… With analysts predicting a $200 billion shift toward digital ordering and delivery over the next four years, the stakes have never been higher and the rate of change has never been faster. To put this in perspective, $200 billion is a greater share of restaurant industry sales than all of drive-thru represents today and analysts are forecasting that this shift will happen 10 times faster than the 40-year history of the drive-thru. The failure to master digital ordering and delivery and meet the needs of the on-demand consumer will undoubtedly result in a wave of restaurant failures.
A November study by William Blair entitled “Takeout or Delivery? Digesting the Rapidly Growing Online Food Ordering Industry” underscores that there is a meaningful distinction between orders originating from indirect digital sales channels (marketplaces like GrubHub, Uber Eats, DoorDash and Postmates) and orders originating from direct sales channels (restaurants’ own websites and apps). While today, indirect and direct channels are in a near dead heat, representing $13.2 billion and $12.2 billion in annual sales, respectively, the growth rate of indirect channels far exceeds that of the direct channels. The report forecasts that “third-party ordering platforms will source over $43 billion of delivery orders in the United States by 2022, up from our 2018 estimate of $13 billion (CAGR of 35%),” while direct channels grow to $18.6 billion of delivery orders in the United State by 2022, up from the 2018 estimate of $12 billion (CAGR of 11.1%). That results in a 70/30 split of digital delivery in favor of the indirect channels.
If you look at the 15-year history of the hotel industry’s shift to digital booking, you will see a similar disruption from the indirect channel represented by online travel agents (OTAs) – firms like Travelocity, Priceline and Expedia. These channels have since grown to an eerily similar 70% share of digitally booked rooms, extracting a 10-20% commission on every transaction and leading to the erosion of customer brand loyalty. In response, the hotel industry has deployed tactics like aggressive advertising for direct booking, lowest price guarantees and frequent traveler programs that include benefits like free nights and upgraded rooms. However, fewer than one out of every three bookings are made on hotel direct digital platforms. William Blair’s recent study suggests that the restaurant industry will suffer an even worse fate, especially given the already substantially higher 20-30% commissions that restaurant delivery marketplaces are charging for orders that originate through their indirect digital channels.
Restaurants must double down on their direct digital channels by offering delivery through their apps and websites and maintain their direct relationship with their most loyal customers. Rather than redirecting customers from the restaurant website to a delivery marketplace where the restaurant is listed next to competitors, restaurants must integrate into their website the capability for local customers to get real-time delivery time and price quotes and get their orders delivered. After all, another recent study from E-Poll Market Research showed that consumers prefer to order directly through restaurant apps and websites. Olo’s Dispatch platform enables restaurants to offer direct digital delivery without building their own in-house delivery fleets, and instead tapping into a nationwide network of on-demand delivery couriers as a decentralized point-to-point delivery service. This approach keeps loyal customers on-brand, while keeping restaurant profit margins intact.
… Restaurants must harness their natural assets like their four walls, their takeout packaging, their websites and other owned media to engage the natural affinity group of existing loyal customers and enroll these customers in their digital channels. Digital customers tend to generate 25% larger average ticket sizes at a significantly higher visit frequency due to the convenience of food on-demand (skipping the line and the wait at pickup or getting the order delivered). This leads to a highly positive return on investment by converting existing analog customers into digital customers, represented by greater monthly food sales per customer. And when customers become part of the digital database, restaurants can finally understand their lifetime value in general and as part of distinct customer cohorts, training their models to better target high-value customers in their marketing activities (and with a well-understood budget to spend on customer acquisition). Perhaps one day, we will witness restaurant brands providing user-level financial reporting, just like e-commerce companies do. In the war for $200 billion dollars in restaurant industry sales, their very survival depends upon it.