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Will higher menu prices thwart third-party delivery?

RB editors discuss whether raising prices on delivery orders will turn away customers and hurt the service's growth.
third party delivery
Photograph: Shutterstock

Editor’s note: This is the initial installment of an occasional feature we’ll call Editor’s Roundtable, in which Restaurant Business Editor-in-Chief Jonathan Maze bugs his fellow editors and demands they answer his inane questions. Today’s topic is the future of third-party delivery. He discusses that with Editor Heather Lalley, who covers fast-casual restaurants, and Senior Editor Joe Guszkowski, who covers technology.

Jonathan: So it appears that some fast-casual chains have grown a bit frustrated at the direction of third-party delivery. Specifically, it’s become too expensive.

Chipotle Mexican Grill, Noodles & Co. and Fiesta Restaurant Group all recently said that third-party delivery ate into their margins. Chipotle and Noodles specifically are now considering higher menu prices on delivery orders.

The problem is as plain as day. Delivery comes with a high cost—as much as 30% per order!—which was fine for these companies to stomach when the orders were incremental and so all the labor and other costs were already paid for. But that 30% starts looking awfully problematic once delivery became a sizable percentage of sales.

So now these companies want to steer customers away from a third-party delivery service they were all about even before the pandemic. This must be the beginning of the end for that service’s growth. What say you Heather Lalley?

Heather: Eh … I wouldn’t go quite so far, Jonathan. Even before the pandemic, we were seeing large numbers of folks willing to pay a premium to get a burger and fries delivered direct to their couch. Add in a global pandemic that makes leaving one’s house potentially deadly, plus the fact that unprecedented numbers of people are working from home and trapped indoors with their families? You have the perfect conditions for delivery to keep growing and growing and growing.

The bigger issue, though, is that restaurants haven’t figured out how to properly monetize this convenience. What started out as a way to lure traffic has now become a necessity for many people. So, operators need to rip the band-aid off and make people pay for that convenience. Sure, you can incentivize pickup. But there is always going to be a strong subset of folks who are willing to pay for the convenience of getting a bag of hot food on their doorstep. Finding that sweet spot of price increase and delivery fees, though, is going to take some tinkering. But do I see any end to delivery’s growth, at least for the immediate future? Definitely not. And you’d have to pry the remote from my cold, dead hands to get me to say otherwise.

What do you think, Joe? Is delivery going to continue its upward trajectory? Is there some new tech out there that’s going to ease these headaches for operators? What do you think?

Joe: I don’t think there’s anything stopping delivery anytime soon. For example, we might have expected to see delivery slow down over the summer, when outdoor dining was available, dining rooms started to reopen and stimulus checks were dwindling. Instead, Grubhub and Uber Eats had their best quarters ever. Now COVID is raging again and we’re heading into winter—perfect conditions for delivery to keep rolling. I don’t think a few big chains ushering customers away from it is going to make that much of a difference.

With that in mind, the time is now for restaurants to figure out how to make this work. I’ll continue to stump for the best solution I’ve heard of, short of hiring your own drivers: Have your own online ordering platform and drive guests to it by offering lower prices or wider selection. You can still use third parties to deliver the orders, but you’ll pay a lower fee and keep that valuable guest data. For orders that do come through a third party, stuff a card in the bag reminding the customer that they can and should order directly from you.

Meanwhile, take a page out of Chipotle’s book and promote the hell out of your more margin-friendly curbside and takeout channels. Those have been even more popular than delivery during the pandemic, and will probably continue to be going forward.

Jonathan: OK, but price matters. It costs me 50% to 100% more to get chicken wings delivered. Guess what? I don’t get chicken wings delivered. And that is explicitly the goal of Chipotle and Noodles and others, to get customers away from third-party delivery.

But then it becomes a niche service. And if only select people are willing to pay for it, then that makes it that much more difficult for these third-party services to get enough business to make their operations efficient and therefore make a profit. And if they can’t make a profit, then they go away. What do these services do then, Joe?

Joe: If every restaurant did what Chipotle and Noodles is doing, then yeah, it would probably hurt delivery. But it’s far from becoming a niche service. Look at the explosion of ghost kitchens and virtual brands—those are all supported by third-party delivery, and more restaurants are getting into them literally every day. Technomic says that 50% of restaurants are using a ghost kitchen. Are 50% of restaurants that wrong?

But, OK, let’s say Chipotle and Noodles are the first dominoes to fall in the demise of delivery companies as we know them. Let’s pretend other restaurants start pulling away and consumers follow suit. Those delivery companies can now do a lot more than just bring you a burrito. Uber Eats will deliver almost anything. DoorDash just teamed up with an operator to open a restaurant. Grubhub sells its own POS system. They’re diversifying and embedding themselves in ways that could help them stick around if delivery doesn’t work out.

I just have a hard time seeing that happening after it’s become such a pillar of the industry. But I’m open to the idea that delivery companies might have to change. Heather: The year is 2025. Is delivery a luxury reserved for the 1%, with the rest of us relegated to the drive-thru, or is some other scenario possible? 

Heather: Sheesh. I bet Jonathan is still getting DVDs in the mail from Netflix. Joe is exactly right: More restaurants are adding delivery-only concepts every day. Are there probably going to be a whole bunch of them that fold? Sure. But a good number will stick around, even after this pandemic is over. And these delivery services are diversifying, adding even more convenient options for consumers.

Unless the U.S. suffers a complete, Depression-level economic collapse, there will always be couch-fulls of people willing and able to pay for the convenience of delivered restaurant food, groceries and more. This crisis has only made us more hooked on the time savings, safety and ease of delivery. I don’t see any scenario in which delivery becomes less efficient or more expensive due to falling consumer demand.

This all means, though, that restaurants need to be stepping up their game. If I can get a prepared salad or tray of sushi delivered with my groceries, I don’t even need a restaurant. If a chain keeps forgetting my can of Coke with my delivery order or my fries are always cold and soggy, I’ll go somewhere else when I’m ready to Netflix and chill.

Yes, delivery is and always has been a luxury. But it is not going anywhere and, with so many options available, restaurants need to deliver their A-game.

Jonathan: Netflix? Bah. I still get my video cassettes from the library.

OK fine. Enjoy your delivery kids. I’ll enjoy all of my excess spending cash from not paying for all those fees.

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