Delivery Services: Who's Going To Pay For All Of This?

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QUESTION From Mike S. in VA:

Which delivery services are the best ones and how much should they charge? I feel like 20% is a lot.

 

HH ANSWER:

The short answer is that it depends largely on your: existing model, square footage, number of outlets. location(s),  customer base and occupancy cost (why we're answering this under: #FACILITIES as opposed to #TECH) but it's also imperative to factor in your other biggest costs like labor and menu  - but ultimately... whoever is cheaper and more manageable: you and your own drivers (consider the independent contract agreement, additional profit center to manage, taxes and insurance liability among other implications) or a service like UberEats that takes a percentage.

The problem is that while you might be able to survive sacrificing up 20-30% today - what happens when a truly uncontrollable and unforeseeable expense or market condition occurs? Will that be the straw that breaks your back or are you handling all the forseables and prepared to handle the unpredictable...because hardship, in some form or another, WILL hit - and you don't want delivery as your hardship since it's a foreseeable cost. Discuss it with your partners, consultant and/or your accountant.

If you're watching the market, you may have heard of Silicon Valley's latest "unicorn": #DoorDash. Their $1.4B valuation has caused me to wonder how the #dabbawallas or “tiffin-wallahs” of India are paid.

While #tiffinwallahs might not fully reflect the market opportunity in the United States due to their being reportedly a largely uneducated and often illiterate workforce; I think their history illustrates that such systems in this country would eventually require monetization supported by the end-customer instead of the supplier / restaurant.

John Glass, Morgan Stanley's U.S. restaurant analyst, predicts that approximately 40% of all restaurant sales will be up for grabs to delivery companies looking to capitalize on consumer demand for online delivery.

Glass reported that 43% of consumers who had delivery said it replaced a meal at a restaurant this year. Did it really replace a meal at a restaurant or did they replace them actually doing the cooking. The rise and prepped meal delivery like blue apron might argue that point with Morgan Stanley.

And I would argue that #MorganStanley is finding that: “Share of orders placed online through a delivery service website or app increased to 18%, vs. 15% last year.” are increases in online instead of over the phone ordering.… and reporting like this can cause an inexperienced operator to assume they need online ordering just as badly as @PapaJohn does.

But There is a definite increase in consumer demand for food delivery that's fueled, in part, by the likes of UberEats, Caviar and GrubHub. You can’t ignore the impact delivery it’s having on the restaurant industry and neither can investors.

There may be a flurry in the next few years but Darwinian Economics (on steroids) will ensure that third parties not acting in concert or synergistically with restaurants will usher in “low tide” at an exponentially faster rate.

Eventually, restaurants will have to charge the customer more to cover the delivery fee or customers will have to pay the fee themselves.

Transportation may not be the best example but once the critical mass of remaining restaurants is reached - I imagine customers will be willing to pay more for the convenience just as they are for their Lyft ride to the restaurant.

Those outside the industry may view food as just another commodity - and see India’s tiffins as a model ripe for adoption; but I believe there is a significant market segment in America that doesn’t see their food similarly - or as a warehoused or mass produced item supplied by whomever is able to take the biggest cut into profits.

Although fast-food comprises a large portion of food sales in the US - the restaurant industry marketplace is not akin to AmazonPrime.

Yes- this move towards convenience is more than a trend but less of a disruption.

Its a bubble that’s just starting to balloon due to the ever common story of so many people believing that any kind of corporate success can translate directly to the restaurant business.

The reality is that although outside successes and plenty of cash can get you into the restaurant industry, the industry has a way of weeding out those who simply don’t get it.

Don’t get me wrong, models like #DeliveryHero’s “cloud-restaurants” or #Deliveroo ’s rentable “kitchen lot” restaurants” may work for the likes of #YumBrands and the #McDonalds of the world; but this country has countless communities of serious foodies and a significant portion of the population filled with culinary entitlement... people who demand fresher ingredients, locally sourced foods, artisan breads made in-house and sous-vide level precision.

At the end of the day- someone has to pay for all of that...and most successful seasoned restaurant operators know that it can’t be them...or it at least not past a certain point... like: 20-30% and that point is being reached - and passed like million dollar mortgage approvals for borrowers with bad credit.

The average operator willing to forego 20-40% of their profit for delivered meals won’t see the damage that can cause until it’s too late unless of course they have 200 units or a growth strategy with abundant capitalization to get there.

But I’m talking about the everyday independent neighborhood operators and the small regional groups with less than 10 outlets. There is a segment of the consumer market that makes up the loyal guests who make a conscious effort to support their favorite places. And I believe those guests can and will be willing to pay for the convenience of meal delivery once it's necessary - just as they are willing to pay for a Lyft in order to get to there.

There are so many ways to do delivery in-house, or with an outside third party, in a fiscally responsible way... but someone will reap huge rewards for quickly thinning the herd at the expense of inexperience.

Once that cannibalization occurs, food delivery companies will either be forced to sustain themselves with big corporate contracts or by bringing their earnings expectations more in line with what makes sense for smaller operators or... my bet is that customers will end up paying for the service they have become accustomed to receiving / benefitting from once enough restaurants realize they can't be the ones footing the bill for door-to-door convenience.

If your business model is set up for customers walking through your door, then you can't pay to walk through theirs.

That being said, I am working on cutting the amount of tables / FOH space by 30% for a current client so that the delivery service fees are covered / part of the overhead while we structure our own independent delivery service...which happens to work perfectly for her concept.

If you’re going to use one of these delivery services, I’d recommend using them only as an interim service until you have your own, as a market viability test or as a way to introduce (via flyers in every bag) a curbside pick-up option at your location with dedicated spaces near the door and 20% off the bill (Like some national chains are doing).