It’s safe to say that Jimmy John’s does not like third-party delivery.
The Champaign, Ill.-based sandwich chain, which helped demonstrate that consumers are willing to order foods delivered that are not pizza or Chinese, has come out strongly against third-party services—vowing to “never” use them and questioning the services’ long-term economics.
“Every day a new restaurant is announcing a partnership with one of the delivery companies,” Jimmy John’s Chief Marketing Officer John Shea said in an interview. “We’ve been researching this for the better part of the past year, plus what is best for our customers and our brand. In our exploration we came to the conclusion that we do it better.”
Delivery is indeed rapidly expanding throughout the country. The Mexican fast-food chain Taco Bell, for instance, just this morning announced the expansion of delivery throughout the country—integrating the service into its point-of-sale system in part to improve speed. The chicken sandwich chain Chick-fil-A, meanwhile, announced its own such expansion in November.
The expansion has ignited a debate of sorts on the service’s economics and its quality. Chipotle Mexican Grill, for instance, used delivery promotions to bolster traffic 2% last quarter, and on Wednesday, it argued that the service is actually improving its margins. “We’re bullish on where this goes from a sales and margin standpoint,” CFO Jack Hartung said.
But others have questioned the economics of the services, as well as their quality—franchisees have increasingly questioned their use as they work to squeeze out profits during a challenging period in the restaurant industry.
Executives at some chains, for instance, believe that the service will not last in its current iteration. Darden Restaurants CEO Gene Lee in particular has been critical of the services, at least for smaller orders.
For Jimmy John’s, however, the growth of third-party delivery has taken away a key point of differentiation. The chain’s biggest competitors, notably Jersey Mike’s, Firehouse Subs and the market leader Subway, have all aggressively adopted delivery in their bid to take advantage of the growing business.
“We’re not surprised they have done it,” Shea said. “They’ve seen the success we’ve had in delivery and they look at a lot of the same numbers. Consumers are going into delivery. They’ve got to do it out of necessity. That’s the way consumers are going. But they haven’t built their capabilities.
“What we’ve built and the way we’ve built it give us a significant competitive advantage.”
To be sure, they’re not the only ones arguing that quality of delivery is a competitive advantage. The Ann Arbor, Mich.-based pizza giant Domino’s wants to build 2,000 more units in the U.S. in the coming years in part to improve delivery speed and quality in the face of competitive pressures from third parties.
And quality is one of the arguments companies like Jimmy John’s make in arguing for their long-term competitive advantage.
The company commissioned a study by the Boston Consulting Group as it researched the service and found that 35% of customers experienced a problem with their deliveries.
“That’s more than three times the industry average,” Shea said. “The customer experience just right off the bat is not up to our standards.”
Jimmy John’s argues that 92% of customers expect their food delivered within 30 minutes, but that the typical delivery time for a third-party service is 49 minutes.
The company also argues that much of the blame for delivery problems goes to the restaurant brand and not the service—Jimmy John’s says that 76% of customers hold the restaurant partly responsible for any errors.
That could be an issue for chains that deploy the service because delivery customers are often different from a chain’s typical customer, Shea said, which can hurt a company’s reputation.
But another issue is the economics. Delivery providers charge a fee, which can often equal 20% to 30% of an order’s cost.
While Hartung said that the service has been “accretive” to the chain’s margins because delivery orders would not come in otherwise, others have argued that they generate lower overall profits.
“The math doesn’t work,” Shea said.
Shea said that the company commissioned the Boston Consulting Group study largely to “understand” the issue of third-party delivery to see if it would fit into the company’s model. Some chains that have their own services, such as Papa John’s International, have been more open to use third-party services to supplement their own delivery.
Instead, he argues that over time the service and financial challenges the services have on restaurant chains that use them will ultimately hurt those companies. But customers demanding delivery will use Jimmy John’s more often because of its ability to delivery quickly and accurately.
“We determined it was not right for us,” Shea said. “The way our system is built, where we’re owning every step of the process, that’s really important for us. Restaurants announcing they’re going to third-party delivery don’t have the same infrastructure, systems or science the way we do.”
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