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Delivery could force changes in the restaurant business model

As delivery visits replace existing visits, lower profits will push more companies to look for new options, says RB’s The Bottom Line.
Photograph courtesy of Honeygrow

The Bottom Line

If delivery is the future of the restaurant business, the restaurant business as it is currently constructed is in trouble.

The service is growing rapidly. But it’s increasingly replacing existing restaurant business rather than taking business away from grocers or other food retailers.

And as this incremental nature diminishes, the industry will have to adapt. Because delivery orders are not as profitable as other business.

For the latest piece of evidence, we refer to our podcast from last week, when Honeygrow founder Justin Rosenberg told a story about walking into one of his restaurants and finding the staff busy, but the dining room mostly empty.

“We haven’t seen a positive effect,” he said. “If anything we’ve seen profitability erode.”

Honeygrow has started taking app orders and delivery orders from its test kitchen in Philadelphia, under the theory that the kitchen can divert delivery orders away from busy locations while demonstrating a model that could work as the service takes hold.

This isn’t necessarily an anti-delivery screed. It is a caution to operators about some of the more aggressive predictions on the delivery business, and a strong suggestion that they take a deep look at their business model and operations to adapt to the profit challenges more of these orders will inevitably bring.

Some of the predictions I’ve heard have tended toward the spectacular. “The restaurant is replacing the grocery freezer section,” for instance, which is decidedly not what’s happening.

As delivery has grown in recent years, overall same-store traffic to the restaurant business has struggled. Black Box Intelligence index traffic has been down for more than three years, including a 1.5% decline in September.

And some chains that have gone big into the delivery trend haven’t demonstrated the traffic growth one would think would occur if the service was incremental. McDonald’s transaction count has fallen all year despite having delivery at about half of its restaurants.

All of which suggests that delivery is mostly replacing existing visits. And if delivery is replacing existing business, it’s taking away from the profitability because of the fees restaurants have to pay for the service. Or, if they are employing their own drivers, they have to fund those costs.

That should force more moves like the ones we’ve seen recently from Honeygrow as well as from the Atlanta-based chicken chain Chick-fil-A, which is opening two delivery and catering locations in Nashville.

Chains such as Famous Dave’s and Outback Steakhouse are also toying with the prospect of delivery-only locations.

More to the point, however, restaurants have to rethink their everyday models to adapt to a business where more customers are taking their food with them. That means smaller boxes, for instance, and fewer seats inside the restaurant and perhaps parking spaces dedicated for delivery drivers.

“Delivery is here,” James Walker, vice president of North America for Subway, said back in May. “But as delivery grows, more of your customers will want to get their food that way, and it’ll be less incremental.”

This is a challenging environment for the industry right now. Traffic is weak. Labor costs are high. Rent costs are not exactly cheap. Add into that a delivery business that adds another cost element for operators and profitability becomes an even bigger challenge.

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