Delivering America’s meals is very big business. The $26.8 billion online ordering market is the fastest-growing source of restaurant sales in the United States, according to David Portalatin, a food industry adviser for the NPD group. While restaurant visits have remained somewhat flat, digital orders, which only account for 5% of all restaurant orders, are growing some 20% each year. Why? More customers than ever are using third-party delivery apps. Data from eMarketer.com shows 38 million people in the US now use food delivery apps at least once a month, up 21% from last year. By 2020, food delivery app usage will surpass 44 million people in the U.S., reaching nearly 59.5 million by 2023. By then, a little less than one-quarter of all smartphone users will be app users, compared to 16.3% in 2019.
When it comes to delivery apps, private company DoorDash is the largest player in the delivery space, closely followed by Grubhub and Uber Eats from Uber Technologies. Not surprisingly restaurants are turning to these delivery apps out of necessity however delivery via a third party has become a catch-22 for restaurateurs – they improve sales, but delivery fees negate a significant portion of the profits.
The delivery platforms charge restaurants for having their menus listed on their sites, which customers can use to place orders – similar to the way consumers book hotel rooms through third-party online marketplaces like Priceline, Kayak or Expedia. Restaurants pay higher fees if they want to be listed more prominently, or if they use the services to deliver the orders placed through them. On average restaurants can pay commission fees as high as 30% per order. Restaurants continuously voice that fees charged for delivery services often eliminate all profit in the transaction with margins shrinking from 69% in-house to 39% of the total cheque for delivery via a third-party App. And you can only imagine that the smaller a business is, the more it impacts their margins. Some would say, that’s the price of convenience.
However, the delivery field has become a crowded space and delivery companies increasingly find themselves in stiff pricing competition with each other. Thanks to this intense competition, not only are some of the biggest restaurant operators pushing back against fees charged by delivery companies but small and mid-sized food chains with just 25 to 50 locations recently have found they have more leverage to negotiate better terms. “The competitiveness of the market creates an opportunity for these brands to work harder to get business, and because there are so many local and national players, there are always going to be sales and account managers trying to win business, that’s going to give operators leverage,” Darren Tristano, president of restaurant research and consulting firm Technomic.
Cost has always been a challenge when working with third-parties but with rivals in an increasingly crowded market to bring food to people’s doors, how can your restaurant go about negotiating a better deal?
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Do your homework: When exploring options for third-party delivery providers, know who’s using the services already and who has had success with them. Reach out to “friendly” operators who will be willing to talk behind closed doors. Talk to multiple groups to see who is best and do a test to see which costs are better and provide the sales.
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Know Your Terms: While third-party delivery should be seen as an opportunity, according to Bonnie Riggs, director of the research firm NPD Group’s foodservice division, delivery does add an extra cost and can hurt profitability. As profit margins can be challenging when using these services, work out and understand what range or limit your company can operate within in order for your delivery to be a success.
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Negotiate as a brand: For larger brands, negotiating is a little easier. The big public companies have the power to make choice deals in boardrooms as the third-party services scramble for market penetration and exclusive deals. If you’re a smaller company exploring various third-party delivery companies as a brand instead of location-by-location will offer better wiggle room for negotiating better terms.
Medium-size brand like 14-location Flying Biscuit Café have found success by negotiating as an entire brand. Brent Fuller, brand leader and VP of operations at the bakery concept said, they’ve been able to stay mostly within their maximum 20 percent fee range by negotiating as a group rather than individuals. Going rogue makes for mediocre deals and leaves the data provided by the services under-utilized.
Whether your restaurant currently uses, wants to engage with a third-party delivery services to more easily reach your consumer base and/or envisions taking ownership of their own delivery in the future, one thing is for certain, the online food delivery market is here to stay. Delivery continues to exhibit robust growth. Driven by increasing urbanization, disposable incomes, changing lifestyles and smartphone usage, delivery offers a fresh channel for restaurants and takeaways to increase their sales. All you need to do is figure out which method is best for your business.