Home Delivery as Destruction
Many restaurants need to offer home delivery to compete. They find that they need to associate with DoorDash, Uber Eats and the like, for mobile delivery and loyalty. The average commission rate that private restaurant chains pay third-party providers of digital ordering and delivery is 25%. That means that third-party transactions need margins of roughly 45% in order to be profitable. In the alternative, you could sell a lot more food at very low margins.
Privately owned restaurants are at a disadvantage when negotiating the commission rate. Because of bargaining power and geographic scope, large chains, and particularly franchise restaurant chains, are able to negotiate commission rates down to 15%. Still, that is a hefty expense for any restaurant. An independent restaurant chain without a fully integrated point of sale system may pay 35% for the digital platform and delivery. Franchised restaurants almost always have a point of sale system for digital ordering. Your royalty payments at work. So franchised and large chain restaurants dealing with third-party providers will save about 50% of the commission costs imposed by the third-party delivery provider.
Uber Eats works with restaurants in two ways: It processes orders for restaurants that manage their own delivery; it can also manage orders and provide delivery for restaurants that require both services. Uber Eats charges as high as 35% in commission for every order that is calculated as a percentage of sales. The platform offers two pieces of software to restaurant partners—the Restaurant Dashboard, which runs on a tablet in the restaurant, and Restaurant Manager, a web-based tool for restaurant managers to view analytics. The delivery platform promotes the restaurant’s menu on its app and website. Once an order is received, a delivery partner picks up the meal and delivers it.
Most restaurants operate on already thin margins of around 10% to 20%. By paying per-order commission fees for customers and repeat customers, they soon realize how hard it is to build long-run, sustainable growth for their restaurants. Some find that as third-party delivery increases, profitability decreases.
Home Delivery as Disrupter
Third-party delivery providers are simply restaurant aggregators for ordering and delivery systems. Brands are finding ways of increasing margins without increasing volume. The future is the millennials and Generation Z. They may not care for in-house dining, full service hospitality or taking a ride in a car to pick up food. They may not mind re-heating lukewarm food deliveries and might prefer the convenience of ordering through Alexa or Siri. Delivery of dinner is competing with the daily home-cooked meal for dinner, and this trend is continuing. As third-party delivery digital ordering and delivery systems grow, consumers will grow with the convenience and the market for home delivery is expected to grow exponentially.
What Is the Future?
As the third-party delivery systems aggregate more restaurants, their costs per delivery will drop and their bite out of the margins should fall. This would benefit both the restaurant which can realize better margins, as well as the consumer, who is being asked—more and more—to absorb some of the delivery costs through the pricing of the product.
But will restaurants reach a saturation point with third-party providers? Digital ordering should become as easy for restaurant owners to apply as Quicken© and Quickbooks© simplified business accounting. High-margin beverages, soft drinks as well as alcohol, are generally not being ordered for delivery. Expect restaurants to shift from high-profit, full-service dining to low-profit delivered meals. Retail real estate will be shifting from high-rental, consumer-facing sit-down restaurants to lower rental commissaries in industrial areas that deliver food to population centers quickly and efficiently. Expect real estate to be combined for both uses, with commissaries attached to dining locations, or restaurants going more “industrial” to satisfy the need for commissary space.
The third-party delivery companies themselves will be subjecting themselves to increasing pressure to decrease their commissions. They will need to re-invest in their digital platforms and their interfaces with the restaurant-ordering systems. They will have problems with finding labor and complying with increasingly complicated employment laws. Third-party delivery companies must compete for additional market share and the restaurants are simultaneously asking for lower fees. The growth and stability of these third-party providers may be a determinant of the future.
Will restaurant chains form their own digital ordering and delivery systems, or pay for someone else to do it? Will restaurant concepts downsize full service facilities to survive the margin erosion from customer-delivery demands?
Developing algorithms to calculate delivery coverage and times, and the digitizing of ordering is not the mainstream business of most restaurants, including chains and franchise systems. Instead, third-party providers has become its own booming business. It is a business of aggregating different restaurants and finding drivers. It is a business of refining the software. It is a business of using delivery data properly and ethically. As John Hamburger of Franchise Times quips, “Third-party delivery companies are building their own brands, ominously for those restaurant operators sitting on their hands.” That is the future of restaurant operation, and whether it will be the disruption or destruction of each individual brand remains to be seen.