Food Delivery Apps are Killing the Restaurant Industry
There is a growing issue in the restaurant industry around third-party delivery apps and their dominance for online food ordering. They’re destroying businesses’ bottom line from the inside out and taking advantage of their partners’ reliance on them during COVID-19. Should the industry be afraid of these rapidly growing food e-Commerce giants?
Many restaurant owners think they’re receiving extra business from these apps and consider their commission fees as a kind of marketing expense, but they don’t realize that they’re giving away their revenue to these companies and destroying their own successful business model. There are some underrated ways to fix the problem that I want to highlight here.
Commission Rates
Commission rates and fees are the biggest, most-relevant problem that exists in the restaurant industry from these delivery apps. They can take up to 40% of revenue from the transactions on their platform. When restaurant owners look at the big picture, this number is devastating to their bottom line. Restaurants run on paper-thin margins, so almost every bit of revenue gets pumped back into operations. When they have the primary source of revenue being one (or more) of these third-party platforms during COVID-19, those margins get even smaller.
Let’s look at an example. If a customer makes an order of $30, one of these platforms could take up $12 of that order, leaving $18 for the restaurant. In some cases, this commission might be more than the restaurant pays in labor for one hour.
The commission hits the bottom line so hard, that we’ve seen some restaurants even incentivizing customers to order pickup directly from their restaurant, rather than ordering on the delivery apps. In Washingon DC, we've seen numerous restaurants emphasizing pickup orders. Call the restaurant, talk to a real human, and allow them to receive 100% of their revenue. It makes you wonder: if the rates are so bad, why are restaurants continuing their business on these platforms? The answer is simple: they think they have no other choice. If they take their business off these apps, they’ll lose all of those customers that want delivery. But there are other ways to avoid this simple problem.
Restaurants can set up their own online ordering platform and use a local courier service to perform on-demand deliveries for them. By finding a courier that charges on a per-order basis, rather than taking a commission percentage of the sale, they’ll protect their bottom line and save thousands of dollars each month, expanding their already-thin margins. They can choose how much they want to charge the customer as a delivery fee, then use that to pay the courier fee or a portion of it. Many businesses that are making this move are finding this to be a much healthier alternative and a better permanent solution.
"At our business, we heavily encourage customers to order delivery directly through us. Instead of paying up to 30% commission for the order, we pay a fraction of that in flat rates to our courier partner, OneVim," says Will Hand from our partner, District Doughnut, "OneVim provides the same drivers every time. Those drivers are familiar with our business so they provide better customer service, and we can contact them easily. Contacting a delivery app driver is like pulling teeth."
Customer Service
Poor customer service is another risk the platforms pose to the restaurant's business and brand. These apps like Postmates or UberEATS have hundreds of drivers on the road that don’t care about any individual business or customer service. Delivery is the customer-facing fulfillment of a restaurant’s business, therefore the driver should provide a good experience for the customer at their door in the same way that an employee would at the counter.
Drivers have little incentive to provide great customer service. They often don’t take their job seriously because they’re essentially running errands for people and getting paid based on their time on the road. In the same way that these platforms take advantage of their restaurant partners, they also don't value their drivers.
With a courier like OneVim, the drivers take pride in their job as a delivery service for your company. They’re rewarded for their consistency by a competitive percentage of the delivery fee, rather than being paid hourly. Our drivers treat each successful delivery like a performance for your company and reflect the way you treat your customers with the same respect at each fulfillment.
Since customer service is one of the most important pieces of running a successful restaurant business, finding the right delivery partner to iterate that is critical. Unfortunately, there’s no way to trust this with the traditional food delivery platforms. Reliability in their performance is sparse and inconsistent. Restaurant owners can stop accepting those 1-star reviews on Yelp that mention their delivery order nightmares when they move away from these platforms and build a delivery system for themselves.
Takeaway
In 2017, Morgan Stanley predicted that delivery would make up 40% of restaurant revenue, with that number creeping closer to 50% by 2022. With COVID-19, we’re much closer to that number than anyone could have imagined. If delivery orders are 50% of your business, and these platforms take up to 40% of that, then you’re giving away 20% of your total sales to these companies as a tax for having you on their platform. And, again, these numbers are growing faster than we could have ever imagined because of the coronavirus pandemic.
Long term stability and growth through COVID-19 and beyond is only going to come from innovative ways to develop restaurant delivery and to-go offerings from the inside, off-boarding with these delivery platforms. In fact, Collin Wallace - who used to be the Head of Innovation at GrubHub - has stated, "[these platforms] are in the business of finance. In many ways, they're like payday lenders for restaurants and drivers. They give you the sensation of cash-flow, but at the expense of your long term future and financial stability."
If there’s one thing you take away from this blog post - it’s not that you should download the OneVim app or contact us to be your new delivery partner - it’s that restaurants don’t have to fall victim to these platforms. There are other ways to set up your external sales so that you’re not shaving money off of your bottom line until you run out of business. Create your own platform. Your loyal customers would love to order from your website instead of having to download the Postmates app and order there. We’re seeing restaurants make this step, but more have to get on board in order to lower the trajectory of these companies and keep the restaurant industry alive.