Is Anyone Winning with Third-Party Delivery Companies?
Are third-party delivery companies like DoorDash, GrubHub, Postmates, and UberEats creating value for any parties in the restaurant ecosystem?
Nothing has disrupted the restaurant industry in the last five years as much as third-party delivery apps. And forecasts predict things aren’t slowing down anytime soon. According to a report by Allied Market Research, the global food delivery mobile app market is expected to hit $16.6 billion by 2023, a compound-annual growth rate of 27.9 percent.
While impressive in scope and forecasted numbers, who is really winning in this market?
Let’s look at the three sides of this marketplace: restaurants, customers, and the third-party companies themselves.
Third-party delivery companies once brought a fresh and appealing option to restaurants looking to attract new and ancillary revenue. As a minor incremental strategy for marketing and expanding beyond its current customer base, third-party delivery apps were poised to deliver new customers and a modest “new” revenue stream. Despite the expensive margins (30% or more), the benefits seemed to outweigh the cost. The reality is that these platforms have cannibalized dine-in business.
Morgan Stanley reported 43% of delivery patrons acknowledged that a meal they ordered with a courier service replaced one they would have otherwise eaten at a restaurant. Not only does the restaurant lose 30% of these sales (commissions to third-party delivery), but the restaurant also loses the ability to sell high-margin items like cocktails, coffee, and desserts.
The situation for restaurant operators is perhaps best summarized by one restaurant operator as “death by a thousand cuts” in this NY Times article about the effect third-party delivery companies are having on restaurants.
While consumers have sampled many third-party delivery apps as a new mechanism for meals, the reality is that the cost, timeliness, and quality of their orders have been underwhelming.
Nearly 30% of delivery orders are “unacceptably late” and/or the food is the wrong temperature, according to a recent survey. In fact, customers experience problems with one out of every four orders fulfilled by third-party delivery companies. Not to mention the staggering, and truly disgusting, report that 28% of delivery drivers admit to sampling food from your order as they deliver it.
In addition to poor quality and timeliness, delivery fees add up. It is not uncommon for delivery charges to inflate a menu item by 50% or more. Plus, many restaurants have begun to charge more for menu items on their delivery menu to offset the high commissions they are being charged by delivery apps. How much of the cost can consumers bear over time?
Third-Party Delivery Companies
With all the money being paid in commissions and delivery fees, clearly the delivery companies themselves are the real winners in this marketplace, right? Actually, no.
As Wedbush analyst Dan Ives predicts, Uber may need to “significantly curtail” or “possibly shut down” its food ordering business in 2020, because “UberEats went from an asset to a liability for the company because it is unprofitable.” The CEO of GrubHub told shareholders in a letter that their business wasn’t as good as his competitors seemed to think, and scale will not help the poor economics of the business. GrubHub has even considered a sale of its business, and UberEats recently sold its interests in India to Zomato in an effort to stem losses.
And how are delivery drivers doing? A thriving part of the gig economy? According to a study released just this month, the average hourly salary for a DoorDash driver (a “Dasher”) is $1.45, with around one-third of Dashers making less than $0 per hour after accounting for basic expenses. The debate around the contract nature of this type of work additionally looms in the industry and will have economic and legal ramifications to these gig workers and gig economy employers.
If no one is winning with third-party delivery, then what is the end game? A few years ago, we didn’t know the realities of this marketplace as we do today. How the marketplace evolves with taxes, regulations, and permits remains to be seen but restaurant operators need a renewed strategy for encouraging dine-in customers. In other words, it's time to get back to basics!