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OPINIONFinancing

Why delivery is not incremental

If it is incremental, it won’t be for long, and operators have to prepare for it, says RB's The Bottom Line.

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 Reality Check.

the bottom lineI have a question for my colleague, Mr. Romeo: When have you ever done an interview or listened to an earnings call and heard a restaurant chain CEO say something like the following:

“Our current sales driver is less profitable and takes away business from existing sales, but we’re going to pursue it because we can’t think of anything else to do.”

Never? Me neither.

I’m not saying that these CEOs are lying, per se, when they say that delivery is incremental. But there is little evidence to suggest that the service is generating additional traffic for the U.S. restaurant business.

And restaurant operators need to prepare as if it won’t be incremental, because of the profitability and operational challenges that delivery brings.

Now, I am not saying that restaurants should not be working on delivery. In most cases, they should!

I am not a delivery customer (I’m way too much of a control freak for that), but many Americans are delivery customers, and they are willing to fork over a few extra dollars so they don’t have to get off of their sofas and away from their Netflix.

This is the way the consumer is going. Americans are lazy, or they’re busy, or both, and anything that helps them with their laziness, or offsets their busyness, is a good thing. Restaurant CEOs, especially in the fast-casual and fast-food sectors, would be stupid to ignore it.

And plenty of chains can probably generate incremental sales, at least for a time, through delivery—some, definitely, more than others. Chicken chains such as Wingstop or KFC or Popeyes have a lot of potential with the service. Delivery is also a ridiculous no-brainer for a chain like Chipotle, which is actually generating sales with the service. So is Taco Bell.

But any incrementality from delivery is temporary, at best.

For one thing: U.S. consumers spend more at restaurants as a percentage of their food dollar than any other country on earth. We spend 50% to 100% more than other industrialized nations. While that doesn’t necessarily mean that it won’t continue to increase, there are limits. Any suggestion that delivery is shifting business from grocers to restaurants is likely wrong, especially given financial challenges experienced by a large number of millennial consumers.

Millennial consumers are already insisting they plan to eat out less. That’s a group that would theoretically spend more through delivery.

Plus, we’ve been talking for three years about the oversaturation of the restaurant market.

As delivery has skyrocketed in recent years, industry traffic hasn’t gone with it. Transaction count was flat at best at same restaurants in 2018, even as the service boomed. And same-store traffic isn’t exactly blowing the industry out of the water so far this year.

So we know that delivery is simply shifting traffic from some chains to others and is not actually pulling in additional sales.

While some of these chains with delivery could probably claim “incremental sales!”, eventually they will not be incremental. And that eventuality is probably going to come sooner and not later.

And that means operators need to prepare for this. Because delivery fees are high, they should seek to renegotiate deals to lower fees. If the provider refuses—which for most small chains is likely given the providers’ own profit challenges—then chains should work with multiple providers and demand the ability to increase prices for delivery orders or charge fees.

Providers should also be looking at packaging to make sure the food gets to its destination as hot as possible. And they should also look at things like pickup shelves or other strategies to ensure that the drivers can pick up those orders without standing in line, and without distracting from walk-in business.

Ultimately, I ask people this question: If you go to a certain restaurant chain today, will you go back tomorrow? In our increasingly competitive industry, that answer is no more often than not. That includes delivery.

So while you might get a nice sales boost today while adding that service and marketing the hell out of it, prepare for the day when that incrementality goes away. Because it will.

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