Chipotle could exceed $2.5B in digital sales in 2020

Dive Brief:

  • Chipotle’s digital sales grew 202.5% to $776.4 million and accounted for 48.8% of total sales during Q3 2020, according to an earnings release. About half of these sales were from delivery with the other half coming from order ahead, which includes in-store pickup and Chipotlanes. 
  • The company expanded its delivery capabilities with additional partnerships with Uber Eats and Grubhub and expanded its digital capabilities into Canada. An average Chipotle restaurant delivers a digital average unit volume of over $1 million, compared to a few hundred thousand dollars per restaurant a few years ago, CEO Brian Niccol said on Wednesday during a call with investors
  • Given its current momentum, which doesn’t seem to be slowing down — October’s digital mix remains in the high-40s — digital sales could exceed $2.5 billion this year, which is more than double what it was in 2019, Niccol said. Adding up Q1 and Q2 sales, which totaled $372 million and $829.3 million, respectively, with Q3 digital sales brings category sales for the first nine months of the year to just shy of $2 billion. 

Dive Insight:

Two years of digital innovations is paying off at Chipotle, especially with customers still reticent about returning to dine-in during the pandemic. While Chipotle’s comp sales were down in Q2, they increased 8.3% during Q3 2020, and its digital mix, which tripled during the quarter, appears to be part of the company’s growing sales momentum. The company added group ordering in June and continues to shift its real estate strategy toward more Chipotles with its mobile order ahead drive-thru lanes, dubbed Chipotlanes. This channel benefits from a second make line, which was added in 2019 to focus on digital orders.

During the quarter, Chipotle opened 44 new restaurants, of which 26 were Chipotlanes, according to the release. The company now has 128 Chipotlanes, including five conversions, out of its over 2,700 restaurants, CFO Jack Hartung said during the investor call. If the company adds another 25 to 30 Chipotlanes during Q4, it would be on target to reach its original goal of building 150 to 165 Chipotlanes this year. 

The company will also consider relocating some Chipotles, especially those that are now 20 years old, to locations that allow for drive-thru lanes, Niccol said.

“We’re starting to see much more traction with landlords being willing to work with us on the conversion, and we’re also seeing nice results from the conversions that we’ve tested to date,” Niccol said.

Comps at Chipotlanes stores are 10% higher than a traditional store, which equates to about $200,000 in sales volume, more than making up the additional $75,000 to $100,000 needed to develop these locations, Hartung said. The most recent openings of Chipotlanes during the pandemic were actually returning comps 25% higher than non-Chipotlane stores, Hartung said. 

“Opening more Chipotlanes will not only enhance customer access and convenience, but it also increases new store restaurant sales, margins and returns,” Hartung said.

Having more Chipotlanes also pull people away from delivery, which negatively impacted margins due to higher costs associated with the channel. Hartung said 15% of in-store customers shifted toward delivery. 

“So between now and next year … if delivery shifts into in-store and shifts into order-ahead and pick-up, then I would say our margins, for sure, are headed on the way up,” Hartung said. “If delivery stays the same or increases, we’ll have some challenges.”

The company is experimenting with increasing menu prices to offset delivery costs, he said. 

Chipotle’s loyalty program, which has 17 million members, is also starting to provide insights into customer behaviors. These insights will help the restaurant find ways to reengage with members if their visits decline, thereby increasing the stickiness of digital, Niccol said. Members also become more familiar with the company’s app and the ability to order-ahead and grab and go has also resulted in more frequency, he said. 

“There are those occasions that are dedicated to deliveries, but there’s also these occasions for everybody in these cohorts where the order-ahead proposition makes a lot of sense,” Niccol said. “And we’re very bullish on being able to use the data and the insights to drive the behaviors around these various occasions that maybe Chipotle before wasn’t top of mind but now they are.”

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Chicago May Reconsider Capping Third-Party Food Delivery Fees

After taking a summer vacation from discussions, Chicago’s City Council is once again grumbling about third-party delivery companies with one alderman urging his colleagues to pursue capping what DoorDash, Grubhub, Uber Eats, and Postmates charge restaurants. This comes as the city on Wednesday announced a $500,000 grant program for ailing restaurants funded by DoorDash.

While praising the DoorDash sponsorship, Ald. (42nd Ward) Brendan Reilly says — as reported by the Tribune — that if the council “really wants to help the industry, they should put their money where their mouth is and support this ordinance.” He’s referring to an ordinance introduced in April that would have capped delivery-service fees at 5 percent of the cost of a food order. That would give Chicago the lowest cap in the country. In comparison, D.C. capped fees at 15 percent and New York agreed to a 20-percent limit.

Third-party fees average at about 20 percent but and surge to as high as 40 percent, restaurant owners say, and there’s confusion over what the amount buys clients. Delivery reps say it’s an ambiguous combo of marketing, technology, and customer services. While Chicago did not adopt a cap, they did mandate third parties to provide itemized receipts to customers with a breakdown of what they charged restaurants. Restaurant owners have said companies have largely ignored the mandate.

Supporters of the cap ordinance say it’s needed as restaurants are desperate for money during the pandemic as they rely on takeout and delivery. But, many in the industry see third parties as predatory. Several restaurant owners shared their experiences of third parties of deceiving customers by creating fake websites that imply a restaurant is part of their network. Customers are fooled thinking that they’re helping a restaurant when the truth is there’s no agreement with the courier.

Those stories failed to move the council as the ordinance did not advance. Perhaps there’s sympathy for the third parties that have struggled. Postmates announced earlier in October that it was $929.3 million in the hole. The city has concentrated on outdoor dining to make the best use of warmer summer weather. But as winter returns, food deliveries will increase along with frustrations from restaurant owners angry about service fees. At a September press briefing, Mayor Lori Lightfoot warned third parties that the ordinance was not dead.

There’s been an evolution in the city’s understanding of third parties since March when Grubhub officials appeared with Lightfoot at City Hall to clumsily announce they would defer the collection of service fees (after first saying the fees would be waived). Grubhub, a Chicago-based company, has since been sold. The city took heat for cozying up with Grubhub, as restaurants cited the service fees and shady business practices. At the aforementioned September briefing, Lightfoot appeared with Brian Fitzpatrick, the co-founder of Tock, another Chicago-based company that pivoted from reservations to offering online ordering. The company charges restaurants 3 percent for its services.

The lifeline for the industry would be federal intervention, whether that’s via a stimulus or grander bailout. In the absence of that, local authorities are scrambling for solutions. A cap would be a logical next step.

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Denver restaurateurs share why third-party delivery regulation was necessary

The problems started for Giles Flanagin, cofounder of Blue Pan Pizza, when Postmates marked up his menu prices 10% this year without asking his permission.

Then came issues with third-party delivery drivers. One came into his Denver restaurant demanding to go to the front of the line, and another refused to wear a mask when she entered his restaurant. Unhappy with his reactions, both then posted one-star Google reviews.

Finally, when a customer informed him that orders placed with a third-party delivery service were canceled an hour later, Flanagin demanded that Postmates, which he did not contract with, take his menus off the site. When weeks of requests went unanswered, he got the service to list his restaurant as “closed,” believing it was the only option he had left.

“The alternative is to continue taking orders until they take us down, and we were going to end up damaging our reputation,” Flanagin said. “It’s not worth it.”

Denver City Council members voted on Oct. 5 to impose a number of regulations on third-party delivery sites, including a 15% cap on fees charged to restaurants, a requirement that eateries opt in to have their menus listed and a ban on cutting drivers’ salaries because of the new rules. The rules will be in place through Feb.9, designed as pandemic-time relief.

While Councilwoman Kendra Black introduced and passed the law in less than a month, Katie Lazor, executive director of independent-restaurant group EatDenver said the growth of third-party companies has been one of the biggest topics for the sector for the past three years. That only increased this year when coronavirus restrictions closed restaurant dining rooms and hooking on with a delivery service became viewed as a necessity by some businesses for survival.

The problem, however, is that the four services that control about 95% of the market — Postmates, Grubhub, DoorDash and Uber Eats — charge fees that often are 30% for independent restaurants with limited bargaining power. Considering that profits at most restaurants are between 3% and 6%, orders through these services amount to “essentially giving away food for free or worse,” said Brad Ritter, owner of Carmine’s on Penn.

Still, because bringing any business through the door was critical to keeping restaurants alive since mid-March, so many signed up for these services despite the costs, Lazor said. And that, in turn, led to problems beyond the prices — in some cases, even for those eateries that hadn’t agreed to work with the services.

One company listed menu items that Carmine’s doesn’t even make, such as lasagna, and when Ritter’s staff told that to a delivery person calling in an order, the driver replied, “Just do whatever you can that’s close.” Another driver showed up to get an order on a scooter and attempted to put food into his pockets to deliver it, Ritter said.

Both Flanagin and Ritter said they work to explain to disgruntled customers asking why their order is taking so long or isn’t available that it was an issue with the delivery companies and their drivers, but both acknowledged that the ultimate consumer judgment falls on them.

Both also entered into brief dalliances with companies before deciding that neither the price nor the service problems were worth it, then discovered that removing menus from sites was a Sisyphean ordeal. Ritter, who is doing 31% of his business in non-delivery takeout orders now, spent weeks getting bounced back and forth in a frustrating process.

With the new rules, particularly the 15% cap, going into place on Oct. 9, Lazor said that some restaurants who haven’t considered using such services may try it now and others who have used them but not wanted to draw much business that way may market the service now. Reducing fees to 15% “is the difference between feeling like they need to offer it or feeling like they can promote it with confidence,” she said.

Even those regulations won’t be enough to get Ritter back into contract after his interactions with delivery services previously, though. He and others would prefer to explain what he considers to be a “predatory” business model to the public and hope they choose to dine in or pick up food themselves in order to help local restaurants.

“What I’m hoping is that the dirty little secret will escape so customers can get to the place where they understand the model comes at a cost,” he said.

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ShiftPixy Partners with Big Association, Readies Native Delivery Push

ShiftPixy has been working toward a hybrid native-gig delivery model for some time now, but a big new partnership gets the staffing platform one step closer.

The company’s overall aim is to bring efficiency to the part-time labor market by taking over the overhead of insurance. As CEO Scott Absher explains, that’s especially helpful when it comes to delivery.

“The underlying strategy is we own the human capital; the operator terminates the employees we hire them and lease them back. That allows them to redispatch and redeploy people so we can turn someone into a driver for that location,” said Absher. “Then we have a master, non-owned auto policy, it’s really a passthrough of $5 to the consumer so the restaurant doesn’t even have to pick up the premium.”

He said the company also handles the online order capturing, routing and pinging the right driver in the system and connecting with the end customer via text.

So far, there have only been tests, but a new partnership with the Washington Hospitality Association could push the concept into prime time. The Washington group is a little more engrained in member companies than similar state organizations. For one, members buy into a broad insurance network within the association.

“Members let the association carve out their own captive. They grew that rapidly to 300,000 lives. That represents about 18 percent of the state restaurant market,” said Absher. “It’s not just a casual association, it’s a very active engagement when you’re handling all the workers comp.”

That deep connection, he said, will help ShiftPixy approach two key problems in delivery: one, operators can’t find good people to drive—a ubiquitous issue that continues—and two, the margin hit from the third-party networks. It’s the same sharing model that underlies the company’s restaurant gig work where operators share employees across locations or across branded restaurants.

Most partners start with the insurance and human capital aspect of ShiftPixy, but from there he said it’s easy to dip into the more novel offerings.

“Because the association is in the daily conversation with their members, we think it will be a quick push forward,” said Absher. “I think this will be our biggest use case yet, obviously population density is a big driver, so in Seattle, Tacoma or Spokane you’re going to see a real interest in the sharing side of the platform.”

Anthony Anton, the president and CEO of the association said the partnership offers more arrows in the proverbial quiver for members.

“An important focus of ours is to keep our restaurant and hospitality operators agile and equipped with the latest tools to succeed. We found the ShiftPixy platform to be exactly what we were seeking, especially during times such as these, when the ability to adapt to new market realities is of the utmost importance. We’re excited to join forces with the ShiftPixy team and eagerly look forward to introducing the ShiftPixy ecosystem to our restaurant and hospitality operators and the thousands they employ across Washington State,” said Anton in a statement.

Absher said the company has seen a big uptick in requests for demos around the native delivery program as COVID-19 accelerates the switch to more efficient forms of delivery as the proportion of sales going out the door remains historically high.

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Uber Eats revamp looks to improve restaurant discoverability

Dive Brief:

  • Uber Eats will roll out a revamped app and website in the coming weeks with an enhanced pickup map that contains more information about local spots, including user ratings of nearby restaurants, the company said in an email. New features like Hidden Gems will recommend restaurants based on past orders at other establishments while shortcuts will provide instant access to favorite cuisines and new merchants like grocery stores, butchers, flower shops and pet supply stores, according to a company blog post
  • The features also include family favorites with food bundles, which allow users to order from multiple restaurants at the same time through a single order, and one that shows what other diners have ordered in their immediate area. 
  • Uber Eats said that during consumer testing, it learned the delivery experience was fast, but users had a challenging time reaching the ordering stage. The delivery platform’s features will help increase usability and benefit restaurants with more orders, the company said.

Dive Insight:

With demand for delivery and pickup increasing since the start of the pandemic, third-party delivery companies have been expanding their services and improving usability for both customers and restaurants. Uber’s new features could make it easier for a diner to discover restaurants they haven’t tried yet — for example, if a customer ordered pepperoni pizza from one restaurant, the platform would recommend pepperoni pizza from a different highly rated restaurant.

This latest revamp of Uber Eats’ platform also coincides with various services it rolled out for restaurants in July, which include online ordering capabilities for restaurants and customer insights to view consumer behavior and clicks to gain a better understanding of ordering patterns. Added onto these insights, Uber Eats said it expects its revamped user features to provide richer data back to its restaurant partners. Uber Eats also launched a contactless dine-in and pick-up order feature in September months after it debuted a pickup map allowing users to see restaurants offering takeout within walking distance. It also added a restaurant loyalty program and priority delivery option in June.

All of these features seem to be making a difference. Gross bookings were up 113% year-over-year globally during Q2 2020 and Uber Eats’ restaurant partnerships surpassed 500,000 in June, growing 50% year-over-year. Uber Eats said it also had a 70% increase in orders in the U.S. and Canada across its website from February to June on top of increased usage of its app. 

With app usage up among its competitors as well, additional features will help set each of the third-party platforms apart. Grubhub partnered with Lyft in October to provide Lyft Pink members free access to Grubhub+, while DoorDash added customer tracking for pickup orders and turnkey digital storefronts, for example. 

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Labor department considers new independent contractor definition, could be used to federally challenge AB 5

The U.S. Department of Labor (DOL) is revising its interpretation of independent contractor status under the Fair Labor Standards Act (FLSA), which could open the door for federal challenges to Assembly Bill (AB) 5.

“Once finalized, it will make it easier to identify employees covered by the Act, while respecting the decision other workers make to pursue the freedom and entrepreneurialism associated with being an independent contractor,” said Secretary of Labor Eugene Scalia in a statement online.

The proposed rule is expected to promote innovation and reduce litigation, according to the Federal Register. Public comments are due October 26, 2020. 

“It could only take hold in California for federal cases because in California you have to apply California law unless it’s a company that has employees in various States and is sued or has sued under federal law,” said Nina Yablok, an employment law attorney who practiced for 40 years in California and wrote a blog about the proposed rule. “California is not very business-friendly.”

As previously reported, when AB 5 became effective Jan. 1, 2020, it forced companies to reclassify many independent contractors, such as Uber and Lyft drivers, photographers, freelance writers and other gig-economy workers, as employees.

“There have already been attacks on AB 5 in terms of lobbying groups and lawsuits,” Yablok said in an interview. “The legislature has, on its own, made some changes already and Californians can keep on fighting for their right to be independent contractors and to use independent contractors.”

If the proposed DOL rule is approved, a 5-prong economic reality test would be employed to determine a worker’s status as either an employee defined under the FLSA or an independent contractor. 

The five prongs include:

The nature and degree of the individual’s control over the work.

“Independent means that you have control over what you’re doing,” said Yablok. “The fundamental economic reality is someone who is really an independent business person controls how they do business.”

The individual’s opportunity for profit or loss

“That gets to the heart of being in business because employees cannot suffer an economic loss,” Yablok said. “They can lose their job but if the company has a bad month, they still get their salary whereas if you’re an entrepreneur, you could have a bad month. You could have a bad year. You could work on a project where you lose money. This is the heart of entrepreneurship. It’s about risk-taking a risk.”

The amount of skill required for the work.

“If a person has a high level of skill, they can be more independent,” said Yablok. “They don’t need someone standing over them. They don’t need to be monitored or checked and it’s possible that the company may not even know how they do their work as is often the case with attorneys.”

The degree of permanence of the working relationship between the individual and the potential employer.

“Permanence is something very easy to measure,” Yablok said. “How long has this person been with you full-time or part-time, which does reflect how dependent the worker is on that one company. It’s dependence analysis that is not as easy to grasp as the Department of Labor says.”

Whether the work is part of an integrated production

“It’s important because if you’re contributing to what the company sells, the company is going to want to control what you do a lot more closely,” said Yablok. “People who are doing something totally unrelated to what the company sells will have a better chance of being an independent contractor.”

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Dutch firm’s shareholders vote yes to Grubhub buy, no to CEO’s pay

Just Eat Takeaway.com, the online food-ordering company, on Wednesday said its shareholders approved its proposed $6.9 billion purchase of rival Grubhub, but rejected a pay package for the company’s chief executive, Matthew Maloney.

Takeaway agreed in June to buy Grubhub in a deal to create a transatlantic group which would be the biggest food delivery business outside China.

Takeaway founder and CEO Jitse Groen is to become head of the Takeaway-Grubhub combination, which will be based in Amsterdam, while Grubhub CEO Maloney is set to lead its North American business.

Takeaway shareholders approved Maloney’s appointment to the board, but rejected a separate motion setting out the terms of his pay.

Maloney was to have received a $745,000 base salary in 2021, with long-term stocks and options grants of up to 1,000 percent of that amount as part of a long-term incentive plan, a Takeaway shareholder circular said.

Large stock bonuses are rare in the Netherlands and were capped at 100 percent of base pay across Europe for financial industry executives in the wake of the 2008 financial crisis.

Takeaway’s shareholder circular specified that the merger itself was not conditional on shareholders’ acceptance of Maloney’s new pay deal.

“We will discuss the outcome (of the vote) with Grubhub and Matt,” a Takeaway spokesman said. “Unfortunately we can’t comment further at this time.” A Grubhub spokeswoman also declined to comment.

The companies had said before the vote that the pay package was designed to ensure Maloney remained with the company and that it mirrored his current pay and US norms.

Takaway also said on Wednesday it still expected the deal to close in the first half of 2021, pending approval from Grubhub shareholders and regulators.

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Grubhub makes food delivery deal with Lyft

Grubhub Inc. said it’s made a deal with Lyft Inc. to provide all of the ride-sharing company’s Pink members a free membership in Grubhub +.

The Chicago company’s (NYSE: GRUB) + membership normally costs $9.99 a month and allows members free unlimited delivery from selected restaurants.

Membership to San Francisco-based Lyft’s Pink costs $19.99 a month. In addition to the new Grubhub + membership, Pink members get 15% off rides, relaxed cancellation fees, expedited airport pickup and three free scooter rides a month (in available markets).

“Connecting hungry diners to the restaurants they love and giving them the most rewarding experience is our mission at Grubhub. We’re excited to extend these rewards to even more consumers through our partnership with Lyft,” said Alex Weinstein, senior vice president of growth at Grubhub, in a statement.

In June, Just Eat Takeway.com of The Netherlands announced it was buying GrubHub Inc. for $7.3 billion in an all-stock deal. The two companies said that after the deal is completed, they’ll service more than 360,000 restaurants in the world, serving more than 70 million customers in 25 countries. Just Eat Takeaway.com will own 70 percent of the combined company, which will keep its North American headquarters in Chicago.

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Restaurants get a break on profit-eating delivery fees from third-party apps

A law passed Monday by the Denver City Council caps fees taken by third-party food-delivery apps at 15 percent of the customer’s tab.

City Councilwoman Kendra Black sponsored the bill in response to the pandemic-caused recession that has leveled local restaurants. A quarter of all jobs lost in Denver during the COVID-19 era have come from the restaurant industry, according to city council documents. Restaurants employ about 10 percent of the city’s workforce.

To pick up and deliver food, apps like DoorDash, Grubhub, UberEats and Postmates had been charging restaurants up to 35 percent of each customer’s bill, said Black, who worked with delivery companies and the restaurant industry on the law. She said large chains have better luck negotiating smaller fees than local, small businesses.

“It’s really the little guys who are paying the highest rate, and it does really hurt them,” Black said during a committee meeting last month.

Spokespeople for DoorDash and Postmates framed the cost to restaurants as a “commission” — not a fee — that’s negotiated based on restaurants’ needs. That commission is the company’s main source of revenue, said Ashley De Smeth, head of public affairs and policy communications for Postmates.

“Arbitrarily setting on-demand delivery prices has real consequences that undermine our ability to operate (and) fund relief efforts and benefit programs for merchants, couriers and customers, and kills the whole industry’s ability to provide the services restaurants need to stay open during this national emergency,” De Smeth said in a statement. “But to keep delivery available to all customers and merchants in Denver, we hope the council will consider a phasing out of the cap in proportion to the opening of in-room dining capacity.”

The law will expire on February 9 unless city council renews it. Black said council will monitor the state of the local industry through the winter.

Taylor Bennett, global head of public affairs for DoorDash, said “price-fixing” might unintentionally harm business owners, customers and couriers. The company is “eager” to work with the city council on future policies, he said in a statement.

Denver joins more than a dozen cities and states that have passed similar laws with a cap of around 15 percent. Councilwoman Robin Kniech urged residents to ask restaurants if they provide in-house delivery to keep even more money in the pockets of local business owners.

“It’s always best to check there first … because 15 percent is still steep,” Kniech said.

Delivery apps can charge restaurants more than 15 percent if they opt into other services like marketing, according to the law.

Another part of the law affirms that couriers must retain all of their tips; food-delivery apps cannot garnish gratuities to make up for smaller profits from local restaurants, the law states. And restaurants must opt into the service — a stipulation that came from apps listing restaurants without their permission, Black said.

The council unanimously OK’d the new law.

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Postmates Is Over $929.3 Million in the Hole

According to the Wall Street Journal, a Friday regulatory filing from SF-based Uber reveals that (also SF-based) food delivery app Postmates is running at a very, very steep loss. “Postmates had an accumulated deficit of $929.3 million as of June 30,” reporter Laura Forman notes, and in the second quarter of 2020 — yes, in those months when delivery apps were supposedly making the biggest bank in bankville — the company lost over $32 million. According to the filing, Uber’s hopes as a company are pinned on the market advantage the Postmates acquisition might offer it … but if Proposition 22, the California measure to keep delivery drivers classified as contractors, fails to pass, both companies could find themselves in even bigger trouble than before, because turning those gig-workers into full-fledged employees will cost a lot of money.

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