Who wins in food delivery?
Food delivery has become the normal expectation for many consumers, which includes Underdogs Too. Personally, although I consider myself a person who will always try a new idea; I was probably one of the last people to get onboard with food delivery at my flagship restaurant, the Taco Shop at Underdogs. Currently, delivery makes up almost a quarter of our daily revenue there, while our dining area has seen a significant decrease each week. This has affected our operations, staff retention, and our bottom line. Let’s examine its cause and effects.
I want to first go over the challenges we face at our restaurants and then go over some financial examples on the impact of delivery.
Challenge 1: There is no integration into our Point of Sale for delivery orders and delivery times.
When the delivery companies first started (DoorDash, UberEATS, Postmates, Grubhub etc.) they wanted to send us orders via email, calling on the phone, or fax. This was obviously not scalable in any way, so many of these delivery companies chose to have a tablet to receive orders. The issue is that these orders then need to be transposed into our POS from the tablet. Many times, this is done manually, however we also subscribe to a service that maps the delivery orders to our POS. This is way better than the manual process, but the mapping sometimes fails or is incorrect. These mapping services do not have direct partnerships with all the delivery companies, so sometimes there are strange errors or bugs, and we don’t see the orders at all. Lastly, the customer facing menu could be incorrect or limited, as every new delivery partner requires another external menu to manage in their own specific portal!
Additionally, when an order comes into the kitchen, and we make the order, there is no way for us to control when the delivery driver shows up. We have had drivers show up in 5 minutes, and some drivers show up in 45 minutes, and some not at all! Each delivery platform allows you to set a kitchen prep time, but most of the time these settings are 100% ignored. This results in many unhappy customers with cold food, delayed food or food not received. Also, when the delivery partner does not show up, or we must remake food, this comes right out of our pocket. The delivery partners offer no reimbursement model for this that is manageable and scalable.
Challenge 2: We have no control over the customer transaction or when the food leaves our location.
This was one of the major reasons why I did not want to offer delivery. First, all the financial transaction with the customer is with the delivery partner. That means if a customer calls us directly with an issue with their order, we have no control to refund, correct or adjust their order. We can send them a gift card (which essentially means we are getting double-dinged) which we often choose to do. However, we can’t adjust a customer’s delivery order , which leaves many customers upset, and often leaves them feeling cheated.
As a store owner, we also don’t receive the revenue for a week on delivery orders, so we have to front the cost to pay for the labor and food packaging associated with the sale. In essence we are loaning the delivery company money for a week! The delivery companies also charge us for “error” charges which in theory would cover a mistake from our restaurant. We get charged for errors if drivers do not show up, show up late, or don’t deliver the correct food. We have no visibility to verify/check why we are being charged an error.
Lastly, when the order leaves our door, we have no control on what happens from there to the destination point. Is the food being stored in bag warmers? Is it being shaken around or worse, has it been touched or eaten? There have been several articles written about drivers eating the food that they pick up! Here are a few:
Challenge 3: There is no throttling for delivery, which can greatly increase ticket times.
I previously wrote a separate blog on this, which can be found here: http://www.underdogstoo.com/where-the-is-my-food/
The short story is, there is no way to automatically throttle getting 30 delivery orders sent to us in 1 minute, and thus overloading the kitchen and creating long ticket times for all customers, including dine-in. The delivery companies will never investigate a throttle because they want to flood us with orders so they can make money, as they don’t care the dine-in customers!
Challenge 4: There is a revenue loss as well as a customer loss to delivery acting as a double whammy.
Of course, one major issue is the revenue share that the delivery partners take from the restaurant. This could be anywhere from 20-35% depending on how well of a negotiator you are. It doesn’t take a math whiz to know that you will not have the same profitability for the same item with delivery as dine-in unless you raised your delivery menu prices. (which many restaurants now do). So, as a consumer who cares about value, on average, you are spending 15-25% more on the same food for delivery when you add in delivery fees, service fees, and restaurant or delivery company upcharge.
However, the biggest contributor to less profit is not necessarily the revenue share, additional labor costs or packaging costs associated with deliver. It is in fact the conversion rate of dine-in customers to delivery customers. In a very simple example, if a customer comes in 4 times a week and spends $20 each time, that would be $80. Let’s assume we make 10% profit (which is double the industry average) on that revenue, this would generate a profit of $8. If this customer now does delivery 3 times a week and dine-in once per week then the revenue is now $68 after the revenue share subtraction. With a 10% profit of $6.80,this is a 15% reduction in profit! That is a significant loss, which could mean the inability to pay bills and rent on time.
Looking at a larger scale below is an example of a store and the profitability if there was no delivery, delivery only, and combined. Adding delivery increases revenue but decreases profits. This is because in general, most stores only receive 20% new customers from delivery. Most of the customers are in fact conversions from current customers. We have calculated that it will take a rate of 75% to 80% of new customers due to delivery to have zero impact on the bottom line. As an industry, this is an unrealistic expectation, and an unrealistic value to achieve. In the chart below the margin went from 35% to 27% with delivery despite the increase in revenue.
That begs the question, why don’t you just STOP doing delivery all together. (We tried this, and it was a disaster!) The issue is that the customers will just go elsewhere, and the overall revenue will drop significantly. As a business owner, we would rather take some small profit on a transaction than zero. The loss of revenue and customers (not offering delivery will also lose dine-in customers), can lead a restaurant to go into the red, and not be able to pay their bills, including rent!
Challenge 5: The FOH staff receives no tips for delivery.
I can write an entire blog on tipping in the hospitality industry, but the fact is that servers and bartenders rely on tips to make a living. In most restaurants without a host, the servers or bartenders will deal with delivery. This could mean a variety of things, including:
1.) Processing orders
2.) Building the order
3.) Checking the order contents for accuracy
4.) Interacting with the delivery driver for the order
They do all of this for no tip, while a regular to-go customer or dine-in customer is waiting. This “waiting period” or delay in service to those to-go and dine-in customers could potentially cause them to not tip or reduce their tip due to service time or a feeling of being ignored. This affects the employee’s “take home pay” and really makes employee retention difficult. We all know that pay is not the only factor for staying at a job, but it certainly is a large factor.
Most restaurants, including mine, cannot afford to have a dedicated person to process delivery orders because the volume and gross profit for deliver does not justify the labor cost. “Just increase the volume” you say, well this then affects kitchen ticket times, causes more customers to not dine-in and will eventually create a large rapid decrease in revenue. (see challenge #3 above). This is a very vicious cycle!!
Conclusion: Who wins in food delivery?
The clear winner in all of this is clearly the delivery companies. As they scale and add more restaurants, their profitability goes up.
On the consumer, it is obvious that people are ordering food delivery due to its convenience, even though it costs them an average of 25% more.
Zion & Zion, n.d.,
However, that extra spend is going direct to the delivery company and not to the restaurant. This extra spend is disguised as delivery fees or service charges. At this rate, many restaurants will be priced out of the market, and will be forced to close or drastically change their business model. In San Francisco, we are beginning to see this with weekly closures of restaurants; some that have been open for over 15 years! For the first time in the history of San Francisco, there are more restaurant openings then closings!
So, before you hit that deliver button on your phone app, think about coming to dine-in. A restaurant is more than a place to eat, it is a community center, a place to meet old and new friends, and a contributor to fundraising and neighborhood enrichment. Help us stay open!