Why pizza chains have little to fear from third-party delivery

Value matters, and that gives pizza a strong edge as restaurant delivery grows, says RB’s The Bottom Line.

The Bottom Line

Earlier this week, we wrote about how third-party delivery is besting meal kits when it comes to customer loyalty, which is a sign that the meal kit business is a weak restaurant industry competitor.

That’s also a sign of the relative strength of delivery companies, demonstrating that customers try them and are more likely than not to keep using them after a year. It’s clear at this point that many consumers are fans of the service and will pay to have their food delivered.

“If you’re not thinking about it yet, you’ve missed the train,” Grubhub CEO Matt Maloney said at a Restaurant Leadership Conference loaded with discussions and comments on delivery.

One question, however, is the potential impact on pizza chains that have built entire businesses around delivery.

As restaurant companies add the service, some wonder whether that will hurt business at Domino’s, Pizza Hut and Papa John’s. Executives with those chains have pretty consistently said that it wouldn’t, and at this point it’s difficult to argue.

Why? Value.

One of the more underrated but important strengths of the pizza business is its value. I can feed my family of four for a little more than $20, including the delivery fee and the tip. Few restaurant chains can match that kind of value.

In most cases, that delivery is twice as much. Add in the other advantages that pizza has, such as its relative ease (everybody likes pizza) and its ability to travel, and you get a business that is relatively insulated from the growing demand for third-party delivery.

None of this is to say that pizza is fully insulated from a much larger pool of restaurant chains that deliver.

Ultimately, if consumers get a lot more cash, they may feel flush and could opt for other, more expensive options on nights they’d otherwise order pizza.

And, historically, the sector has been vulnerable to encroaching competition. A decade ago, many of us thought pizza was headed for a long-term decline because of the proliferation of higher-quality frozen pizzas—a proliferation that sent Domino’s sales southward in the years before the recession.

But it’s important to remember that value matters. The biggest challenge with the third-party delivery business is its price.

Remember: This is a world in which a certain segment of consumers went nuts when Subway started offering $6 Footlong subs, rather than the $5 subs they were used to. It’s also a world in which McDonald’s sales fell after it went away from its Dollar Menu. Many consumers are price-sensitive.

Third-party delivery has to make money to keep going, just like every other business. Such services are more viable in urban areas thanks to their density of restaurants and people. But they will need more demand in spread-out areas.

If they charge more to restaurants—and many, many chain executives we speak with complain about the losses they take on delivery orders—then those companies will be less likely to promote or push the service. Or they’ll charge higher prices, and consumers will back off.

And the services could charge higher prices to consumers, but that also could limit demand in less dense markets where consumers have less money. The higher the price of the meal, the less demand there is, and the better that pizza value looks.

Again, we believe third-party services are here to stay. As the National Restaurant Association’s Hudson Riehle said, “What the consumer wants comes to fruition.”

But it’s also important to temper some of the rosier prognostications of delivery’s future, largely because of the value question. There is only so much demand for a $50 restaurant meal.

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