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New York (CNN Business)Restaurants have a delivery problem.
Early in the pandemic, when eateries were forced to shut their doors, delivery became a lifeline. Restaurant operators scrambled to set up delivery channels from scratch or promote ones that previously existed.
But there was a reason that many restaurants hadn’t focused on delivery before the pandemic: Delivery is a pain. It’s expensive, since restaurants have to hire drivers or outsource to third-party providers like DoorDash (DASH) or Grubhub (GRUB), which charge a fee that cuts into their already razor-thin margins. It’s also stressful for employees, who must balance taking care of in-store customers while filling increasing numbers of to-go orders. And when deliveries go wrong, the restaurants take the blame, whether or not it’s not their fault.
Customers, on the other hand, don’t see it that way. Delivery is convenient. It’s usually pretty fast, and perhaps best of all, they can do it through an app — without ever having to talk to a person.
Although dine-in restrictions in most places have eased, delivery rates remain higher now than they were pre-Covid. In 2019, delivery accounted for about 7% of total US restaurant sales, according to Euromonitor International. After a spike in 2020, it settled at nearly 9% in 2021, according to Euromonitor’s forecast for last year (The company’s 2021 foodservice data has not been published.)
So whether restaurant owners like it or not, delivery is here to stay.
“Consumers have become accustomed to getting products delivered to their homes,” said Joe Pawlak, managing principal at Technomic, a food service consulting company. Now, restaurants “have to figure out what to do to make it profitable.”
For restaurants, fixing delivery means not only making it work better, but also finding ways to convince customers to choose carryout or drive-thru instead.
The problem with delivery
During the pandemic, restaurants had to shift to a delivery or takeout model to survive, said Tom Bailey, senior consumer foods analyst at Rabobank.
“They didn’t necessarily do the most efficient adjustment,” Bailey noted.
For some restaurants, the economics of delivery simply don’t add up. Third-party providers charge fees which can be as high as 30%. Restaurants, particularly independent ones, already have thin margins. For some, delivery fees can mean operating in the red.
Certain measures have been put in place to help make delivery less expensive for restaurants. Cities have been capping fees at lower rates. Third-party providers have also started offering lower rates for limited services, allowing restaurants to opt into more affordable, if less extensive, services. Some restaurants are able to negotiate lower rates directly. Others pass costs onto consumers.
Another problem with outsourcing delivery is that when circumstances outside of a restaurant’s control go wrong, their own costs can spike. Starbucks (SBUX) CEO Kevin Johnson walked analysts through a recent scenario that increased costs for the coffee chain during a February call.
“Our third-party delivery providers had Omicron-related staffing shortages, impacting their ability to fulfill a portion of our distribution needs,” he said. “This required us to greatly increase the use of much more expensive … alternative delivery solutions in order to meet strong customer demand,” he added. Ultimately, the disruptions meant “a rapid increase” in costs.
One way to tackle the delivery challenge is to separate the service from regular restaurant operations, and use it mainly to attract new customers. That’s especially important for casual dining brands such as Applebee’s and Chili’s, which are designed to serve diners primarily in their restaurants.
The pandemic prompted these chains and others to set up online-only concepts designed specifically for delivery.
Applebee’s launched Cosmic Wings, which serves Cheeto-flavored chicken wings. Brinker International (EAT), owner of Chili’s and Maggiano’s Little Italy, has two virtual brands so far: Just Wings and Maggiano’s Italian Classics.
Online-only brands allow restaurants to promote products that travel well for delivery, such as sandwiches and wings, helping turn the service from a burden into an competitive advantage.
Those virtual brands “offer some really unique opportunities to explore … urban and smaller take-out delivery-centric prototypes,” said Wyman Roberts, Brinker’s CEO, during a February analyst call.
For fast casual and fast food restaurants, which were already designed to get people out the door quickly, better drive-thrus and incentives for carry-out may be the way to go.
Better drive-thrus and easier pick up
As customer habits change, restaurants are rethinking their layouts. For many, that means more drive-thrus.
Chains from Taco Bell to Burger King are adding drive-thru lanes to restaurants. More lanes can help speed pick ups — and faster drive-thrus could ultimately be a more attractive option to consumers than delivery.
Chipotle (CMG), for example, is planning to open about 4,000 more locations in North America. Most of them will have Chipotlanes, a dedicated drive-thru for customers who place orders digitally.
“What we’ve seen with the Chipotlane [is], our digital business goes up, our delivery business goes down as a percentage and the order pickup percentage goes up,” the company’s CEO Brian Niccol told CNN Business in a recent interview ahead of the opening of the chain’s 3,000th location. “From an economic standpoint, the best margin transaction for us is in order ahead, and then the customer comes in,” he said.
If chains can’t convince customers to use speedier drive-thrus, they might try something else, like a small bonus for skipping delivery.
Late last month, Domino’s (DPZ) offered a deal: Pick up your own pizza, the company said, and get a $3 credit toward your next order. Earlier this year, the chain also vowed to deliver a pizza to customers in under two minutes — but only if those customers drove themselves to a Domino’s location and parked in the right spot.
If all else fails, companies may see delivery fall off naturally as the service becomes pricier.
To make delivery more profitable, companies have been making it more expensive.
At many restaurants, “menu prices are higher for delivery than they are .. when somebody goes to the restaurant,” said Pawlak.
That’s certainly the case at Chipotle (CMG). “The reality is that channel comes with additional cost,” Niccol said during a recent analyst call. “What we’ve seen is people recognize that and are willing to accept that for those occasions.”
Companies have been raising prices on everything from menu items to consumer goods and are saying that so far, customers are sticking around. But that won’t last forever.
“It’s easier to do pricing in a stimulus environment where everyone else is going up,” Coca-Cola’s CEO James Quincey said during a recent analyst call. “It’s much harder when there’s a real squeeze on income.” Coca-Cola (KO) raised prices last year, and may do so again this year if needed.
The risk is that with inflation on the rise, customers might turn on higher prices, including for delivery. “Consumers are willing to pay for [delivery] now,” Pawlak said. “At a certain point, there’s going to be some pushback on that.”
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