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Is Delivery QSR’s Groupon Redux?

Getting customers through restaurants’ doors and getting restaurants through customers’ doors are two very different things. One can lead a business to succeed, even thrive, while the other can spell its gradual demise.

Delivery is convenient on the consumer side; there’s no doubt about that. And aggregators like Grubhub, Seamless, DoorDash and Uber Eats make it even more so. But, for quick-service restaurants (QSRs) and fast-casual establishments, is it a smart business move?

It’s a debate.

Customers demand this kind of convenience in today’s world. They may even feel they’re supporting local restaurants with their patronage when they order takeout through one of these platforms — after all, they’re eating the restaurant’s food. Why should it matter if they got it by sitting down at a physical table until waitstaff put it in front of them, if they ordered takeout through the restaurant’s website or app or if they turned to Grubhub to get it delivered — maybe even for free (bonus!)?

But according to Chief Innovation Officer Geoff Johnson at Bypass, it does matter.

“Aggregators are powerful,” Johnson acknowledged. “They have the consumer’s eye, so restaurants feel like they have to be on them — but it’s a double-edged sword.”

Double-edged, he said, particularly since most delivery services aren’t profitable. Without restaurants — and good ones — they’d have no business, and they know that. The rap against them is that restaurants, fearful of missing out, feed these aggregators revenue even if it shreds their own bottom line.

A 2017 study by Morgan Stanley showed that, today, digital food delivery comprises only 6 percent of the market, around $30 billion. Yet over 90 percent of public restaurant companies covered by Morgan Stanley had embraced the segment, which could lead the percentage to leap to 11 percent by 2022.

The study suggested that as much as 40 percent of total restaurant sales, $220 billion, could be up for grabs as early as 2020, particularly in urban areas where delivery is more concentrated.

The pressure is real, Johnson admitted, and many restaurant owners feel they must make a quick decision to either join a platform or take a stand against such platforms. However, he urged businesses to take a measured approach and introduce new strategies step by step to evaluate how they’re working (or not).

Size Matters

Johnson said much depends on the restaurant’s size and the typical activity of its customer base — data which is not always accessible when restaurants rely on aggregators to bulk up their order volume.

The problem (or at least a major part of it, Johnson said) is that restaurants using multiple aggregators end up with a mess of iPads — often as many as five to six — at the counter to manage.

When an order comes in, an iPad pings and prints it out. Then an employee has to re-enter the order into the point-of-sale (POS) system, increasing not only time and labor but also the potential for rekeying errors. Such mistakes can damage the business’ reputation and prevent repeat business from disappointed customers.

Furthermore, Johnson said, it can be difficult, if not impossible, to run a sales report that shows how much revenue, say, Grubhub is generating for that establishment compared to DoorDash compared to Seamless and Uber Eats. It would require someone to go into each platform to collect the data and then analyze it manually.

Johnson said the challenge is greatest for small restaurants with one to 10 locations. As businesses grow beyond that point, he said, there tends to be more investments in analysis and POS technologies that can integrate the various services into a single POS, eliminating the iPad collection and the rekeying errors that go with it, as well as enabling detailed reporting.

Volume Vs. Margins

But that’s not the biggest issue delivery presents to these restaurants. When it comes time to choose delivery or not to choose delivery, it’s a choice between volume or margins.

While there’s some value to the exposure gained through working with aggregators, Johnson cautioned that the traffic driven by aggregators may not turn into the pipeline for profitable customer acquisitions.

Instead, Johnson said, it may be Groupon Redux for the restaurant.

Aggregators certainly can deliver volume, but Johnson warned it’s often the same type of volume that Groupon delivers: Customers show up once to take advantage of a certain deal (or, in the case of dinner, free delivery), then move on to the next place that’s offering the next good deal. There’s no loyalty or even brand recognition. Customers are simply chasing what is cheapest and easiest — and the only brand they associate with is the aggregator who’s delivering their food for free.

The proof, Johnson said, is in the data.

Offering delivery through aggregators doesn’t have to be all or nothing. Bypass partners, he said, have found that total ticket prices tend to come in lower on orders placed through aggregators than orders placed through a restaurant’s own ordering platform. Some restaurants choose to offer a limited menu, encouraging people to order through their website or to go to their storefront for the full selection. In these situations, volumes may be lower, but revenue generation can be substantially higher.

For at least one brand, Johnson said discovery led the restaurant to remove itself from Uber Eats because the platform was driving volume without profit. Looking at the data, the restaurant decided it was OK to lose business from customers on Uber Eats since the lifetime value of those customers was questionable anyway. That restaurant made the decision to protect its margins over volume, Johnson explained.

It’s Not (All) About the Money

Johnson doesn’t expect restaurant storefronts and physical dining spaces to go away anytime soon. That’s because restaurateurs care about the food they’re making and serving — not just the profits they’re generating.

As wholesome as that attitude may seem, it can leave the bottom line malnourished. Johnson said businesses must recognize the situation is complex and multifaceted and ask themselves what they hope to gain from offering or not offering delivery through aggregators.

What really needs to happen, said Johnson, is that aggregators need to loosen their grip on data so restaurants can understand their customers and make informed decisions. Right now, the delivery aggregators function more like marketplaces, he said, but that may (and, in his opinion, should) change.

Restaurants must have the knowledge and opportunity to differentiate themselves within aggregator apps, he said, in order to drive loyalty and to help create the sense that customers are regulars — even if they’re ordering online.

The current system is structured so restaurants can never really win, said Johnson. If there’s a mistake anywhere in the process, it always comes out looking like the restaurant’s fault. Meanwhile, the aggregator gets the data and can drive the customer back to the app.

It’s the same supplier/merchant tension that exists in every marketplace, Webster noted, but when a customer buys something off eBay, the “store” is often simply some guy’s living room. The seller’s business is not harmed by the buyer not coming into his living room.

But with a restaurant, there’s a way to physically engage with the business — and it seems that choosing not to can do more harm than consumers realize.

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