Food delivery is a big mess. Here’s how companies are doing.

But there was a reason many restaurants hadn’t focused on delivery before the pandemic: delivery is a pain. It’s expensive, because restaurants have to hire drivers or outsource to third-party vendors like DoorDash (HYPHEN) Where Grubhub (WORM), who charge fees that cut into their already wafer-thin margins. It’s also stressful for employees, who must balance caring for in-store customers while filling an increasing number of take-out orders. And when deliveries go wrong, restaurants take responsibility, whether it’s not their fault or not.

Customers, on the other hand, don’t see it that way. Delivery is convenient. It’s usually pretty quick, and perhaps even better, they can do it through an app – without ever having to speak to a person.

Although dining restrictions in most places have eased, delivery rates remain higher now than they were pre-Covid. In 2019, delivery accounted for about 7% of total restaurant sales in the United States, according to Euromonitor International. After peaking in 2020, it leveled off at nearly 9% in 2021, according to Euromonitor’s forecast for last year (the company’s 2021 foodservice data was not released.)

Whether restaurateurs like it or not, delivery is here to stay.

“Consumers have become accustomed to having their products delivered to their homes,” said Joe Pawlak, chief executive 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 improving it, but also finding ways to convince customers to choose take-out or drive-thru instead.

The delivery problem

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

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

For some restaurants, the economics of delivery just don’t add up. Third-party providers charge fees of up to 30%. Restaurants, especially independent ones, already have low margins. For some, delivery charges can mean running into the red.

Some measures have been put in place to help make delivery cheaper for restaurants. Cities have capped fees at lower rates. 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 are able to negotiate lower rates directly. Others pass the costs on to consumers.
Another problem with outsourcing delivery is that when circumstances beyond a restaurant’s control go wrong, their own costs can increase. Starbucks (SBUX) CEO Kevin Johnson briefed analysts on a recent scenario that increased the coffee chain’s costs during a call in February.

“Our third-party delivery providers have experienced Omicron-related staffing shortages, which has impacted their ability to meet some of our distribution needs,” he said. “This has forced us to dramatically increase the use of much more expensive alternative delivery solutions…in order to meet high customer demand,” he added. Ultimately, the disruptions caused “a rapid increase” in costs.

Virtual marks

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

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

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

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

These virtual brands “offer truly unique opportunities to explore … urban and smaller prototypes focused on take-out delivery,” Brinker CEO Wyman Roberts said on a call with analysts in February.

For fast-casual restaurants, which have already been designed to get people out quickly, better drive-throughs and take-out incentives may be the way to go.

Better drive-thru and easier pickup

Restaurants like Burger King are investing in drive-thru.

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

Chains from Taco Bell to Burger King are adding drive-thru lanes to restaurants. More lanes can help speed up pickups – and faster drive-thru could ultimately be a more attractive option for consumers than delivery.
Chipotle (GCM), for example, plans to open about 4,000 more locations in North America. Most of them will have Chipotlanes, a dedicated drive-thru for customers who place orders digitally.

“What we saw with the Chipotlane [is]our digital business is going up, our delivery business is going down as a percentage, and the order pickup percentage is going up,” company CEO Brian Niccol told CNN Business in a recent interview ahead of the opening of the city’s 3,000th location. chain.” From an economic perspective, the best margin transaction for us is in sight, and then the customer comes in,” he said.

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

At the end of last month, Dominoes (DPZ) offered a deal: Pick up your own pizza, the company said, and get a $3 credit on your next order. Earlier this year, the chain also pledged to deliver pizza to customers in less than two minutes, but only if those customers drove to Domino’s and parked in the right place.

If all else fails, businesses may see delivery naturally drop 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 they are .. when someone goes to a restaurant,” Pawlak said.

Why you will see more
This is certainly the case at Chipotle (GCM). “The reality is that this channel has an additional cost,” Niccol said on a recent analyst call. “What we’ve seen is that people recognize it and are willing to accept it for those occasions.”

Companies have hiked prices on everything from menu items to consumer goods and say customers are sticking around so far. But it won’t last forever.

“Pricing is easier in a stimulus environment where everyone is going up,” Coca-Cola CEO James Quincey said on a recent call with analysts. “It’s a lot more difficult when there’s real revenue pressure.” Coca Cola (KO) increased prices last year, and may do so again this year if necessary.
The risk is that with rising inflation, customers will turn to higher prices, including for delivery. “Consumers are willing to pay for [delivery] now,” Pawlak said. “At some point there will be some push back on this.”

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