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12/11/2022

Restaurants: Revisit Your Food Delivery Strategy

If restaurants are to reap the financial rewards, they need to consider all their options.
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a person holding a cell phone ordering delivery

Before the pandemic, food delivery was enjoying double-digit growth, owing to consumer demand for convenience, and value that was edging closer to grocery-bought meals. Many restaurants, however, had previously chosen not to investigate delivery options, but when COVID-19 struck, the industry had to reinvent itself, and food delivery revenue offered a welcome lifeline. Consumers downloaded third-party delivery apps in record numbers. These marketplace delivery platforms enjoyed astonishing levels of growth as a result with some tripling their total number of orders within a year.

Independent restaurants and those belonging to small chains often hand over more than 30% of their customer basket spend to these platforms, in order to receive orders to their businesses, and have them delivered. This, ultimately, removes all of the restaurants’ margin from food delivery sales. While this was once tolerable – when food delivery was just a small part of their business – delivery now represents a far bigger piece of a restaurant's P&L. As a result, the tables have turned significantly and losing money on delivery is no longer an option. Add to that the impact of the rising cost of labor, insurance, fuel, food raw materials, etc., and you quickly call into question the sustainability of the independent restaurant sector.

72% of consumers prefer to order delivery direct from the restaurant,according to HT's 2022 Customer Engagement Technology Study.

This effect is not felt by the quick service restaurant (QSR) brands to the same extent. QSRs have multiple locations (usually numbering in the hundreds) and therefore enjoy sufficient volume and consumer appeal to negotiate better fees with these delivery platforms. As you would expect, they also have the scale and operational expertise to deliver efficiencies across many parts of their business, and so would generally have a lower cost base, enviable customer acquisition costs, and the brand budget to build a loyal clientele.   

QSRs embrace technology and have the resources to do so, allowing them to operate alternative delivery solutions to the marketplace platforms. These technology solutions also allow them to take back ownership of the customer experience from the hands of the marketplace delivery apps. In short, technology enables these restaurant brands to operate a very profitable delivery business and restricts the ability of the marketplace platforms to use their immense marketing budgets to transition customers from quick service restaurants to the independent restaurants, where platform fees are at a premium.

As we head into a difficult recessionary period, the outlook for quick service restaurant brands is encouraging. Indeed, there are pressures on their cost base, but these shouldn’t last. Consumer spending is down, but from experience, while this can have a detrimental effect on dine-in revenue, take-out revenue will enjoy an uplift. This can be explained by a shift in consumer behavior, with customers opting to enjoy their restaurant-bought meals at home, and in doing so, stripping out the taxi, babysitting and inflated alcohol costs from the occasion. As a result of this shift in behavior, restaurant brands that have adopted the technology to reduce their reliance on marketplace delivery platforms are operating a more profitable delivery business, which will likely see growth, rather than decline, as a result of the recession.       

Integrating with third-party delivery systems is impacting POS purchase decisions for 29% of restaurants, according to HT's 2023 POS Software Trends Report.

The outlook is less positive for the independent restaurant sector unfortunately. Many closed as a result of the pandemic and most of those that survived are worse off than they were back in January 2020. Struggling to find staff, under pressure from marketplace delivery apps, and rising costs affecting nearly all aspects of the business, there is often little or no alternative but to increase prices, impacting both inflation and consumers in general. As a result, the impact on the consumer pocket is very real, but a contracting independent restaurant sector and expanding quick service restaurant sector has more serious, longer term consequences. These include the impact on packaging, pay scales and even obesity levels – a condition which is incredibly costly to the country and one for which the US is already ranked 12th in the world.

On a more positive note, many of these independent restaurants do enjoy servicing loyal, local consumers, and encouraging their audience to order directly, rather than through a marketplace platform, will certainly help their overall business model. In addition, running incentives for customers to collect their order as an alternative to delivery will help their bottom line. Notably, as with the larger chains, there are also technology solutions available – usually through their Point Of Sale provider – which will help to make their delivery operations more profitable.

The sustainability of the restaurant sector does depend somewhat on the future of the marketplace delivery platforms. As it stands, there are three players of any significance in the US market and while that remains the case, competition will continue to be intense and will manifest itself with deeper discounts for consumers and incentives given to restaurants. Should three become two and potentially territories divided, then competition will ease, incentives disappear and if anything, delivery fees increase. That would be catastrophic for any restaurant brand that has not found an alternative delivery solution.

About the Author

Brian Hickey is CEO and Co-founder of VROMO.