In just a few months, people’s work and meal routines all around the world have changed dramatically. Over one hundred countries have gone into lockdown and non-essential movement has been restricted. Food delivery seems to be one of the few bright spots in the economy, saving time and being a source of solace as people order in or send food to their loved ones whom they can’t meet in months.
Restaurants were quick to sign up with fast-growing delivery companies such as DoorDash, Postmates, and Uber Eats. The promise of access to a large market of customers with these apps already installed on their phone is alluring to struggling food businesses.
Yet the rapid onboarding of these restaurants has revealed onboarding fees and high commission fees - sometimes up to 35% of the bill - charged by these delivery platforms. But in the drive to go digital, restaurateurs frequently end up footing the bill in delivery wars.
The appeal of delivery platforms compared to in house delivery
Why do restaurateurs still work with third-party delivery platforms even as the terms offered are unfavorable?
Traditional retailers selling books and apparel had been the first victims as consumers moved from bricks to clicks thanks to ecommerce giants like Amazon. With the benefit of watching another industry contract painfully, restaurateurs were keen to go digital as soon as a platform was widely available. It seems so straightforward.
Cook food → Get on various delivery platforms → Reach increasingly digital-savvy consumers who order online for delivery
Next, the cost of building a complete in house delivery infrastructure remains high. Sandwich-and-soup chain Panera Bread Co. had spent over US$100 million and six painful years building an online ordering and delivery system and improved kitchen operations.
The drawbacks of working with food delivery platforms? It’s costly working with third-party apps as high fees dent profits. Imagine paying well over a quarter of your revenue just to stay in business.
Restaurateurs also lose control of valuable customer data and no longer have a direct relationship with their customers.
But food delivery companies say that their prices are justified given the upfront investment required and ongoing operations. Backed by venture capital financing, startups have rapidly built order taking systems, backend logistics, and hired delivery drivers.
Boiling tension between restaurants and delivery platforms
Despite charging high platform fees, it’s not as if delivery companies are rolling in cash. The Wall Street Journal (WSJ) reported that delivery companies spend heavily to build brand recognition and retain market share: DoorDash and UberEats now account for more than half of the food delivery market in the US.
Yet, profitability remains a challenge for all in the food business with intense competition, high marketing costs, and driver incentives payouts.
Many large chains like Applebee’s, McDonald’s, and Subway are seeking lower commission rates from delivery platforms. Imagine how smaller businesses are hurting even more.
Recently in Singapore, tensions exacerbated by the lockdown and lack of business from dine-in customers came to a boil. A business owner, Colin Chen, who owns The Refinery in Singapore, detailed how the poor unit economics of food delivery services ended up hurting his restaurant.
After accounting for variable costs like salaries, ingredients, and packaging, restaurants frequently have barely any income leftover for other overheads and activities like paying rent, buying equipment, or improving recipes.
His Facebook post picked up steam and led to an official clarification from local food delivery platform GrabFood. Then, GrabFood provided a clarification with a zinger - that GrabFood wasn’t profitable either.
Consumers eat, delivery platforms and restaurants starve without in house delivery
Let’s not forget that without restaurants, none of us would get to eat delicious food, and delivery platforms would not exist at all. The question is how to split the pie equitably.
Here are a few other scenarios to consider, since restaurants and delivery platforms already aren’t making much:
Make customers pay more
Customers might not be willing to pay more. 85% of consumers are not willing to pay more than $5 for delivery according to Tillster's Delivery Index in 2019.
Faced between having no deliveries and customers or shutting down completely, restaurants don’t have a choice but to eat the cost to keep their patrons while earning dangerously thin margins.
Pay riders less
If we chose to pay riders less to give more to restaurants, there may not be as many willing riders. Riders need to be out and about regardless of weather elements, spend wait times at the restaurant, and ultimately deliver the food. Already, we know that riders are less protected for their efforts, rain or shine.
Cook and deliver more food in higher volumes
For restaurants, simply increasing order volume is not a panacea to the problem of thin margins. For instance, Panera Bread Co. had to improve kitchen operations to handle higher volumes and increased customizations with the implementation of their digital ordering system. This took them years.
In Singapore, high delivery growth that wasn’t balanced by operational upgrades has manifested in long wait times for food delivery drivers at popular restaurants such as Din Tai Fung. Restaurant staff had prioritized takeout customers.
And if some restaurants are making a loss off food deliveries, increasing order volume only results in accelerating losses.
The odds seem stacked against restaurants on delivery platforms.
Restaurants doing in house delivery don’t have to lose with different ways to deliver digitally
So what can restaurants do to keep existing and new customers happy with food deliveries, and go digital without eating into margins?
In tough times, food businesses need to stay creative and flexible. So, instead of depending on food delivery apps to market their restaurant and advertise their menu, many restaurants have also started managing their online orders in-house themselves without frills.
This allows restaurants to tap on a whole new market of online customers, expand their reach beyond on-premise dining, manage order volume, and avoid paying excess fees.
Some of these restaurants hire drivers from a pool of part-time delivery drivers (usually taxi drivers or rideshare drivers). There are messaging applications, such as WhatsApp and Telegram, where large groups can be found (contact us if you need introductions).
The drawback is that the end-to-end experience isn’t as instantaneous or smooth as ordering from a delivery giant app. Orders are also managed on the fly.
No-frills in house delivery means restaurants take control of their orders and growth
Linda Tan's parents run Signature Noodle House, a comfort food staple for locals living in Singapore’s east side. The restaurant is famous for generous servings of wanton noodles, dumplings, chicken wings and other delicious treats.
Linda spends most of her time these days marketing the restaurant on social media, talking to customers and arranging payment via bank transfer (which minimizes credit card fees).
This has two advantages. Firstly, Linda can tap existing loyal customers and reach new customers who are eager to support local F&B establishments. She can do this without the need to offer promotions to stand out, retain customer loyalty and build relationships, or pay hefty delivery platforms hefty onboarding fees.
Secondly, by hiring part-time drivers on an ad-hoc basis, Linda maintains margins necessary to sustain their business without being at the mercy of any delivery giant.
Delivery fees are paid by the customer, and cost anywhere between $10 to $15 - not much different from the service fees paid to delivery apps but they go straight to the driver, no middle man needed.
Food delivery, especially in house delivery is our new reality
Food delivery is our new reality. COVID-19 doesn’t help restaurateurs either. The industry is now facing two major shocks: disruptive technologies and a global pandemic.
Getting food delivery right is tricky. It requires a complex mix of developing technology and logistics expertise to get right and management chops to onboarding and retaining a large group of driver contractors. At the same time, growth needs to be sustainable. It makes no sense to scale up a food delivery business massively when costs are simply absorbed by restaurants.
Restaurateurs need to play by the new rules consumers set or risk going out of business slowly like food and apparel. Signing on a delivery platform is not a simple solution for the host of complex issues buffeting the F&B industry now. The important part is to grow orders and improve in house delivery operations sustainably.