Tech Check is a regular column on restaurant technology by Senior Editor Joe Guszkowski. It's also a newsletter.
There was an eye-opening detail in my colleague Jonathan Maze’s recent story about problems at Dickey’s Barbecue Pit.
A former franchisee of the chain said that Dickey’s practice of pushing discounts and capping price increases created a serious issue when it came to third-party delivery orders.
For example, the operator said, on a DoorDash order for a one-meal plate priced at $19.89, she ended up owing the delivery provider $1.50 after commissions, marketing fees and Dickey’s royalties were accounted for.
This was a regular occurrence, she told Maze. “I had to pay DoorDash to deliver my food that I made nothing on at all.”
The anecdote illustrates the risk operators take when they do business through apps like DoorDash, Uber Eats and Grubhub. And though many restaurants have managed to make third-party delivery work for them, it can be a dangerous proposition when all of the potential costs are factored in.
To illustrate how easily a delivery order can go bad, take a look at the receipt below, provided to Restaurant Business by Chowly, a tech company that helps restaurants manage their third-party delivery orders.
The subtotal on the order from Grubhub was $28.20. After the restaurant’s usual costs—delivery commission, food and labor, packaging and payment processing—are subtracted, the operator is left with $4.74.
That’s a 16% margin, which is not so bad. But consider what would happen if one or more of some other common costs are factored in.
For instance, let’s imagine this restaurant was running some sort of promotion through the third-party delivery app—a popular tactic these days to catch customers’ attention and juice sales.
The restaurant might choose to cover the customers’ $3.99 delivery charge. That leaves just 75 cents left over from a $28 ticket.
Or it might offer $5 off if the customer spends $25, putting the ticket 25 cents into the red.
Now let’s say this restaurant is a franchisee of a larger brand. It would have to pay a royalty fee of anywhere from 4% to 12% of the subtotal of $28.20.
If we use the median figure of 8%, that would knock another $2.25 off of the operator's earnings for a total loss of about $2.50.
Now, there’s an argument to be made that even a money-losing order still holds some value. It could be a first-time customer who might come back and order again or tell their friends about the place.
But this is ultimately not a very healthy way to acquire customers, especially if there’s a discount involved. There’s no way of knowing whether that customer will be willing to pay full fare next time, or if they’ll just bolt for whoever is offering the best freebie. And because this order came through Grubhub, the restaurant won’t learn anything about the person on the other end.
One might also propose a simple fix to the margin problem: Raise menu prices on third-party delivery apps. This has become a routine practice and has helped many restaurants expand their margins on delivery and incentivize customers to order directly from the restaurant for a lower price.
But it has also been discouraged by delivery apps, which are concerned about appearing unaffordable to consumers. On DoorDash, a too-high markup can hurt a restaurant’s visibility on the app.
The lesson here is not that third-party delivery is bad or that restaurants shouldn’t offer it. There is a certain segment of customers that prefer to order this way, and restaurants would be silly to ignore that. But restaurants need to pay close attention to the puts and takes on those orders.
It may take some extra work, as the accounting on those orders is not always as clear as I've laid out above. Delivery margins may be lower, but if they are consistently losing money, something is wrong.