A Blog by Jonathan Low

 

Jun 29, 2019

Why Delivery Costs Are Killing Restaurants

The price of convenience may not be sustainable. JL

Heather Haddon reports in the Wall Street Journal:

Delivery services typically take a 25% cut of an order. Other fees and investments to set up delivery partnerships can further squeeze a restaurant’s margins. Restaurant executives say they were too quick to accept unfavorable terms from delivery companies, fearing they would otherwise meet the same fate as clothing stores and bookstores whose sales have been felled by online delivery. U.S. food-service delivery sales reached $34 billion last year, up 13% from 2017. But those sales often aren’t translating into profits for restaurants. “The economic model is not sustainable in the way it has been structured.”
Some of the biggest restaurant operators are pushing back against fees charged by delivery companies, turning up the heat on young businesses already wrestling with rivals in an increasingly crowded market for bringing food to people’s doors.
Restaurants were quick to sign up with delivery companies such as Grubhub Inc. GRUB 2.39% and Postmates Inc. to reach more customers. Now, growing competition in the delivery business is emboldening many restaurants to seek lower rates from such companies. McDonald’s Corp. , Applebee’s and Cousins Submarines Inc. are among chains negotiating to pay lower commissions and asking their delivery partners to spend more on marketing and promotional discounts, people familiar with the negotiations said.
Restaurateurs say high fees dent their profits. They add that lower fees and more promotional spending by delivery companies could increase customer choice by enticing more establishments to offer delivery.
Delivery has quickly emerged as one of the biggest conundrums facing the food business, from restaurants to groceries. Consumers want the convenience, but the technology and logistics required to get it right—whether in-house or through an outside provider—often are more costly, outweighing any additional revenue generated.
Investors have been optimistic about the sector. Venture-capital firms invested $4.8 billion across 60 deals in food-delivery companies last year, according to PitchBook Data Inc., the most transactions since the company began tracking such investments in 2002.That flood of capital has allowed delivery companies to plow money into their businesses, but also intensified competition. Since 2017, Grubhub’s market share has roughly halved, while DoorDash Inc. and Uber Technologies Inc.’s Uber Eats division have gained business, according to an analysis of credit-card data by research firm Second Measure Inc.
Postmates is expected to publicly list shares this year. DoorDash has raised $2 billion, including $600 million last month, giving it a valuation of $12.6 billion. Meanwhile, Amazon.com Inc. said it would close its four-year-old Amazon Restaurants service this month after failing to gain much traction.
Some restaurant executives say they were too quick to accept unfavorable terms from delivery companies, fearing they would otherwise meet the same fate as clothing stores and bookstores whose sales have been felled by online delivery. U.S. food-service delivery sales reached $34 billion last year, up 13% from 2017, research firm Euromonitor said. But those sales often aren’t translating into profits for restaurants.
“The economic model is not sustainable in the way it has been structured,” said John Cywinski, president of Dine Brands Global Inc.’s Applebee’s chain, which is renegotiating with delivery companies including DoorDash, Grubhub and Postmates.
Delivery services typically take around a 25% cut of an order, executives and consultants said. Other fees and investments to set up delivery partnerships can further squeeze a restaurant’s margins, those people said. Renegotiated terms could also make delivery more expensive for customers if companies pass on costs that restaurants will no longer pay.
Mr. Cywinski said he believes customers so far are willing to pay more for delivery from 1,700 Applebee’s across the U.S., either through higher fees or menu prices. Not all restaurant executives agree.
“What I’m seeing is brands moving that burden away from themselves now to the consumer. And at this point, I’m just a little uncomfortable with that,” said Darden Restaurants Inc. Chief Executive Gene Lee, explaining to investors recently why Olive Garden’s parent company doesn’t offer delivery.
Delivery can also complicate the economics of franchise-run restaurant chains, sometimes benefiting corporate owners who rake in additional revenue while franchisees shoulder the burden of paying commissions on their profits.
For instance, McDonald’s franchisees have complained publicly that Uber Eats erodes their margins. McDonald’s, for whom delivery is a $3 billion annual business accounting for nearly 3% of global sales, in 2017 signed an exclusive contract with the Uber division in the U.S. and other countries. Company executives have pledged to improve terms for franchisees.
McDonald’s last year negotiated the commission it pays Uber down to about 15% of each order from nearly 20%, people familiar with the discussions said. Uber also agreed to pay for more ads promoting the partnership. McDonald’s and Uber representatives said the two companies recently reached a new deal. McDonald’s executives have met in recent months with other services, including DoorDash and Grubhub, people familiar with those talks said.
As they fight for market share, some delivery companies have become more willing to cede better terms to restaurants. Barry Friends, a pizza franchisee in the Minneapolis area, said he gets several unsolicited calls a month from delivery companies undercutting each other to deliver his pies. Postmates offered him a 25% commission on each order when he said he pays Uber Eats a 30% fee.
“They are just dialing for dollars all day long,” Mr. Friends said. “It’s a circus.”
Greg Flynn, CEO of Flynn Restaurant Group, a franchisee with 1,245 Applebee’s, Panera Bread Co., Taco Bell and Arby’s restaurants in the U.S., said delivery companies are beginning to make concessions to some of his restaurants.
And some restaurants are dropping delivery entirely. Hell’s Kitchen in Minneapolis canceled its partnership with Waitr Holdings Inc.’s Bite Squad delivery service last year because it weighed so heavily on margins, co-founder Cynthia Gerdes said. Waitr CEO Chris Meaux said Bite Squad’s fees are among the lowest in the industry.