- Experts say that delivery companies and restaurant chains will need to grapple with the question of how to deal with delivery in 2020.
- The cost of delivery is increasingly being passed on to the customer, in the form of higher delivery fees and more expensive menu items.
- Meanwhile, workers say they are in “tablet hell,” juggling work with multiple delivery services in addition to traditional orders.
Restaurants are delivering more food than ever before. By 2022, food delivery is set to become a $75.9 billion business, more than triple the $23.2 billion recorded in delivery sales in 2011, according to a 2018 Cowen & Company report.
Business is booming. And, it is creating some massive problems.
“Delivery is still a mess,” Fred LeFranc, the CEO of the restaurant-industry consulting firm Results Thru Strategy, recently told Business Insider.
LeFranc said that 2020 needs to be the year that restaurants sort out their delivery strategy. Currently, he said, delivery is getting the most attention as a growth channel in the restaurant industry, even though it accounts for a relatively small proportion of sales.
While chains like Chipotle and McDonald’s have been happy to report double and triple digit increases in delivery sales, a reckoning seems to be set for 2020.
“The restaurants are in pain because they have incremental revenue, but not incremental profits,” LeFranc said. “The delivery companies are beginning to shake down.”
Delivery companies are feeling the pressure to boost profits, Fortune reports. Grubhub’s stock fell by more than 30% over the course of 2019. Uber Eats is exiting certain markets, while Postmates delayed its plans for an IPO in October.
Meanwhile, chains are getting sick of the fees charged by delivery partners, with The Wall Street Journal reporting in June that many were renegotiating deals.
The era of exclusive partnerships seems to be over, as chains increasingly announce deals with various delivery companies.
McDonald’s, which originally partnered exclusively with Uber Eats in 2017, announced partnerships with DoorDash and Grubhub this year. According to a source with knowledge of the situation, the company plans to expand its Grubhub partnership nationally in the near future, and a yet-to-be announced partnership with Postmates is in the works.
A McDonald’s representative told Business Insider that only DoorDash and Uber Eats were national delivery partners, and they declined to confirm other information about the chain’s delivery service.
“We’re excited to be partnering with a brand like McDonald’s and are happy about our results thus far in New York,” a Grubhub representative told Business Insider in an email. “We’re looking forward to what the future will bring.”
The most fundamental problem is that the current economics of delivery are “not sustainable,” according to LeFranc. Currently, most restaurants or delivery partners subsidize delivery. Having food delivered simply costs more – and it may be time for customers to start paying more for the convenience.
Brace yourself to pay more for delivery in 2020
Delivery is still a “mess.” Reuters
Delivery is an expensive proposition. Drivers need to be paid, and third-party delivery providers – which charge restaurants a commission typically based on order cost – need to cover other operating costs.
LeFranc says that a significant portion of delivery companies are eating the cost of delivery, “propped up by P.E. groups,” or private-equity investors willing to allow companies to forego profitability for growth or longer-term profits. For example, in October, Grubhub – the only major delivery player that is profitable – wrote in a letter to shareholders that it does not believe a company can “generate significant profits on just the logistics component of the business.”
“Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner,” the letter reads. “That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time.”
Bart Shuldman, the CEO of TransAct, which has a back-of-house automation service called Boha, said that sorting out delivery would be the top challenge for the restaurant industry in 2020.
“I think it’s a necessary evil. The millennials love it,” Shuldman said. “So, you’ve got to figure it out. I think eventually the customer is going to pay.”
As the economics of delivery shift, restaurants are beginning to ask customers to pay more. That doesn’t mean simply charging or increasing delivery fees – it could also mean listing higher prices on online menus than customers would find in stores.
“For a long time, [third-party delivery] marketplaces were saying, you must charge what you charge in the restaurant on your marketplace version of the menu,” Noah Glass, CEO of Olo, said on a panel at the ICR Conference in Orlando, Florida, this week. “What’s changed is now you see brands charging more through the marketplace. They’re charging more through direct [delivery] channels than the ordinary store.”
“I think that’s important, because I think the commissions are not just because someone is greedy and charging too much,” Glass continued. “It’s a really high cost of doing delivery, and doing it at a high quality. So, that has to be offset by somebody paying more. I think more and more brands are offsetting that cost of delivery to the consumer, and the consumer is willing to pay.”
Companies are also looking towards channels outside of delivery for profitability.
In the October letter, Grubhub emphasized its abilities as an online advertising partner – not just a delivery service. Hudson Riehle, senior vice president of the research and knowledge group for the National Restaurant Association, said on the ICR panel this week that the industry’s “new frontier” would be partnering with other industries, such as bundling streaming services and meal delivery.
Workers are in ‘tablet hell’
McDonald’s is testing a “McDelivery Center.” McDonald’s/Business Insider/Kate Taylor
As industry insiders attempt to balance costs between customers, restaurants, and delivery companies, workers are dealing with the consequences in stores.
With more delivery partners to work with, employees say they’ve been thrust into what has been deemed “tablet hell.” Workers are juggling multiple tablets to handle delivery, in addition to even more tablets to deal with matters from walk-in freezer temperatures to scheduling workers’ hours. One McDonald’s employees said that, in addition to tablets, stores were given Bose speakers to facilitate the Uber Eats partnership – many of which were promptly stolen. (McDonald’s declined to comment on the claim.)
Part of the solution is turning to partners that streamline the process. Tech companies like Cuboh and Olo work to integrate different partners and manage the various systems.
Some companies are getting more creative in dealing with tablet hell. McDonald’s is testing a “McDelivery Center” that is intended to hold tablets from various delivery services that work with the chain, according to leaked documents obtained by Business Insider.
“We’re proud of the technologies we are bringing to restaurants as part of our continued focus on innovation,” a McDonald’s representative told Business Insider. “Our goal with the ‘McDelivery Center,’ as an example, is to continue to improve the delivery process for restaurant crew, couriers and customers.”
Delivery is huge, but it’s also messy, both physically and economically. In 2020, restaurant chains will be attacking that messiness more than ever before.