Restaurants look to reclaim diners, profits lost to delivery services
- Consumer demand for grocery deliveries is growing but affecting restaurant profits.
- Chains like Taco Bell are taking steps to convert delivery app users into direct customers.
- Chipotle increases delivery prices by 13% to offset costly commission fees.
- You can find more stories in Insider’s business section.
Almost four years ago, McDonald’s signed an exclusive deal that would see Uber Eats as the sole delivery company. While the exclusivity of that partnership didn’t last, the announcement signaled the start of a delivery boom as restaurants sought to partner with DoorDash, Postmates, Grubhub, and the like.
The war among the top grocery delivery providers has only intensified as consumers’ appetites for on-demand grocery deliveries increase and restaurants in the middle are forced to pay commission fees of up to 30% per order.
In good times, those fees hurt.
During the coronavirus times, they can be crippled.
According to The NPD Group, delivery orders have more than tripled compared to two years ago. And restaurants know consumer demand is not going down, but they are finding workarounds to regain consumers and profits that are lost to delivery aggregators.
For example, some chains increase menu prices listed in delivery apps to offset high commission fees – and pass the cost on to the consumer.
In this way, chains send a simple message to consumers: they pay less when they order through us.
“What we’re going to see are a whole host of different models that allow the brand to regain control – to reconnect with the customer,” said Emil Davityan, whose startup Bluedot helps operators like Dunkin ‘engage with customers directly connect by supplying their pickup truck with power on the roadside.
Here are four common strategies that chains are using to reduce third-party delivery costs and build personalized customer relationships.
The coronavirus crisis has increased the raw economy of delivery: restaurants hardly benefit from orders that come from delivery markets after paying high commission rates.
One way to counteract this is to put excessive prices on third-party apps.
The price hike for menu items found only for delivery apps began months before the pandemic. Early adopters included Del Taco, El Pollo Loco, Noodles & Company, and Taziki’s Mediterranean Cafe.
Taziki increases delivery prices by 20%. CEO Dan Simpson said he tried internal delivery to save money, but ultimately found that a price increase was the best option to offset commission fees.
André Vener, founding partner of fast-paced Southern California chain Dog Haus, said premium pricing is essential to make money on delivery.
“You can’t charge the same price [as the restaurant]. You will lose money, “said Vener, who also owns a number of virtual restaurant brands.
National chains like Chipotle are also increasing delivery prices.
In its most recent call to win, Chipotle said it had increased delivery prices by an average of 13% as a surge in delivery sales affected margins.
So far, consumers are not afraid of the price increase.
“We have seen modest resistance so far and will continue to monitor prices and adjust them if necessary,” CFO Jack Hartung told investors earlier this month.
Lunchbox provides online ordering solutions for restaurants that no longer want to use Grubhub.
Online order alternatives
While demand for deliveries has increased significantly during the pandemic, statistics give chains hope to avoid costly delivery fees: 45.8% of restaurant orders are for fulfillment, according to The NPD Group.
As a result, many chains rely on online ordering solutions from companies like Olo, Chowly, ChowNow, Lunchbox, Slice, and Toast. Many of them offer their services for monthly fees or reduced commission rates.
Texas-based franchisee TJ Schier said he uses OneDine, a startup that allows restaurants to control their delivery business and own the data.
OneDine provides Schier with a unique QR code that he can place in companies such as hospitals and hotels, where there is high demand for food deliveries from employees, patients and guests alike.
Hotel guests scan the QR code with their phone to order directly from the sandwich restaurant. No app is required.
Schier, who uses his own staff to handle the deliveries, says OneDine allows him to make adjustments when an order is available so he can plan the work and control the entire process.
Last mile delivery
Taziki’s Simpson said the 90-unit fast-casual chain is also saving money by using DoorDash to fulfill last mile delivery for orders placed through the chain’s app or website.
Chains prefer this delivery compromise as they only have to pay operators like DoorDash a fee to cover delivery costs. You do not pay an additional price for listing on a marketplace.
Simpson believes it is a win-win when consumers order delivery or roadside collection through the Taziki app, as it accomplishes its goal of “turning it into our own” [digital] Ecosystem, “he said.
Chipotle and Burger King also use DoorDash for direct delivery. Shake Shack started with Uber Eats in December.
“We made a strategic decision some time ago to invest in a delivery platform direct from BK because we knew the value of interacting directly with our guests and the improved ability to personalize their experiences,” Burger King told Insider in a statement.
Gain customer loyalty
Shyam Rao, co-founder and CEO of loyalty platform Punchh – the company behind Taco Bell’s new loyalty program – told Insider that third-party delivery apps are not going away. Incentivizing customers to order through their own networks ultimately leads to lasting digital relationships, which provisioning apps cannot guarantee.
“It is much more cost effective to keep than to acquire,” said Rao.
By tricking chains into ordering through their own branded channels, chains are also gaining access to valuable consumer data not normally offered by third parties to personalize customer marketing.
These factors caused many chains to introduce revamped loyalty programs during the pandemic.
While restaurant rewards programs aren’t new, modern loyalty platforms are being developed to tailor offers to customers based on their buying habits. Chains also use their apps and loyalty programs to lure new members with exclusive access to new menu items or to reward regular customers.
For example, Taco Bell’s new loyalty program offers top financiers additional benefits.
Chipotle, whose app and 19.5 million loyalty members envy the industry, routinely only offers online items through its branded channels. The chain’s lifestyle trays, which provide options for consumers looking for plant-based, keto-friendly, and Whole30 meals, aren’t included in third-party delivery apps.
The chain is testing a quesadilla as an online-only product in two markets in the Midwest and has recently started offering “Carside Pickup” at 29 locations in California.