolt Food, which launched in 2021, also opted to leave Nigeria the same year.
Low barrier to entry
One of the factors that makes the food delivery sector attractive is also what makes it so much harder. With just a bike and a website, one could launch a food delivery service. Of course, that's oversimplifying it, but the low barrier to entry increases competition for existing players.
But in spite of this low barrier to entry, the difference boils down to the quality of service and the ability to record large volumes, two things that smaller players might struggle with. For evenly matched players, the competition has often boiled down to who offers the best prices and, in many cases, the most discounts.
Unstable economic environment
Nigeria’s inflation rate has risen steadily in the past year and is driven by food inflation. Recent figures from the National Bureau of Statistics put it at 32.7% for September 2024. In such situations, purchases that are deemed a luxury are usually the first to go.
But customers are not the only ones affected by inflation. Food delivery companies, vendors, and drivers are affected as energy costs, transportation, and the prices of food items force them to increase their prices. Glovo partnered with Siltech to use electric bikes for deliveries while some of its drivers use bicycles.
Can food delivery startups ever be profitable?
The big question for casual observers and potential investors in the food delivery sector revolves around profitability. Food delivery startups globally have struggled to turn a profit despite lots of investments.
Considering Nigerian startups have to deal with huge infrastructural deficits and price sensitive customers, the task appears to be much harder.
Busola Akin-Olawore, Research Team Lead at Versa Research, acknowledges the challenges food delivery startups grapple with but notes that it isn't impossible for them to turn a profit in the near future if they figure out how to offer significant value to every member of the value chain.
While price wars are a common customer acquisition tactic, she is wary of businesses that heavily depend on that and argues that the ideal customers of food delivery platforms will not be swayed by low prices.
It's a strategy that newer players like Chowdeck and Heyfood seem to have adopted. Heyfood, which is planning an expansion drive into Nigeria’s secondary cities, worked on making each order profitable from the start.
According to Akinropo, the startup rarely uses discounts to attract customers and spends less than 5% of its marketing budgets on discounts. As a result, it targets young urban professionals who earn enough to outsource some domestic tasks.
Similarly, Aluko, Chowdeck CEO, had noted that the startup doesn't intend to serve everyone, choosing to focus on customers who are willing to pay for convenience.
"Think of someone who wants to save an extra 30 minutes going to the restaurant; that is Chowdeck's ideal customer," he told Techpoint Africa after the startup closed a seed round earlier this year.
In May 2023, the Nigerian government eliminated fuel subsidies, leading to record-high fuel prices that have forced service providers to adjust prices accordingly. Similarly, the devaluation of the naira has also seen technology costs rise, and Okoro notes that a failure to rein in these costs will affect any push for profitability.
"The average basket value in dollar terms is about $5. You cannot break even from that unless you put up a lot of volume, and how do you get the volume? A lot of people are not consistent in their purchases because the macroeconomics don't support that," he says.
He, however, points out that food delivery startups can pursue some paths to improve their chances. One of these is specialisation, with Slice a prime example. The startup, which focuses on pizza delivery, has raised more than $70 million, and Okoro believes a similar approach could yield benefits in Nigeria.
“You can specialise in some kinds of food and be known for that. The more you do that, the more you can actually create and capture higher value, but going to do what everyone else is doing is a question of when you’ll run out of capital, not if,” he notes.
With rising inflation, increasing the average order value for food delivery companies may prove to be a tough task, but Okoro argues they could increase their revenue per ride through partnerships and product bundling.
“This industry is growing at about 10,11% and is about a billion dollars. That’s quite tiny. What it means is that you probably have to do a lot of other things, and the way to do that is through partnerships and collaborations with other companies. If you can increase your revenue per ride, then you have a good chance, but if you stay at the current rate where you’re probably making $4 per ride, you’re not going to make money.”
Utilising drop-off centres is another strategy he proposes to reduce the amount of time delivery riders spend fulfilling orders. Fez Delivery launched a similar service in January, but adopting a similar approach for food may be tricky.
Looking to the future
Food delivery is here to stay, but the same cannot be said of food delivery startups. With a low barrier to entry, Okoro expects more players to throw their hats into the ring and attempt to capture market share with low prices. While he advises against that, he adds that startups that figure out ways to differentiate themselves and reduce competition could win the market.
Akin-Olawore isn't as optimistic and worries that regulatory uncertainty and a harsh business environment could spell trouble in the future."Nigeria is not a country that makes business easy, and that's what kills us. So Chowdeck might be doing well now, but in five years, are we going to have Chowdeck?"
