What is the logic of AirAsia entering Singapore’s food delivery market?

The delivery business in food-loving Singapore is a highly competitive market dominated by the likes of GrabFood, Foodpanda and Deliveroo. Considering how saturated the market already is, it was a surprise to hear of AirAsia’s entry into the fray.

One has to wonder what cards AirAsia has up its sleeve. After all, airlines are bleeding cash right now and probably do not have the deep pockets required to survive long periods of negative cash flows of a new business venture. Also, how does it plan to carve out a niche and differentiate itself from the competition?

Platform business require a lot of capital

The typical platform model subscribed by food delivery tends to face a “chicken-and-egg” problem – Restaurants look for platforms that have a healthy volume of diners make set up and management costs worthwhile, whilst customers look for platforms that have a large variety of restaurants in their vicinity, ideally their favourites.

To build the required volume, platforms typically run a lot of promotions for both parties. That is, diners and restaurants get discounts and the platform is bleeding cash. These promotions need to be sustained to build and maintain restaurant and customer volume on the platform, and that can take a long time!  On top of that, scaling operations and logistics can be challenging and expensive.

Questions one should ask are: Does AirAsia have sufficiently deep pockets to pull through?  If not, is the business model strong enough so that private equity can be mobilized?  But private equity will look carefully at the business model, its competitive edge, and potential exit strategies such as a trade deal or stock market listing.

Does AirAsia have a competitive edge?

Investing a lot of money into a business only makes sense if the firm has a competitive edge that allows it to enjoy good profits in the future.  Competitive edge means either lower costs than the competition, or unique services and features the competition does not have.

Tony Fernandes, AirAsia’s CEO, plans to lower costs by omitting services such as maps where customers and restaurants can see where the driver (and their food) is at any given amount of time.  Unless he has other great ideas, I personally do not think that there is a lot of fat that can be cut to save costs, especially on the technology front. Riders and fuel costs have to be paid, transport equipment needs staff to operate, and customers need to be supported. In fact, technology will probably favour larger players as they have economies of scale. Also, users of such apps are used to tracking the status of their orders and may not prefer an app that does not provide such visibility.  As such, I do not think AirAsia will be able to truly achieve cost leadership in this market, especially as they are a smaller player.

Is its service unique? As far as I can see it looks quite similar to the other food delivery platforms. After all, what diners want is convenience, lots of food options, fast and delivery, all at a low price.  For restaurants, it is similar, they like it easy with lots of customers and low cost. I don’t see how a small player will be able to visibly differentiate its service and do much better.

Is the target market is unique? AirAsia said they will focus on small restaurants.  However, unless these small restaurants need tailored solutions that differ from what current players already offer, this strategy will not work. My hunch is that the needs of small restaurants are already reasonably well covered. And if not, AirAsia’s competitors already have the established capability to catch up quickly and easily also claim this market segment.

Can AirAsia build loyalty?

After many months of not dining out much, lock-downs and working from home, I would expect all customers who are interesting in ordering food to already have one or more apps on their phone. If AirAsia attracts them to also try their service, they are simply one additional option customers and restaurants have.

When customers have several apps on their phone, they pick the one that offers that what they are looking for at the cheapest price. That is, competition is always only one click away. Thus, loyalty will remain elusive.

Restaurants are also increasingly working with several delivery platforms and tend to channel the business to their preferred platform (which is typically the cheaper one for the restaurant). Restaurants can do this, for example, by offering merchant discounts on their preferred platforms.

While AirAsia may be able to link its food delivery to the AirAsia loyalty program that at the margin could be a plus, I do not think it is enough to bait and lock in customers onto its platform.

Why are restaurants joining AirAsia’s platform?

AirAsia’s food platform has been able to attract about 80 restaurants with some 300 more restaurants are in the process of being uploaded.  Not bad at all!

AirAsia has been able to attract restaurants by offering lower fees, charging restaurants only 15 per cent commission, a rate that is much lower than those offered by its competitors. And for diners, it offers unlimited free delivery until March 16 for deliveries within 8 km from the restaurant. These prices are low and attractive. The question remains, are they sustainable?

For consumers and restaurants it is of course good that AirAsia entered the market and hopefully will succeed as competition is good. Customers benefit through lower prices and restaurants pay less commission.  However, service offerings are likely to be sacrificed to keep costs low. If consumers and restaurants are ready for lesser service levels, Air Asia may stand a chance.

On my end, I personally look forward to going back to dining in restaurants more frequently as Covid-19 retreats and will order in less.  Let’s hope for AirAsia that I am not their typical customer going forward and that this boom in food delivery hasn’t peaked together with Covid-19.