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As delivery grows, debate rages over its profitability

Sales at the largest third-party providers rose 55%, but many operators still question the math, says RB’s The Bottom Line.
Photograph: Shutterstock

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This has been a pretty big week in the restaurant delivery world. To wit:

Jimmy John’s, perhaps feeling a threat from growing third-party services, vowed to “never” use one.

Third-party provider Postmates confidentially filed for an IPO.

Taco Bell expanded delivery nationwide with Grubhub the day after Chipotle Mexican Grill executives couldn’t say enough positive things about it.

The amount of activity this week has accentuated a growing debate over third-party delivery and its role in the restaurant industry. It’s an important debate: There is no question that consumers really like third-party delivery of restaurant food.

Sales at the five largest delivery providers rose 55% last year, according to data from Technomic's Transaction Insights. Technomic is a sister company of Restaurant Business.

Sales at Caviar, DoorDash, Postmates, Uber Eats and Grubhub totaled $9.8 billion in 2018. That would make them roughly the third- or fourth-largest restaurant chain in the U.S. And that’s not counting the numerous other, smaller delivery providers or companies’ own services.

“If this were a competitor, this would be as if a brand new, top-three chain just landed,” said Melissa Wilson, principal at Technomic.

And that expansion is only continuing. The Taco Bell expansion this year, coming on top of the Chick-fil-A delivery expansion announced in November as well as the recent entrance of Burger King into the game, has added a bunch of very large chains into the mix.

It’s clear that consumers want this service. The problem is that it comes with a price in the form of a 15% to 30% charge from delivery companies.

“The math doesn’t work,” Jimmy John’s CMO John Shea told me this week.

Indeed, at the ICR Conference last month,  Paul Flanders, CFO of big Burger King franchisee Carrols Restaurant Group, was decidedly unoptimistic about the service. As the CFO, of course, Flanders is responsible for making the numbers work.

“The numbers are probably marginal for the operator,” he said.

That seems unlikely to change. For one thing, many delivery providers are under growing pressure to generate profits, meaning they’ll have to find ways to keep those charges.

A case can also be made that consumers increasingly prefer choosing their restaurants from the range of choices offered by delivery providers—and that could give them an advantage when negotiating with restaurant companies. That’s especially true for smaller brands.

Delivery apps remain popular. The top three or four food and drink apps for Apple and Android users, for instance, are all delivery apps, besting the popular Starbucks and McDonald’s apps.

Wilson, for her part, says that when delivery providers first emerged a few years ago, she thought they’d have to negotiate better deals to get major chains on their apps—something that hasn’t happened, given the consistent size of delivery fees.

But she believes that it will remain important for these providers to make chains happy to keep them on their apps—especially as the major services are increasingly competitive with one another nationally.

“To get market share, you’re going to see some approaches to differentiation,” Wilson said.

Wilson believes some big restaurant chains could start experimenting with their own delivery services, having proven out the business case.

But chains will also have to find ways to make the service work profitably.

Chick-fil-A is testing takeout locations. Companies such as Kitchen United, for instance, are emerging to provide chains with an option for such services.

Then there’s the lesson from Chipotle, which is aggressively adding digitized second make-lines to its restaurants to handle mobile and delivery orders. Chipotle has been as aggressive as any chain in the restaurant business in adding the service to its locations—and in marketing that service. It helped the company generate 2% traffic growth last quarter.

Speaking on the company’s fourth-quarter earnings call this week, CFO Jack Hartung said that the second make-line is more profitable because it’s dedicated to digital orders and is not focused on inside customers.

He also noted shelves where delivery providers can pick up their orders, and Hartung said Chipotle is about to start a service enabling providers to prepay for orders.

“Everything is set up to be very efficient, very seamless,” he said. And because margins on the second make-line are higher and most delivery sales are incremental, “we can still cover the fee.” The sales, therefore, improve Chipotle’s margins.

To be sure, not everybody can add digital second make-lines or built stand-alone delivery locations.

And as Jimmy John’s noted, there are potential challenges in terms of speed, accuracy, and quality.

The last time I ordered delivery, for instance, my order took nearly an hour to arrive rather than the originally estimated 25 minutes. The driver got lost. And instead of enjoying our food that evening before an event, my family had to quickly eat everything and run out the door to make it on time.

The guess here is that the services figure these issues out, and restaurants grow more sophisticated in their handling of delivery over time, with some doing it on their own. But delivery is still less profitable than your typical order. And that will further pressure margins down the road.

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