This week we are talking to Daniel Flaherty, VP of Business Development here at FoodTec. Daniel brings nearly a decade of experience to his current role where he works closely with most of FoodTec’s customers helping them to solve today’s business issues. This blog is the first in a series of Q&A posts where we will dive into the big issues in the hearts and on the minds of restaurant owners that we hear about when we’re on the road.
Today’s topic: Third-party delivery!
When you go and you’re having a conversation with one of your clients and the topic of third-party aggregators and delivery is raised, what is it they are specifically concerned about?
Daniel: Whenever I talk to multi-units – or even independents for that matter – the feeling is that sales seem to be slipping right now and so they feel the need to advertise their store, or stores, on all of these aggregators – GrubHub, DoorDash, UberEats, Amazon restaurants (They always mention the big ones, though there are lots of smaller regional versions of these popping up as well). And when I ask, “Why?” They say, “Well sales are off and I know I’m missing out on possible orders from these sites so I need to be on this [aggregator].”
Are they attributing the sales slipping because they do not have a footprint or visibility in this new consumer space?
Daniel: I think that’s partially correct in that sales are slipping due to these aggregators, but I think it’s for the different reasons that they’re not paying attention to. So, five years ago, the delivery space was consumed mostly by pizza places – and you had some other segments in there as well and that was about it. But now with GrubHub, DoorDash, UberEats etc being in the delivery business, you are now not competing for the delivery dollar, which predominantly had been pizza, you’re now competing against McDonald’s and Chick-fil-A and all of these other places that never played in the delivery space.
So, what’s the typical commission cost that a restaurant would be charged by these delivery companies?
Daniel: On the low end, a lot of these companies are charging about a 20% commission but they do go as high as 30% with UberEats. Now for 30% UberEats will take the order from the consumer and process the credit card, and deliver it because it’s UberEats’ transaction. They send the order to the store on a tablet and it just tells them an order number and what to make. There’s no consumer information given to the store because Uber keeps that data for themselves. So what is actually happening is that the restaurant becomes a ghost kitchen for Uber. They show up, they pick it up, they deliver it to the customer.
With commissions as high as 30%, on an average order what is the margin that restaurants are working with?
Daniel: That was going to be my exact next point. So industry standard, for an owner operated store might flow through somewhere between 20 to 25% profit. On an absentee owner type of store, it’s maybe about 10 to 15%. So, if you’re only clearing 15% EBITDA, paying out 30% to someone else, why would you do this?
They are discounting their business almost to a point of no profitability. And even if they do get a better rate than 20 or 30%, then they’re still doing the same thing running a discount for “15% off all orders right now”, where they’re offering a coupon. But they wouldn’t think of necessarily running a standard coupon for 30% off all orders. But with a third party that’s essentially what they’re doing (but giving the 30% to another company instead of the consumer).
So really the only way it makes sense for a restaurant to engage with a third party is if they could 1) actually acquire new customers directly so they can market to them directly, or 2) that they would be able to cut those commission fees to such a degree where they could actually make it as a profitable business channel.
Daniel: What some people have started to do to “get” at these guys is direct advertising. Something similar to the hotel industry to incentivize customers to order direct. For example, “When you order direct from us, take 10% off every order”, which is a great way to get more direct customers. What would be great is if you could target, or market directly to those customers who ordered through a third party and say, “Here’s 2 bucks or 20 bucks off your next order when you order direct.” You know, “Thanks for trying us.”
They are planning that the aggregator brings a new consumer to them and hoping the consumer converts to ordering direct from the store in the future. Does it happen? Maybe, but doubtful.
Do they also have parity clauses, similar to the hotel industry? In that, whatever price you set on your website has to be the same or match the prices offer on the third party – Neither one can actually offer lower prices than the other unless it’s a special audience or closed group. Is there a parallel that way in this aggregator environment?
Daniel: For a very long time GrubHub forced stores to sell at the exact same menu price that they offered in store – exactly what you’re mentioning. But then DoorDash came out and said, “Hey restaurant, you do whatever you want for your pricing, if you want to sell it on DoorDash at 10%, 15% higher, so forth”. So, lot of restaurant clients really liked DoorDash as they could increase their prices to recover commission costs. And, from what I’ve heard, GrubHub is slowly starting to let clients do this also because competition, from the likes of DoorDash, is requiring them to bend those rules.
So what’s your recommended course of action for these restaurants facing this issue?
If you want to grow your business over the long term and you want to maximize profitability, it’s a much lower cost option to create a loyalty plan, that includes email marketing, online acquisition strategies, advertising etc. to grow your customer list. Not only will you make more money but you own all of your data too.
Some operators are already doing this, most notably the industry leader, Domino’s. Richard Allison the new CEO of Domino’s was on CNBC – we highlighted it here on our blog at the time – and he said, “I’m not sure why I would want to give up our franchisees margin or give up the data in our business that is so important to us.” You know, he nailed it. For them, they believe that its an absolutely dangerous path to go down the third party route. But the funny thing is, while a lot of people in the industry really look to Domino’s or always turn to see “What is Domino’s doing?”, it seems this time round all those people who always looked up to Domino’s, now say, “Well, I’m smarter than Domino’s and I’m going to do it anyway.”