The pandemic has been a good thing for the business of delivering food to consumers’ homes. Domino’s and Papa John’s both generated record-breaking quarters. Chain after chain has generated stronger delivery sales.
Those sales have been a legitimate lifeline for a lot of restaurants, especially casual dining and other concepts that needed the takeout business. And consumers have needed it, too, both as a source of food at a time when grocery supplies ran scarce but also as a break from the monotony of the quarantine.
But third-party delivery remains an uncertainty. That was made clear this week, when Chipotle reported stronger sales and weaker profits, blaming growth in third-party delivery for slimmer margins.
As my colleague Heather Lalley pointed out, the company’s tone shifted on third-party delivery. Just more than a year ago, the company boasted the incrementality of the delivery sales enabled the company to serve those customers more profitably. Now, it is considering price increases on delivery orders to encourage customers too pick up their own orders.
Third-party delivery orders are more expensive for companies because of the fees that these companies charge per order, which amounts to at least 15%.
When these sales were incremental, that 15% was less of a concern because the companies wouldn’t get those sales otherwise, enabling them to leverage existing costs like labor and utilities. That enabled Chipotle to say that its delivery sales added to profitability last year—the company at the time said that about two-thirds of delivery sales were incremental.
Ah, but delivery sales were not going to remain “incremental” forever. That inevitability arrived during the pandemic, when consumers had little choice but to order their food delivered. With companies now relying more on delivery, that 15% to 30% fee starts to look more and more problematic.
The result? More chains are either raising prices on delivery orders or are testing the idea, or they raise fees or take other steps to offset those profit concerns—steps that independents and small chains can’t take either because their delivery contracts don’t allow it or because they can’t risk losing the sales.
Yet, by raising prices on delivery orders, the cost differential between a delivery and non-delivery order can be substantial. We personally compared prices on chicken wing delivery and found premiums—counting the driver tip, because we’re not cheapskates—that were at least 66%.
Or we can just use the quote from Grubhub’s top two executives last year, who said that “the average diner in the United States will not consistently pay over $25 in total cost for a quick-service restaurant cheeseburger meal.”
Of course, that’s the goal, really. Restaurant chains prefer customers order through their own apps or website and go pick it up because it’s more profitable.
Consumers have been willing to pay these higher prices because they’ve had more cash—incomes actually rose during the pandemic thanks to excess unemployment benefits and stimulus—and they had nothing else to spend their money on but food and consumer goods. Eventually the economy takes over, and those substantially higher prices on delivery orders become problematic.
Delivery companies, meanwhile, have been under pressure to hold down their own charges. And they have also started pushing back against some chains—witness the collapse of the formerly innovative Yum Brands-Grubhub partnership.
The providers are in a tough spot. They need more orders to make their businesses more efficient if they’re going to achieve long-term profitability. But if restaurants raise prices and customers start taking their business to the actual restaurants themselves the companies’ path to profitability gets that much longer. And some delivery providers have struggled to generate profits even with the sky-high demand during the pandemic.
And that will likely force delivery companies to change their businesses to offset the profits they are not making by delivering restaurant food, something that is already happening as Grubhub merges with JustEat and DoorDash expands into other service lines and Uber Eats buys Postmates.
The pandemic may have helped delivery sales. But it certainly didn’t ease concerns about the business.