Fast food companies are betting big on delivery. It might not pay off

Delivery represents a big business opportunity for restaurants. Customer visits to restaurants have been about flat over the past five years through May, but delivery has grown 17% in the same time frame, according to David Portalatin, national food and beverage analyst for NPD Group.

And delivery has plenty of room to grow. It accounts for only 3% of all American restaurant orders, Portalatin said.

The shift to delivery is “profound,” said Noah Glass, founder and CEO of Olo, a business-facing food ordering platform that works with restaurant chains and delivery aggregators like Uber Eats. “It’s happening incredibly quickly and the stakes are incredibly high.”

Partnering with delivery platforms can give restaurants access to a whole new set of customers. But some, like Domino’s, think it’s a bad idea.

Third-party platform commissions could hurt restaurants by eating into their profits and eroding customer loyalty. By partnering with them, restaurants could ultimately be hurting themselves.

…What could go wrong

Incremental sales are good for restaurants. But if customers who would order from, for example, the McDonald’s app go through a partner like Uber Eats instead, McDonald’s earns less profit, because it has to pay Uber Eats a commission.

It could also lose those customers to competitors.

Someone using a restaurant’s app can only order from that restaurant. When they visit a delivery aggregator, they can sort by distance, delivery time, cost or cuisine, and end up ordering from a difference place based on those metrics.

“It’s become clear to restaurant brands that they need to work really hard to get their loyal customers to order direct from the brand,” said Glass.

And if something goes wrong with the order, customers are more likely to blame the restaurant than the delivery service. By outsourcing delivery, food companies are essentially outsourcing their brand management, as well.

Still, restaurant brands shouldn’t avoid working with delivery services altogether, said Morningstar analyst R.J. Hottovy.

“I think at this point there’s enough demand from consumers that you have to do it,” he said.

But “you have to be smart about who controls that data,” Hottovy said. “That’s the biggest thing.”

Ultimately, Hottovy predicts that restaurants will come up with a “hybrid” approach, relying on outside delivery services during off-peak hours and using their own drivers otherwise.

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