Delivery is the future of the restaurant business. Consumers, led by tech-savvy millennials staying at home binge-watching “Stranger Things” on their 60-inch curved TVs, are increasingly demanding their restaurant food be brought to them. And third-party delivery services are the way to go, making the service a price of doing business for restaurant operators.
Or is it?
To some, the business model among third-party services may not be sustainable enough to survive long term. It’s a difficult service to employ, and companies may find the economics prove to be too challenging to deliver nationally. “We’re pretty agnostic,” Domino’s CFO Jeff Lawrence said at the ICR Conference last month. “But we think the economics will rule the day here for aggregators to be successful at scale.” He’s not the only one who believes this.
“My guess is that it all fades away and people end up doing it themselves,” Gene Lee, CEO of Olive Garden owner Darden Restaurants, said at ICR. Darden has been slow to add the service. Lee, a well-known bear on delivery, is concerned about the future of these services as they expand and work with Darden’s competitors.
“Nobody is a clear winner and has built scale,” he said. “We’re going to go slow here. We’re very concerned about what happens with food. We’re not pleased with how long it takes.” He also noted that takeout is “big in urban and heavy suburban areas, but in a lot of suburbs where Olive Gardens are, there are no people out in Uber cars delivering food.”
Texas Roadhouse has likewise avoided delivery, for many of the same reasons as Darden. CEO Kent Taylor has actively encouraged competitors to deliver so their customers get cold food. This resistance stands out at a time when so many companies, from McDonald’s to Cheesecake Factory, are working on delivery—and investors are pressuring other chains to look into the service, in spite of the operational costs.
Restaurants have long complained about the services’ fees, which can hurt profits. But the fees aren’t the only costly consideration—some worry that delivery cannibalizes the more profitable dine-in business. At the same time, operations can be a challenge, with some even turning off delivery availability during peak hours.
But it’s the services’ long-term viability that might concern me the most. Ultimately, all of these services are going to have to make a profit. And it’s not entirely clear that consumers in places like suburban Des Moines are going to pay the prices demanded to have food delivered. “The whole world is not San Francisco and New York,” Lawrence said. “If you go to Indianapolis and Denver and Milwaukee and Detroit, I’m not sure they’re going to pay those kind of consumer fees. You might be paying double to get the food product in twice the amount of time and, oh by the way, it’s cold,” he added. “The value proposition doesn’t work.”
Lawrence said that Domino’s charges its franchisees 1% of sales for orders made on its digital platform. That’s a lot less than third-party deliverers charge—though, to be fair, restaurants using these aggregators aren’t paying drivers’ wages.
“Our platform is better than everybody else’s,” Lawrence said. “It’s a Grand Canyon-size difference in economics, and I feel that economics will rule the day.”
Ultimately, those economic challenges could force many companies to do delivery themselves, much like Jimmy John’s. Already, companies such as Panera Bread and Bloomin’ Brands, the owner of Outback Steakhouse, are doing it in-house. Darden and Red Robin are testing self-delivery, too. But, as Lawrence said, “It’s extraordinarily difficult. It’s not easy to do it at scale.”