Here’s the good news: Delivery helped restaurants generate a lot of sales last year.
Operators across all segments said off-premise was a bigger part of their sales in 2021 than before the pandemic, according to the 2022 State of the Restaurant Industry Report published Tuesday by the National Restaurant Association.
Additionally, roughly 60% of restaurants expect those off-premise sales to stay at about the same level this year. That comes even as dine-in traffic stabilizes for many.
Yay for more sales!
Now for the bad news: Those higher sales did not lead to higher profits.
The vast majority of operators (80%) told the association that their profit margins in 2021 were lower than before the pandemic. Only about a quarter expect them to get better this year.
Now, there are a lot of things eating away at restaurant margins these days. The costs of labor and food have skyrocketed, for one thing. But delivery—specifically third-party delivery—is also playing a part.
The service, despite its role as a lifeline during the pandemic, remains generally unprofitable because of the costs associated with it.
According to a report from McKinsey & Co. published in September, a restaurant can expect to lose about 70 cents on the average third-party order after factoring in a 30% delivery commission on top of tip, food, labor and occupancy costs.
Third-party delivery economics (in $)
Source: McKinsey & Co.
The consulting firm concluded that the current model is unsustainable, particularly if dine-in levels, which can help offset delivery costs, remain lower than before the pandemic.
(And that’s a real concern: 40% of restaurants surveyed by the association said they were still not open at full capacity in November, largely because of staffing issues.)
McKinsey even went so far as to predict that some restaurants would get out of the delivery game altogether, ceding that ground to ghost kitchens and pizza chains.
“It would not be surprising to see restaurants … deciding to specialize in the experiences they offer, with those built around the dine-in experience potentially choosing not to play in the delivery space, because of their inability to compete on margin,” the report said.
That idea contradicts just about everything we thought we knew about the future of the restaurant business. Virtually every chain is investing in driving more off-premise business, which is generally viewed as incremental to dine-in. Right?
Right??
Well, not quite. According to the association, only about a quarter of operators plan to devote more resources to expanding off-premise in 2022.
It seems that restaurants are satisfied with where things are now, takeout-and-delivery-wise. They are much more concerned about hiring/retention and food costs than driving sales, according to other data from the report.
Good for them, because that’s exactly what McKinsey recommended back in September.
“Restaurants should thoughtfully balance delivery against other parts of the business to ensure that the net impact is positive,” it said.
Part of that balancing act could include raising menu prices for delivery, a strategy Chipotle and other chains have adopted.
I’ll throw in my two cents as RB’s tech editor: There is no reason a delivery order has to cost as much as the one outlined above by McKinsey. Restaurants can set up their own direct channels that use companies like DoorDash as fulfillment partners only, limiting commissions and generating better data. Customers prefer this option anyway.
They can also explore self-delivery, which, while expensive, gives them more control over the experience and the data.
Giving up on delivery is also an option. But that route could leave a lot of potential customers on the table.