Stomachaches & Indigestion: Third-Party Delivery Programs
Do Third-Party Delivery Platforms Make Sense for Restaurants?
By James Bailey, CPA
The popularity of digital and online ordering continues to rise in all industries. Consumers are adopting new technologies that simplify their lives, and the restaurant industry is no exception. When people talk about online ordering, they’re typically referring to delivery and carryout. Recent studies note “60 percent of U.S. consumers order delivery or takeout once a week.”1
Third-party delivery platforms are growing with companies like Grubhub, Uber Eats, Postmates, DoorDash, and Foodler capitalizing on the opportunity. Among those platforms, Grubhub is the segment leader. Grubhub’s “2018 revenue is expected between $966 million and $983 million. That’s about half of the year’s revenue in the entire segment.” 2
Shifting the Restaurant Delivery Business Model or Causing Indigestion?
These platforms were once believed to commence the evolution of the delivery business model. Instead, reality has set in and given restaurant owners indigestion and stomachaches. In addition to quality control, the list of issues with these platforms is long and concerning. Delivery platforms have been accused of:
- charging inaccurate fees,
- continuing to increase fees with economies of scale,
- diminishing restaurants’ online presence and ability to capture customer data,
- creating fake restaurant websites,
- and using Yelp to direct phone calls towards their platforms to increase billable fees.
Restaurant Profit Margins: Thin, Thinner, Thinnest
Once thought of as partners, these platforms have squeezed the industry’s already thin margins. If a typical profit margin for restaurants is between 6-12%, how can companies absorb the additional delivery fees between 10-30%? If you didn’t experience indigestion or a stomachache initially, ponder those percentages for a moment. The elephant in the room is asking the question “do third-party delivery platforms currently make financial sense for restaurants?”
David Portalatin, vice president and foodservice industry advisor at The NPD Group notes, “over the last five years, the greatest source of growth [in the industry] is digitally ordered carryout. It’s the digital element that is the key driver. We can apply that to all aspects of the restaurant experience, whether it’s delivery, carryout or even on-premise.”3
While most of the promotion and advertising hype surrounds delivery, carryout programs are often not a priority. Carryout programs enable successful companies to give customers an easy ordering experience without all the added fees. Consumers can still enjoy the pleasant confines of their home after they pick up the order.
Reembracing Direct to Consumer Alternatives
In reality, 70% of customers say they’d rather order directly from a restaurant, preferring that their money goes straight to the restaurant and not a third party.1 There may be a cure for indigestion and stomachache mentioned earlier. Restaurant owners and operators must reembrace the challenge of direct to consumer alternatives to better serve their guests and everyone’s pocketbook.
With the uncertainty surrounding the ability of third-party delivery platforms to economically fill the need, new options, such as cloud kitchens, have already started to emerge. What is a cloud or ghost kitchen, you ask? Stay tuned because that’s a story for another day!
James Bailey, CPA, Senior Manager, leads Adams, Brown, Beran & Ball, Chtd.’s Restaurant Industry niche. With over fifteen years of public accounting and restaurant consulting experience, he strategizes with ABBB’s Restaurant clients on the unique challenges they face. Additionally, James is a keen researcher of cutting-edge technologies in the industry. For more information, visit abbbstg.wpengine.com or contact him at firstname.lastname@example.org.