This week’s surprising controversy, at least in the restaurant space, came courtesy of McDonald’s and DoorDash.
The third-party delivery service, eager to market its newly minted relationship with the world’s biggest restaurant chain, offered Big Macs for 1 cent apiece this week.
The cost, as detailed by Stifel analyst Chris O’Cull, factored out like this: 1 cent for a Big Mac, plus $1 for taxes and fees, and a delivery fee of $2.99. That comes to $4. Add in a $2 suggested tip, and that single Big Mac is actually more expensive than if you simply went and got it yourself.
But that’s the point, isn’t it?
In fact, let me say this: Yes, the Big Mac was actually 1 cent. But customers still have to pay for the fact that they got their food picked up for them and brought directly to their home. That should not have been remotely surprising.
Hopefully, consumers aren’t just ordering a single, 1 cent Big Mac. O’Cull noted that adding fries and a drink to that delivered Big Mac came to $9.16. That’s cheaper than the typical cost of a medium Big Mac combo, $11.66, but any difference would be wiped out with the tip.
“As with much about delivery,” O’Cull wrote, “it’s not as cheap as it seems.”
The issue highlights a key factor in delivery going forward: Customers will bear the brunt of the cost of the service, as they should.
After all, someone is making that meal more convenient. That sort of service comes at a price, and consumers can be reasonably expected to pay it.
It’s the impact of this cost that makes me curious. How big of a service will delivery be as consumers start learning that it costs them money? Can third-party service providers get enough efficiency to keep the higher costs to a minimum? And will consumers quickly cut back on delivery if a recession hits?
It echoes some of the concerns regarding the casual-dining sector over the years—that the 20% tip hurt chains’ values and, ultimately, sales as consumers reduced frequency.
Existing delivery providers like pizza chains can provide the service at a relatively low charge to consumers because they can deliver many orders at the same time. Plus, pizza concepts in particular offer relatively strong value, and a single pizza can feed more than one person.
As it is, third-party delivery players have a tough time making money. To get chains like McDonald’s and others onto their platforms, they’ve had to cut fees. Ultimately, they will need to increase charges to make the profit they need, unless they can find a way to provide delivery more efficiently than they do now.
These higher fees will come from consumers eventually, either directly or indirectly. Sure, many restaurants view third-party delivery as a marketing strategy to get at a certain segment of consumers. But higher delivery fees and higher menu prices are already more common.
Customers ultimately notice they are paying higher prices and act accordingly. Many people inside and outside of McDonald’s, for instance, suggest that the chain’s higher menu prices recently are as much to blame as anything else for its lower traffic.
Third-party delivery is still a new service. The businesses themselves need to mature, customers have to settle into how they’re going to use them and restaurants have to adapt to their existence.
Navigating the price-value equation of delivery is a major part of it.