OK. I am going to upset a lot of people with this post tonight. I’ve been at this for far too long and have watched our customers work way to hard to grow their restaurant companies. And so, I’m throwing my hat into the ring on this 3rd party delivery issue.
As a restaurateur, are you feeling confused about your options of how to handle 3rd party delivery services? Are you being bombarded by Doordash, Postmates, UberEATS and so many other providers promising you the moon? Promising you more sales?
Well, good luck with all that! It’s a shakedown! None of these services are adding value or growing your sales. It’s a ticking time bomb.
Read this article in the Washington Post last week, “Not All Restaurants Are Fans of Food Delivery Services“. The author does a great job at demonstrating how restaurants are losing control over their brand and off-premise experience.
Need more? Check out these employment reviews about Doordash one of the darlings of the industry. That’s a whole lot of bad will right there. These are the people that are delivering your brand to the consumer. Do you really want your restaurant to be reflected this way?
And then there are these guys! These heavy hitters are claiming that they are going to revolutionize the business. Not a restaurant operator in the bunch. Technology engineers that are pitching their “fast growth” stories to Wall street and getting billions of dollars in funding. Do they have any appreciation for restaurant operations?
None of these companies seem to care about your restaurant operations. If they did, they would appreciate how complicated they are making things for restaurants. As a matter of fact, they are working hard to further disrupt your restaurant operations, and they are taking a piece of the action while they do it. And because this is a technology play, people will get super rich in the process. This has Dot Com all over it. The business model is doomed.
Well, I am really concerned about where this is going. It’s a runaway train and it’s going to create dismal economics for our industry. A lot of restaurant companies are going to go out of business in the process.
Let me share with you that I have worked in restaurants for more than 20 years. And I can tell you, delivery for takeout is (and always has been) a challenge.
Let’s work on an example:
- Let’s take a transaction of $12.00 (sandwich, drink and cookie)
- If you are a GREAT operator, your gross margins are at best 35%.
- This gives you a gross profit of $4.20
- 3rd party delivery services are charging 18% – 25% as a commission.
- This equates to $2.16 to $3.00
- This reduces your gross profit to $2.04 – $1.20.
- Your realized gross margin is actually 17% – 10%, depending on your arrangement.
- If you look at the math, you will actually see that with this scheme, you are splitting 50% or more of your gross profit with these services. It’s just not affordable.
Now, I can tell you from experience that with a gross margin this dismal, it is impossible to make any money on this transaction. In fact, I might argue that you will lose money on this transaction and you are better off not taking the business. This is steep discounting. It’s not going to work.
So go ahead! Ramp up your takeout delivery business with these 3rd party players and watch your profits fly out the back door. Watch your customers walk out the door and watch as you lose total control over your takeout business. BEWARE!
Here are some additional facts:
- The customer is not yours. The customer belongs to the 3rd party delivery company. The orders are being placed in their database and systems.
- Depending on your agreement, the more you pay and the more transactions you allow, the higher your listing and more visible your restaurant is on their websites. They will drive more “non profitable” business your way.
- Not one of these 3rd party companies is making any money. They are ALL being funded by Venture Capital and Private Equity.
- The business model is not sound. Neither restaurants or the delivery companies can sustain this model.
- Their valuations are starting to decline.
If you want to deeply discount your products and quickly cannibalize your sales, sign up for these 3rd party delivery services today. It’s a sure way to lose your money, and fast. Oh, they will bring you a “ton of sales”. Thats for sure. But you will lose money on each one. Good luck with that.
Delivery for takeout has always been a challenge because the cost of distribution is prohibitive. Delivery for catering works because the order values make sense. You can afford to absorb the cost of distribution when an order is a few hundred dollars.
This topic is complex. My recommendation for restaurants is that they should focus on the basics. Do what you do well. Focus on your core business strategies and don’t run head on into a technology gold rush.
If you want to do delivery, then do it yourself. Do a good job. Take good care of your customers and just do a good job. Pizza operators have done that forever. Just ask them.
Focus on a solid catering and takeout program and take care of the last mile yourself.
My two cents.