Here is how far delivery has come in the restaurant business in just two years: Companies are now testing what it’s like not to have it.
Flynn Restaurant Group, Applebee’s largest operator, is testing going without the service in a trio of large markets. And the results thus far have been surprising: almost no pushback, and in-restaurant sales increased in those markets.
“So far, we’re seeing our dine-in and carside-to-go business rise faster in the markets where we canceled delivery than in markets where we still maintain it,” said Greg Flynn, the company’s CEO and chairman.
Flynn said the company will continue testing it before expanding the no-delivery test at his other Applebee’s locations.
Flynn Restaurant Group isn’t just some random Applebee’s franchisee. The company is the largest franchisee of any sort in the U.S., and it operates more than 400 Applebee’s locations, or about a quarter of the system.
That alone makes the test a big one for Applebee’s as a brand, not just for Flynn Restaurant Group.
Flynn is not anti-delivery—his company operates Taco Bell, where delivery is going “great” thanks to that chain’s Grubhub partnership, as well as Panera Bread, which has its own service and can control pricing.
Nor is he anti-delivery when it comes to Applebee’s. The problem, Flynn said, is margins. He doesn’t believe the service is worth the disruption it can cause to the in-store business if it’s not going to at least be margin-neutral.
“As an industry, we may be in a good position to take business” away from grocers, he said. “But for that to be attractive to us, given that there is lower incrementality and it’s disruptive to our dine-in business, it needs to be a margin-neutral channel.”
That means the cost must either come from the delivery provider or, more likely, the consumer. And restaurants have to be able to charge their full prices.
Flynn’s test is the latest demonstration of a shift in thinking by restaurant chains when it comes to delivery. Chains are far more willing to take a hard line when it comes to delivery margins.
As the service emerged two years ago, chains accepted costly commissions from third-party providers, believing that they needed to start offering the service quickly.
The industry was dealing with traffic challenges, and many executives saw the service as a potential sales-generating strategy. Those executives believed the incrementality of the sales they received from delivery would offset those commissions.
But more companies are shifting their focus to profitability, getting bolder in their demands in the process.
Some chains such as Habit Burger charge higher prices for delivery orders. Delivery surcharges have become more common. And larger concepts, notably McDonald’s, are renegotiating their delivery deals to reduce commissions.
“I believe the restaurant industry is at an inflection point,” Flynn said.
Flynn said he has the support from Applebee’s, noting that Steve Joyce, CEO of parent company Dine Brands Global, had previously worked in the hotel industry with Marriott International and Choice Hotels.
Years ago, online travel sites such as Expedia and Priceline emerged to take hotel reservations. Hotel companies got on board, hoping to get that business.
But those sites have since come to dominate the business and have hurt hotel companies’ profitability in the process. Many see restaurants’ current challenges with delivery in the same vein.
“He saw the rise of the online travel agencies,” Flynn said of Joyce. “They permanently took 10% out of the profit structure of the hotel industry as traffic came through their channel. He knows you need to resist that.”
Flynn’s Applebee’s no-delivery test also provides some evidence behind the idea that delivery is not quite as incremental as it seems.
Executives have long argued that delivery customers decide they want delivery, and then they decide on what they want to get. That seems likely.
But a delivery sale today could eliminate a sale tomorrow. That is, if someone gets Applebee’s on a Friday night, they may be less likely to dine there on Saturday.
Even if it is incremental, restaurants should take care before they sacrifice some of their margins. They may come to regret it down the line, as hotel companies did.