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Are delivery prices too high?

Higher menu prices coupled with delivery fees and charges could make this an easy service for consumers to cut back on if the economy turns, says RB’s The Bottom Line.
Grubhub app
Photograph courtesy of Grubhub

the bottom line

This week, I ordered chicken wings for my family of four. I tipped the driver, because I’m not a jerk, and my final cost was $84.

That seemed like a lot. In recent weeks, I’d taken that same family of mine to Applebee’s, Red Robin and Chili’s, ordered an appetizer each time and never crossed that price mark, even after the tip.

So I checked what it would have cost had I simply picked it up myself: $39. I paid $45 to avoid wearing pants.

I went back and found that my recent chicken wing forays have cost me at least 66% more than I would have paid otherwise. That premium came in the form of delivery fees, service fees and higher menu prices for delivery food. We also counted the driver tip, because as any casual-dining operator knows, tips matter in the total cost consumers pay at a restaurant.

I could have fed my kids a lot more wings had I simply gone to visit the restaurant.

I’m not the only one to notice this. The New York Times this week analyzed several restaurant chains and found that consumers paid up to a 91% premium to have the food brought to them.

To be sure, there has to be some premium attached to food delivery. Consumers are getting a service. As we noted before in the aftermath of the Big Mac deal controversy, there is a cost associated with having food sent to your door.

And the cost of third-party delivery is entirely too expensive for operators. They need to make that up somehow.

As multiple operators have pointed out to me, some consumers are willing to pay for this. There are times when it is just worth that kind of premium to have food sent to your home.

One operator once told me consumers would walk past his restaurant, head home and order delivery from his location moments later. There are stories of people who have their food delivered across the street from a restaurant.

But it’s difficult to imagine the delivery business growing all that much based on current prices. Those sorts of premiums restrict the occasions for which consumers will order delivery. Or they will restrict the markets where it’s popular, remaining confined to the urban locations where delivery is currently the most popular.

Don’t take my word for it, either:

“The average diner in the United States will not consistently pay over $25 in total cost for a quick-service restaurant cheeseburger meal.” That came from a letter to shareholders from Grubhub CEO Matt Maloney and CFO Adam DeWitt last year.

Delivery providers themselves are struggling to generate profits, as Grubhub noted, which makes it likely that a merger of some sort is in the offing. Uber recently replaced the head of its money-losing Uber Eats business with Pierre-Dimitri Gore-Coty, who had overseen its international rides business.

Delivery providers may well keep their charges low this year as they seek to maintain their market share. But they will ultimately need to raise their prices to get to profitability, and that will likely keep these prices high.

The bigger long-term challenge with delivery is what happens when the economy turns south, which could happen sooner rather than later, given growing fears over the coronavirus. If people have to cut back, it’s an awful lot smarter to cut back on something that costs twice as much as it would if you simply left the house.

Of course, fears of a coronavirus outbreak could make delivery a lot more appealing, as it has in China. But the prices attached to these delivery orders remain a long-term concern.

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