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Why the coronavirus shutdown will upend delivery services for good

Delivery has surged since the shutdown, but price concerns, regulatory moves and operators’ own adjustments suggest it will look a lot different once life returns to normal.
Photo illustration by RB

This is the first story in a five-part series examining the long-term impact of the coronavirus pandemic on the restaurant industry.

Since its massive dining rooms were forced to close last month, 62-unit Portillo’s has rethought its approach to delivery.

The Oak Brook, Ill.-based Chicago-style comfort food chain began curbside service for delivery drivers. It added Uber Eats to its roster of third-party delivery providers, bringing it in as a partner in just three weeks, a move that led to instant sales growth. The chain’s third-party delivery sales have almost doubled.

Now, Portillo’s is considering making some deliveries itself. “A year ago, with the labor market, it was impossible to do self-delivery,” said Nick Scarpino, senior vice president of marketing and off-premise dining for Portillo’s. “Now we’re saying we can do this, and we can get a decent amount of sales from them.”

The restaurant industry is facing massive changes because of the coronavirus shutdown. The closure of restaurant dining rooms has been an unprecedented opportunity for delivery providers, giving operators a much-needed source of revenue and quarantined consumers a relatively safe source of food. Delivery is almost certain to survive on the other side of the crisis.

But it’s bound to look different two years from now. More restaurant operators are openly experimenting with their strategies. Independents are pushing hard against third-party delivery fees and are getting support from state and local governments. Consumers are also starting to notice.

At the same time, an oncoming recession and continued questions about the state of third-party delivery services mean that who will be providing delivery, and to whom, remains an open question.

“A healthy percentage of independents were already on board with delivery, but right now they’re grappling with survival,” said Melissa Wilson, principal with Technomic, a sister company of Restaurant Business. “Chains are embracing the fact that this is an opportunity to provide the product to the consumer and keep business flowing.

“It’s going to be very interesting to see how things flow as the industry comes back.”

Portillos

Portillo's delivery sales increase

 

Source: Portillo's

Chains jump aboard the delivery bandwagon

With dining rooms closed, restaurant chains have had little choice but to laser in on delivery.

Noodles & Co., Krystal, El Pollo Loco, Dickey’s Barbecue Pit, Chipotle Mexican Grill, McDonald’s, Applebee’s, Tijuana Flats, Panera Bread, IHOP and Wingstop are among the many chains that have offered free delivery since the shutdown began.

Yet the government-mandated dining room closure has pushed more chains into deals with multiple services. Going into the shutdown, many chains had already been shifting away from exclusive arrangements. The closure of so many locations has accelerated that.  

Noodles, for instance, has added Uber Eats to its delivery options, joining DoorDash.

“I do think this is a catalyst for some change in the third-party delivery business,” said David Henkes, senior principal with Technomic. “We’d been talking about how it was ripe for potential change, and this accelerates that.”

Portillo’s previously used DoorDash as its primary partner. It supplied delivery for orders made via the DoorDash app as well as those placed through Portillo’s website. After the shutdown, the company quickly decided to use Uber Eats and was sending orders through the service three weeks later.

“We had rapid adoption on Uber Eats,” Scarpino said, noting that third-party delivery sales are up 90%. “They are going gangbusters.”

And delivery sales through Portillo’s own website are up 60%. That’s even better news, because the chain gets all of the customer information from those orders.

Indeed, the Portillo’s model has been one worth watching. The chain charges higher menu prices to customers who order from delivery services’ apps, using its status as an in-demand concept to push those orders, believing that it should be able to make the same profit off delivery as anything else.

“The days of restaurants taking a 20% to 30% haircut on their own menu prices in order to be on third-party delivery is going to go away,” Scarpino said.

"The days of restaurants taking a 20% to 30% haircut on their own menu prices in order to be on third-party delivery is going to go away." —Nick Scarpino, Portillo’s


Independents and consumers push back

Independents can’t push back as easily against delivery services’ fees or requirements on menu prices.

That has long fed an adversarial relationship between the providers and operators. But consumers have started to push back, too, as they’ve learned about those fees and grown concerned about the financial condition of local restaurants amid the pandemic.

A number of consumer publications have called on diners to call restaurants directly rather than order through services such as Grubhub or DoorDash.

Food & Wine magazine, for example, in a piece headlined “It’s Time to Delete Your Delivery Apps,” urged consumers to stop using third-party providers until they agree to cap their commission fees. 

And three consumers in New York filed a lawsuit arguing that third-party delivery providers drive up prices and reduce competition. The lawsuit in particular targets requirements many delivery providers require of many restaurants that they charge the same menu prices for delivery that they charge for dine-in.

While chains such as Portillo’s avoids those requirements, not all of them do, and the lawsuit argues that these requirements lead to higher overall charges in many restaurants.

Now is the time for third-party delivery services to figure out how they can stand out in the marketplace, Henkes said.

“I have three or four different delivery apps on my phone,” Henkes said. “There’s not a lot of consumer loyalty. They’re going to need to rethink how they position themselves. What are they giving to consumers that they can’t get elsewhere?”

Some governments have started taking steps to limit delivery fees. San Francisco, for instance, is capping delivery commissions to restaurants at 15%, at least for now, and other governments are considering similar actions.

That said, the services have taken some action to help independents. DoorDash cut fees to local restaurants in half, for instance, and other major providers are helping operators with marketing and other efforts. Grubhub recently said it would reinvest profits to support restaurants.

“We believe Grubhub has a clear responsibility to help restaurants and all working individuals in our ecosystem,” CEO Matt Maloney and CFO Adam DeWitt said in a letter to shareholders.

“Delivery companies have been aggressive and open in terms of supporting the operator base,” Wilson said. “That’s their customer base, their core constituency. They’re doing a lot to help support it.”

Many independents view delivery as a savior. Robyn Matarazzo, co-owner of Villaggio Italiano Restaurant in Hartsdale, N.Y., uses third-party delivery services in conjunction with her own drivers. She credits companies such as Grubhub with helping her stay in business during this time and expects to stay loyal to them in the future.

“I applaud Grubhub,” Matarazzo said. “Those are all front-line workers. Those guys and girls who are doing the deliveries are phenomenal.”

"I have three or four different delivery apps on my phone. There’s not a lot of consumer loyalty. They’re going to need to rethink how they position themselves. What are they giving to consumers that they can’t get elsewhere?" —David Henkes, Technomic


Self-delivery has an opening

One big potential change could come from within the restaurants themselves. More of them appear willing to take on the task of delivering food, sensing an opportunity while workers have more free time.

Portillo’s is planning to do some of its own deliveries, on larger orders, and Olive Garden is taking a similar step, adding self-delivery for small orders. “We’re ramping up very quickly,” Gene Lee, CEO of Olive Garden parent company Darden Restaurants, said last month.

Many restaurants had been avoiding that move, seeing third-party services as a relatively simple strategy to quickly build delivery. Two things kept many restaurants from doing the deliveries themselves: insurance and a lack of available workers.

That latter issue has suddenly disappeared, as many restaurants feel the need to find more work for their employees. “Labor pool is no longer an issue,” Wilson said, noting that many companies modeled self-delivery. “This gives them the chance to deliver their own food.”

Dave Miller, who co-owns Chicago bakery-cafe Baker Miller with his wife, Megan, describes their business as a “fiercely independent” mom-and-pop operation. They’d tried third-party delivery services a couple of times, before the coronavirus, but the commission fees were too high.

“They ate our margins,” Miller said. “Plus, they present my product in a way in which I have no control. Especially when this hit, I said, ‘I’m not going to use any of these services.’ I didn’t trust their drivers before a pandemic. I’m not going to trust them during a pandemic.”

The Millers crafted a DIY approach instead.

They hired a developer to build them an app. And Miller, who had been researching the Great Depression, decided to test out his delivery operation with a bread route.

The first fresh-baked bread delivery run had more than 100 customers, with Miller and a couple of others doing the driving. It was an experiment that taught them much about the logistics of such an endeavor, including how long deliveries would take, how to arrange the routes and how many drivers would be needed.

The bread deliveries are on hold while Baker Miller readies its app, slated to launch by the end of the week. Customers will be able to order baking kits, ready-to-bake goods, sourdough starter, yeast, flour, store merchandise, coffee concentrate and even organic play dough to keep cooped-up kids entertained.

The app also has a curbside pickup feature that alerts the cafe when a customer has arrived, identifies them by their car’s description and allows a worker to load an order into the trunk.

Miller admits he’s taking a risk, but it could be a risk that provides for the future of his business.

“We might just be really crazy,” he said. “All of this is a trial. We don’t know.”

"It’s going to be really hard to reinstate delivery fees." —Melissa Wilson, Technomic


The economy and the future of delivery

The biggest question going forward on delivery, and what it will look like once the shutdown ends, is what kind of state providers themselves will be in. A lot of that is going to depend on the economy, and their own finances.

The cost of delivery services has led many, including Technomic, to speculate that use of third-party providers would drop once the economy hit a pothole. The economy has hit a giant one, and delivery has flourished. “This situation has changed that,” Wilson said.

Still, an economic recession could further limit consumers’ ability to continue to afford delivery fees and tips. And as more restaurant chains charge higher prices for third-party services like Portillo’s, it could result in sticker shock and steer consumers in a different direction.

As it was, consumers were already price shopping their delivery providers, which was putting a strain on providers themselves. “So many chains were using subsidized delivery fees that consumers already changed their behavior,” Wilson said, noting that many were searching for low price or free delivery.

Delivery providers may have a tough time reinstating their old commissions to independents once the shutdown ends. Restaurants aren’t likely to be in particularly strong shape in the aftermath.

“It’s going to be really hard to reinstate delivery fees,” Wilson said.

The providers were already struggling to generate profits before the shutdown. Uber Eats, for instance, lost $1.4 billion last year. Grubhub added delivery to its online ordering platform in 2015. “We didn’t then, and still don’t believe now, that a company can generate significant profits on just the logistics component of the business,” the company told shareholders in October.

While all of the volume might provide some help to delivery providers, it’s unlikely to be a panacea. While chains are driving volume, they’re also pushing cost controls and other strategies. What’s more, they’re also armed with their own apps and websites and an eagerness to push more delivery to their own sites, where the cost is cheaper.

Without the fees from healthy independents, that could be a problem for the business going forward.

Still, delivery has proven itself. Consumers clearly love the convenience and will likely want plenty of that long after the shutdown ends. But the structure of that service, and of the companies providing it, is likely to look much different two years from now.

By that time, Dave Miller might be doing deliveries for more than just his own restaurant.

“Our long-term hope is we can expand our delivery fleet and partner with the restaurants near us, all these people we’re friends with,” he said. “We take on that initial risk and then share the cost with other people.”

How the coronavirus will change the restaurant industry

Today: How the coronavirus shutdown will upend delivery services for good

Monday: Shakeout and takeout usher in new realities for full-service chains

Tuesday: Will mom-and-pops survive this?

Wednesday: How the coronavirus will change menus

Thursday: With survival on the line, expect restaurants to plan for the impossible

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