Restaurants Have a Problem With Home Deliveries

Dogs scare away seagulls at a Sydney restaurant 1:31

New York (WABNEWS Business) — Restaurants are having a problem with orders for delivery.

At the start of the pandemic, when restaurants were forced to close their doors, delivery became a lifeline. Restaurant operators have rushed to create delivery channels from scratch or promote existing ones.

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But there was a reason many restaurants hadn’t focused on delivery before the pandemic: the delivery is a headache. It’s expensive, as restaurants have to hire drivers or outsource to third-party providers like DoorDash or Grubhub, who charge a fee that eats into their already meager margins. It is also stressful for employees, which must balance serving customers in-store with fulfilling an increasing number of takeout orders. And when deliveries go wrong, restaurants take the blame, whether or not it’s theirs.

Restaurants are not very fond of deliveries.

Customers, on the other hand, don’t see it that way. The distribution is comfortable. It’s usually pretty quick, and perhaps best of all, you can do it through an app, without ever having to speak to a person.

Although eating time restrictions in most places have eased, delivery rates are still higher now than they were before covid. In 2019, food orders accounted for about 7% of total US restaurant sales, according to Euromonitor International. After a peak in 2020, it settled at nearly 9% in 2021, according to Euromonitor’s forecast for last year. (The company’s 2021 data has not been released.)

So whether restaurant owners like it or not, delivery orders are here to stay.

“Consumers have become accustomed to having their products delivered,” says Joe Pawlak, CEO of Technomic, a foodservice consulting firm. Now, restaurants “have to figure out what to do to make it profitable.”

For restaurants, fixing delivery means not only making it work better, but also finding ways to convince customers to choose takeout or drive-thru.

The delivery problem

During the pandemic, restaurants had to switch to a delivery or takeout model to survive, said Tom Bailey, senior consumer food analyst at Rabobank.

“They didn’t necessarily make the most efficient fit,” Bailey noted.

For some restaurants, the economics of delivery just don’t add up. Third-party providers charge fees that can be as high as 30%. Restaurants, especially independent ones, already have thin margins. For some, delivery fees may be a shortfall.

Some measures have been put in place to help make delivery less expensive for restaurants. The cities have capped rates at a lower level. Third-party providers have also started offering lower rates for limited services, allowing restaurants to opt for more affordable, albeit less extensive, services. Some restaurants can directly negotiate lower rates. Others pass the costs on to consumers.

Another problem with outsourcing delivery is that when circumstances outside the restaurant go awry, your own costs can increase. Starbucks CEO Kevin Johnson explained to analysts a recent situation that increased the coffee chain’s costs during a conference in February.

“Our third-party delivery providers were experiencing staffing shortages related to the omicron variant, which affected their ability to meet a portion of our distribution needs,” he said. “This forced us to greatly increase the use of much more expensive alternative delivery solutions to meet strong customer demand,” he added. In short, the interruptions meant “a rapid increase” in costs.

virtual brands

Cheeto-flavored wings are on the menu at Cosmic Wings.

One way to tackle the delivery challenge is to separate the service from regular restaurant operations and use it primarily to attract new customers. This is especially important for casual dining brands like Applebee’s and Chili’s, which are designed to serve diners primarily in their restaurants.

The pandemic has prompted these chains and others to create online-only concepts designed specifically for delivery.

Applebee’s launched Cosmic Wings, which serves Cheetos-flavored chicken wings. Brinker International, owner of Chili’s and Maggiano’s Little Italy, so far has two virtual brands: Just Wings and Maggiano’s Italian Classics.

Virtual brands allow restaurants to promote products that travel well for delivery, such as sandwiches and wings, helping turn service from a burden into a competitive advantage.

These virtual brands “offer some really unique opportunities to explore … smaller, urban prototypes focused on home delivery,” Brinker CEO Wyman Roberts said during an analyst call in February.

For fast-casual restaurants, which are already designed to get people out the door quickly, improving drive-thrus and incentivizing takeout may be the way to go.

Better drive-thru and easier pickup

Restaurants like Burger King are investing in drive-thrus.

As customer habits change, restaurants are rethinking their layout. For many, that means more drive-throughs.

The chains from Taco Bell until Burger King, are adding drive-thru lanes to their restaurants. More lanes can help speed up pickups, and faster drive-thru could ultimately be a more attractive option for consumers than delivery.

Chipotle, for example, plans open some 4,000 more stores in North America. Most of them will have Chipotlanes, a drive-thru dedicated to customers who place their orders digitally.

“What we’ve seen with the Chipotlane is our digital business goes up, our delivery business goes down in percentage, and the order picking percentage goes up,” the company’s CEO, Brian Niccol, told WABNEWS Business in a recent interview before of the opening of store number 3,000 of the chain. “Financially, the highest-margin transaction for us is ordering in advance, and then the customer comes for it,” he said.

If chains can’t convince customers to use the faster drive-thrus, they could try something else, like a small bonus for skipping delivery.

At the end of last month, Domino’s offered a promotion: pick up your own pizza and get a $3 credit towards your next order. Earlier this year, the chain also promised to deliver a pizza to customers in less than two minutes, but only when customers drove to a Domino’s location and parked in the right spot.

If all else fails, companies may see delivery naturally shrink as the service becomes more expensive.

higher prices

To make delivery more profitable, companies have made it more expensive.

In many restaurants, “menu prices are higher for delivery than when someone goes to the restaurant,” says Pawlak.

That is certainly the case with Chipotle. “The reality is that the channel comes at an additional cost,” Niccol said during a recent analyst call. “What we have seen is that people recognize it and are willing to accept it for those occasions.”

High prices don’t stop Americans from buying 0:56

Companies have hiked prices on everything from menus to consumer goods, saying customers haven’t left so far. But that won’t last forever.

“It’s easier to set prices in a stimulus environment where everyone else is going up,” Coca-Cola CEO James Quincey said during a recent call with analysts. “It’s much more difficult when there is real pressure on revenue.” Coca-Cola raised prices last year, and may do so again this year if necessary.

The risk is that, with inflation on the rise, customers could resort to higher prices, including for delivery. “Consumers are willing to pay for [la entrega] now,” Pawlak said. “At some point, there’s going to be some rejection of that.”

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