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OPINIONFinancing

Delivery is growing up, becoming incremental and profitable in the process

Does delivery drive incremental sales? RB Executive Editor Jonathan Maze and Editor-at-Large Peter Romeo offer opposing points of view. For the alternate take, see The Bottom Line.

reality checkMainstream restaurants have embraced delivery with all the reserve of a 14-year-old catching the Beatles on “Ed Sullivan” circa 1964. Now the industry has enough experience with the service to make a cooler, more informed assessment. Yet it might as well hand out paper bags to counter the hyperventilating. 

All signs say delivery’s appeal is growing, with even hardcore skeptics such as Chili’s Grill & Bar opting to finally join the parade. And, to the best of our knowledge, not one convert has reversed itself and dropped the option. 

The ranks of delivery adopters are likely growing in part because of the herd effect. No one wants to be left out if indeed this new sales channel generates the biggest sustained sales upswing since mom scrapped cooking to enter the workforce. Despite doubts about profitability and whether delivered orders would have otherwise been picked up or eaten at the restaurant, they’re willing to take a chance.

But resistance is also being worn down by mounting evidence that delivery can generate truly incremental sales and profits. Dave Deno, the new CEO of Outback Steakhouse parent Bloomin’ Brands, testified to that effect in his most recent conference call with analysts, remarking that “This business is profitable” and “reaching scale.”

“We remain very excited about the incremental opportunity this represents,” Deno said. 

Chili’s is an example of a former skeptic finding religion as other chains prove that delivery, well, delivers. Its sister concept, Maggiano’s Little Italy, jumped into delivery early in the boom because its products traveled well. Chili’s waited on the sidelines, convinced the economics of partnering with an outside service didn’t make sense and that ceding control of its food was too risky. Now it’s shopping for a third-party partner.

“The next thing is, ‘OK, now let's talk about how we all make money off of this,’ and we're starting to feel good that there is a model now that allows us to do that,” said Wyman Roberts, CEO of parent company Brinker International.

The profitability is coming in part for users of third-party services (Bloomin’ does its own delivery) from a newfound willingness by those would-be partners to shave their commission rates, which typically ranged from 20% to 30%. 

“As that marketplace becomes more competitive, you’re seeing what you’d expect to see: people fighting for share. People partnering better. And people working together better,” Roberts said.

Operators such as The Habit Burger Grill and Buffalo Wild Wings franchisee Diversified Restaurant Holdings (DRH) have also found that customers are willing to accept higher prices for delivery, further helping margins. The cost of delivery was running at 21.4% for DRH in the first quarter of 2017. As of last month, the rate had dropped by nearly 10 points, to 11.6%.

Even the incidences of customers adding high-margin desserts or beverages to their delivery orders seem to be climbing. The Cheesecake Factory revealed that its attachment rate for dessert is higher for delivery (at 20% of orders) than it is for dine-in meals (a little more than 17%). Meanwhile, chains such as BJ’s Restaurants are exploring the option of delivering beer and wine.

During Q1 of 2019, delivery generated sales of $2.6 million for the 52 DRH-operated restaurants that offer the service—a $2 million year-over-year increase. Simultaneously, the franchisee has raised its dine-in business, with on-premise sales running about 3% above the year-ago tally thus far in Q2. 

 In short: The delivery business was incremental to on-site business.

Wingstop, a quick-service wings chain, sees no correlation between on-premise and off-premise sales. It had seen some takeout business cannibalized by delivery, but now both are growing at a quick clip, CEO Charlie Morrison told investors. He told Restaurant Businessthat about 80% of the chain’s delivery business is incremental, since the customers using that channel aren’t the usual Wingstop customer.

My colleague and regular sparring partner, Jonathan Maze, doesn’t see it that way. He’s still of the opinion that delivery is a more complicated way of getting sales a brand would likely land anyways. And he’ll likely work the numbers until his calculator melts to prove his point.

But the recent facts just don’t support that viewpoint—with an emphasis there on “recent.” 

 

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