Edit
Financing

Why some companies go slow on delivery

Citing the services’ high costs, Olive Garden owner Darden and Newk’s Eatery are cautious on the industry trend.

Darden Restaurants, owner of Olive Garden and LongHorn Steakhouse, isn’t among the many chains rushing into delivery, and for a simple reason: Third-party delivery services leading the trend can be costly.

Instead, the Orlando, Fla.-based casual-dining operator is taking its time deciding how to approach the service, even conducting a “small test” of delivering the food itself.

“The business is a good business,” Darden CEO Gene Lee said on Tuesday, during the earnings call for the company’s fiscal second quarter. “I’m just not going to live with their current economics.

“They’re not favorable enough for me. I’m not going to give them their discount.”

Delivery is the single biggest industry trend as 2017 comes to a close. Numerous casual-dining companies are quickly adding the service, including BJ’s Restaurants and Cheesecake Factory.

Quick-service chains, too, like McDonald’s and Wendy’s, are making a big delivery push using third-party services.

Operators that have added the service to their restaurants have said it generates sales, and there’s a belief that some of that is coming from people who would otherwise eat at home.

The seafood chain Captain D’s, for instance, said adding delivery has led to a noticeable increase in sales over the past month. Other companies are trying out entirely new delivery models.

But executives at a number of chains are disconcerted by the pricing that delivery services charge, prompting them to take a more cautious approach.

“It still has to make economic sense,” said Chris Cheek, the chief development officer of the 115-unit fast-casual chain Newk’s Eatery. “If you have a third-party delivery brand, there are some that charge 30% to 33% to deliver your product. They charge that to us. We can’t pass that 33% price increase onto customers.”

To be sure, not all of them charge that. “There are providers that do a great job, that integrate well into your business,” Cheek said. “At the same time, it’s equally important to find providers where you can actually make a profit.

“A lot of brands are going through that penciling out whether that economic model will work.”

Some concepts are concerned not as much about profits but about the impact on quality. Texas Roadhouse, for instance, has avoided delivery in part because it is concerned that the business would disrupt its dine-in service that is more profitable. The company also worries about delivery’s impact on the product.

“We encourage all of our competitors to do as much delivery as they can so they can deliver lukewarm food to the people who order it,” CEO Kent Taylor said back in July. “We’re going to stick to our guns on this.”

Others, however, say consumers give chains a break when it comes to quality because they know it takes time between when it’s made and when it arrives at the house—they’re more concerned about convenience.

“Consumers give you a little bit of leeway,” Cheek said. “They’re OK with that for the convenience. A lot of us in the industry have to accept that first. That doesn’t mean you don’t do it. Our customer is telling us to do it.”

The challenge remains profitability using the third-party delivery model. The business is loaded with competitors, like Grubhub, Uber Eats, Postmates and DoorDash, among others, as well as many local and regional services.

While these services enable companies to add delivery quickly, some providers are stronger in certain markets than others. And there’s a belief the business will shake out and restaurant chains will get a better idea about the services and how much they will charge.

“We believe someone is going to rise up and create some scale in this space,” Lee said. “We’ll watch those third-party deliverers. We’re also watching competitors that are doing it themselves.”

Indeed, Lee essentially warned that if Darden didn’t like the economics of third-party delivery, that his company, which owns Cheddar’s, Capital Grille, Eddie V’s, Yard House, Seasons 52 and Bahama Breeze, would deliver on its own.

That would add its name to companies that are ignoring the services altogether and hiring drivers, including Bloomin’ and Panera Bread.

“I don’t like the current economics of the partnership,” Lee said. “I’m trying to understand their profit model, and I’m trying to understand our profit model for doing it internally.”

Some companies find third-party delivery to be a challenge for franchisees—who also pay royalties into the franchise system.

“They carry 5% extra on the [profit and loss statement] that we don’t,” Cheek said.

All that said, Cheek and Lee see that customers want delivery. They’re just not rushing into it as quickly as some others.

“A lot of people are rushing to become providers,” Cheek said. “Everybody is in a very rapid, accelerated learning phase.

“If you’re a brand like us that doesn’t have delivery as part of its model like Jimmy John’s or one of the pizza companies, what’s the best way to get the product to the customer, and also make money.”

Want breaking news at your fingertips?

Get today’s need-to-know restaurant industry intelligence. Sign up to receive texts from Restaurant Business on news and insights that matter to your brand.

Trending

More from our partners