When The Habit Burger Grill began offering delivery to its customers last year, the company did something a bit different.
It upcharged delivery orders by 25%.
“At the end of the day, with the commission structures the way they are, someone has to pay for that convenience,” CEO Russ Bendel said on an upcoming episode of Restaurant Business' podcast, “A Deeper Dive.”
It’s an increasingly common strategy. Chains, eager to jump on board to an increasingly popular service but worried about the impact such fees can have on their business, have started charging delivery customers higher prices.
“It had to be profitable,” said Bendel, whose 250-unit chain works with both DoorDash and Postmates. “We weren’t looking to add a significant sales driver that we didn’t make money in.”
The risk, however, is that such charges could limit the growth of delivery sales, or they could turn off price-averse customers. But so far, companies that have raised prices have said they’ve seen little impact, because the customers using the service frequently need the convenience more than the money.
Carl Howard, CEO of 200-unit fast-casual Italian chain Fazoli’s, said his company tested higher delivery prices in its Dayton, Ohio, locations and saw no changes in the business. Dayton is Fazoli’s biggest delivery market—the service represents 6% of the chain’s sales there.
“We raised prices and it kept chugging along,” Howard said.
Chains’ decisions to raise delivery prices—and delivery services’ willingness to let chains raise them—represents a major shift in the relationship between companies and third-party services.
The five largest delivery providers’ sales totaled nearly $10 billion last year, according to Technomic data, up 55% over the previous year.
As these services emerged, companies such as DoorDash, Uber Eats and Grubhub would not let restaurant chains charge higher prices for delivery orders, believing that would stunt the services’ growth.
Some providers’ contracts require them to keep menu prices the same, said Melissa Wilson, principal with RB sister company Technomic.
Yet that concern has shifted to operator profitability. Delivery providers charge commissions between 15% and 30% of an order. While most chains say delivery orders are larger, the charge still makes it harder for them to make a profit on the orders.
That concern has only intensified as more franchise systems have pushed delivery and franchisees express concern about those charges. The delivery fees are coming at a time when many other costs, notably labor and rent, are hurting operators’ margins.
If restaurant companies can’t make profits, many believe they’d be less willing to offer the service, and that could hurt systems’ growth.
As such, the services are now more willing to let chains charge higher prices for delivery. “Twelve months ago, that was a contentious, hot item in negotiations,” Sterling Douglass, CEO of Chicago-based online ordering company Chowly, said last week at the Restaurant Leadership Conference. These days, he said, third parties are being more “flexible” on pricing.
Wilson said that providers’ concern about the higher menu prices has faded as more chains report little pushback from consumers. “If the brands are not experiencing any reduction in orders, why should third-party care?” she said, noting that higher menu prices would yield higher fees for the providers, which get their take from the average check.
After all, home delivery of restaurant meals is a luxury, and consumers are willing to pay more for it because they often have a need for the service.
Yet that could be easily given up if there’s an economic downturn. “The overriding concern is that at some point in time if the economy starts to falter, that’s going to impact delivery in any case,” Wilson said.
Bendel said that early on in discussions, providers weren’t happy about the idea of an upcharge. But over time they accepted it. He added that Habit Burger's menu prices are low enough to remain competitive even with the higher prices.
“If you look at the price points of our products, we have always been positioned as the everyday player,” Bendel said. “Our price points on burgers compared to our direct competitors are 25% underneath them.”
For Fazoli’s, the Dayton test has worked so well that the company is planning to expand the higher prices systemwide. “People are willing to pay a little bit more for the convenience,” Howard said.
“We have to make delivery more profitable,” he added.