Is the Delivery Dilemma Solved?

In case you haven’t heard, food delivery is all the rage in the restaurant industry. It seems like almost daily there are news articles and press releases related to the food delivery topic. Whether it’s new delivery apps, national delivery portals opening new markets, or projections of revenue resulting from delivery, one thing is for sure:  there is no shortage of delivery related news.  

The explosive growth of food delivery has many restaurant chains and operators partnering with several delivery aggregators like GrubHub, DoorDash and Postmates, among many others, in an attempt to “widen the net” to gain as many delivery orders as possible to offset slower in-store traffic.

So with so much buzz surrounding food delivery, and the very accessible ability to partner with several food delivery portal partners for maximum delivery coverage, is the delivery demand dilemma solved?

The Next Frontier of Delivery: Ordering and Delivery Direct from the Restaurant

The short answer is no. The clamoring by chains and operators to bolt on delivery through delivery aggregators like GrubHub is based on the perception that they provide incremental revenues not otherwise captured. However, the perception doesn’t completely align with reality.

First, delivery may add a bit to top line revenue, but the COGs are essentially wiping away the margin and value of delivery. According to Crain’s Chicago Business, “Delivery apps generally take 10 to 20 percent off the top, with some asking for as much as 30 percent. In the food industry, with its razor-thin margins, those costs can be unsustainable.” And in a time when so much traffic is moving out of the four walls of the restaurant to off-premise, food delivery needs to be adding to the bottom line results and building the business and brand of restaurants.

Second, in addition to the lack of margins from portals, delivery orders originated from the delivery portals means restaurants are not capturing the customer data and only capturing the first name, last initial and order items to fulfill. This means the customer is owned by the delivery company – and not the restaurant. Why is this important? Because now the restaurant has no ability to remarket to that customer for repeat business, making the restaurant more dependent on the delivery portal for continued delivery orders with the razor thin margins, at best.

The off-premise opportunity, in particular food delivery, is enormously big.

Thirdly, when an order is placed through a delivery portal, the order is essentially sent to a tablet that the restaurant has to staff and manage. And for each delivery company, comes a different tablet. Some restaurants have upwards to five or six to monitor at any given time. Once the order arrives at the tablet, the restaurant employee must re-enter the order into the POS – a very inefficient process rife with potential errors leading to refunds, discounts and discontented customers. Furthermore, the convoluted nature of managing tablets comes at a time when the national labor debates and minimum wage issues are adding to operational challenges complicating restaurants’ ability to reduce or reallocate labor.

 All this to say that what restaurants are realizing is the need to have off-premise orders, especially delivery, placed direct from their own website – for improved margins, for the ability to capture (or recapture) customers embracing off-premise ordering technologies, for operational efficiency and for the growth of their businesses and brands.

And here’s the kicker … customers want to order direct! According to the U.S. Restaurant Outlook Spring 2017 Study conducted by AlixPartners, “Consumers strongly prefer ordering from a restaurant directly versus a third party: 53 percent vs. six percent.”

The options for restaurants to build direct are essentially twofold – either invest in the off-premise solution themselves (ala Panera investing $100 million over the past several years for their own infrastructure and fleet), or partner with appropriate third parties that support the building of a direct ordering and delivery system in a more practical way.

Once the restaurant has a direct off-premise ordering platform in place, orders are captured direct and submitted to the POS and data management systems, delivery services serve as partner couriers for improved margins, labor can be reallocated away from tablet management, and the customer in the end has an improved experience.

We’ve Seen this Before – Remember Travel

Even if you’re suspect of this shift to direct ordering and delivery, let’s be reminded that this is not the first time an entire industry rushed to participate with online aggregators and marketplaces only to discover the vital need to build a direct business model. Take the travel industry – years ago airlines, hotels, car rentals etc. all flocked to Expedia, Travelocity and others for the same reason – perception that customers using the online portals were incremental to those that were booking through direct offline means.

Eventually, the travel businesses all arrived at the same conclusion restaurant operators are heading towards – to build a direct booking capability on their websites and regain the customers they lost.

Understanding the evolution that took place within the travel industry is identical to the growing need for restaurants to build a direct business model now.

The off-premise opportunity, in particular food delivery, is enormously big. Morgan Stanley lists off-premise as “$210 billion of the annual $500 billion of restaurant industry revenues.” That’s approximately 40 percent.  However, only two percent is via online and delivery today.  Much if not all of the 40 percent off-premise market will move to online ordering of takeout and delivery over the next few years. So while the opportunity is massive, the restaurants that employ a direct model now are the restaurants that are best positioned to harness it and grow more rapidly.

To see a companion piece on this subject, click here.