If you love ordering some food, pushing a button and having your order 'magically' show up, you're not alone!!! In a study I did in June, 100% (yes, you read that right!) of respondents had used their device to order delivery and over half of them did it more than once a week. The growth in delivery and other forms of off--premise dining options has fundamentally changed the non-fine dining industry and has left many restaurant companies and brands struggling to figure out how best to respond. Given that non-fine dining restaurants (read that as ones who don't take reservations) have mostly not encountered distribution channel has added to the chaos. At least in the hotel industry, even before the advent of OTAs, we were familiar with GDS, travel agents and tour operators. It's been fascinating to watch this unfold.
In this post, I'll give an overview of what's going on and talk about the advantages and disadvantages associated with offering delivery.
What's Been Happening?
Delivery was traditionally offered by pizza restaurants, but the growth of specialized delivery companies like UberEats, Ele.me and Deliveroo, has given both consumers and operators many options to facilitate delivery/eat from home. Global restaurant delivery was estimated to be generate nearly US$83B in 2018. Restaurant delivery revenue in China was the highest (about US$33B with a 10.9% growth rate projected for 2018-2023), followed by the US ($17B with a projected 7.5% growth rate) and Europe.
Restaurant delivery grew by 8% from 2013 to 2017.[1] The growth in delivery was primarily driven by the 47% growth in delivery from non-pizza limited-service restaurants.[2] Looking forward, projections indicate that traffic for restaurant delivered meals, excluding pizza, in 2022 will be 20% greater than in 2016.[3]
While some restaurants operate their own delivery service, most restaurants offer delivery through third-party delivery services. Third party delivery companies typically charge restaurants a 20–25% commission. In exchange, the restaurant’s menu is listed on the company’s app or website. Consumers can then choose the food they want and, if desired, can order from multiple restaurants. While sales have increased for all restaurants adding delivery as a revenue generator, margins are typically higher for companies who handle their own deliveries, they are able to avoid the high commissions and also maintain control over their customer experience.
Consumer surveys have also indicated that people value the convenience and time savings of having their food delivered to them. For example, half of respondents to one survey who order food for delivery said they do so in order to not have to leave home.[4] About a third (38%) justified their use of delivery by noting that having food delivered is easier than cooking.[5] More than a quarter of respondents (28%) indicated that they chose delivery because it is faster than cooking.[6] In addition, many office-workers prefer the convenience of having food delivered to them rather than going out for lunch.[7] Meal delivery services have also become more prevalent in the hotel industry as hotel guests order food for delivery rather than ordering from room service.[8]
The top three things that customers think about when ordering food for delivery are (i) the type of food they want, (ii) from which restaurant they want to order and (iii) the quality of the food.[9] Food quality expectations are extremely high. Of those ordering from a third party delivery service, 37% state that they expect the food quality to be even higher than if the food was consumed in the restaurant.[10] In addition, whenever there is a problem with a delivery, users are more likely to blame the restaurant (44%) than the delivery service (25%).[11]
Advantages and Disadvantages
Clearly, using a third-party delivery service has advantages and disadvantages. In terms of advantages, using a third-party delivery service may increase brand awareness and sales beyond what a restaurant could do on its own with delivery. In addition, a restaurant does not have to invest in delivery personnel or vehicles when using a third-party service.
There are also disadvantages associated with using a third-party delivery service: (1): the high commission and its potential impact on profit margin, (2) the lack of restaurant control over ordering and delivery, (3) the transmission of orders from the third-party service to the restaurant, (4) the potential impact on customer loyalty, and (5) the lack of control over customer data. Each will be discussed in more detail below.
High commission and potential impact on profit. Most delivery companies charge a commission of approximately 20 – 25%. As you might expect, this definitely cuts into a restaurant’s profit margin. Let’s take an example with a $30 delivery meal. Assume you have a typical food and labor cost percentage of 70%, that means that your flow through on that order is $9. If the delivery commission is 20%, that means that there’s another $6 in costs, so now you’re left with $3, or a 10% profit margin. Of course, you can offset some of this with a delivery fee, but depending on how high you make it, your customers might balk at it.
Lack of control over ordering and delivery. Control over the customer delivery experience is crucially important, whenever there is a problem with a delivery, users are more likely to blame the restaurant (44%) than the delivery service (25%).[12].
Transmission of orders. Typically, each delivery service has a tablet that is used at the restaurant to take orders.[13] If your restaurant has multiple delivery partners (which is typically the case), it will have multiple tablets.[14] An employee monitors the tablets for incoming orders and then manually enters the orders into the restaurant POS system.[15] The resulting ‘tablet hell’ is not only inefficient, but also leads to inaccuracies.[16]
Potential impact on customer loyalty. Customer loyalty can suffer since your customers will be exposed to other dining options. Basically, it’s like looking for a hotel room on sites such as Expedia.com, CTrip.com or Booking.com.
Loss of control over customer data. Restaurants that use third party delivery companies do not own the data on their customer orders.[17] In effect, they have given up control over customer data to third party delivery companies.[18] Restaurants cannot develop targeted marketing promotions without having information on who their customers are or what they order.[19]
So, How's This Going to Play Out?
As much as restaurants might wish that delivery goes away, it's not going to. Customers LOVE the convenience of delivery and as we've found in the hotel industry, when customers love something (like OTAs), it's pretty much here to stay. The question then becomes one of how to manage this disruption. In future blog posts, I'll discuss some tips on how restaurant operators can make delivery work for them, present the results from a study I just conducted on US consumer attitudes towards delivery and also talk about some of the analogies between OTAs and the delivery providers. Stay tuned!!
[1] “Driving growth with digitally enabled convenience,” NPD Group, March 2018, p 19.
[2] ‘‘Driving growth with digitally enabled convenience,” NPD Group, March 2018, p 19.
[3] “Driving growth with digitally enabled convenience,” NPD Group, March 2018, p 20.
[4] “Driving growth with digitally enabled convenience,” NPD Group, March 2018, p. 19.
[5] “Driving growth with digitally enabled convenience,” NPD Group, March 2018, p. 19.
[6] “Driving growth with digitally enabled convenience,” NPD Group, March 2018, p. 19.
[7] https://www.wral.com/why-uber-eats-and-grubhub-partnerships-are.../17449097/.
[8] http://www.hotelnewsnow.com/articles/266528/Outside-food-delivery-services-gain-traction-at-hotels.
[9] “The Flavor Experience,” Technomic, 2017, p. 17.
[10] “The Flavor Experience,” Technomic, 2017, p. 18.
[11] “The Flavor Experience,” Technomic, 2017, p. 23.
[12] “The Flavor Experience,” Technomic, 2017, p. 23.
[13] http://foodondemandnews.com/beware-the-tyranny-of-legacy-olos-founder-tells-restaurateurs/;https://www2.olo.com/hubfs/Olo_Delivery_Ops_Guide.pdf.
[14] http://foodondemandnews.com/beware-the-tyranny-of-legacy-olos-founder-tells-restaurateurs/; https://www2.olo.com/hubfs/Olo_Delivery_Ops_Guide.pdf.
[15] https://table.skift.com/2018/05/15/uber-eats-doubles-down-on-pos-integration-with-ordertalk-acquisition/.
[16] https://thespoon.tech/olo-gets-an-18m-investment-to-save-restaurants-from-tablet-hell/.
[17] https://money.cnn.com/2018/03/28/news/companies/uber-eats-grubhub-delivery-apps/index.html.
[18] https://money.cnn.com/2018/03/28/news/companies/uber-eats-grubhub-delivery-apps/index.html.
[19] https://money.cnn.com/2018/03/28/news/companies/uber-eats-grubhub-delivery-apps/index.html.
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