Delivery: Will it drive sales or gobble up profits?
By Christopher Sebes, president, Xenial (formerly known as Heartland Commerce).
There certainly has been a lot of buzz around delivery. Take, for example, the recent news about YUM — parent company of Pizza Hut, KFC and Taco Bell — investing $200 million in Grubhub to help the company expand its network and eventually provide delivery services to Taco Bell and KFC customers. It makes sense; millennial diners love convenience, and many are willing to pay a premium for it.
There has been some backlash against third-party delivery services, however, with some restaurants dropping delivery altogether. The main reasons they cite? Delivery increases costs and complicates restaurant operations. One small independent business in Sydney, Australia, announced it was dropping its UberEats partnership because the shop actually lost money on delivery orders after UberEats took its 35 percent cut.
Ultimately, you have to ask whether the numbers pencil out for your business. Because let's face it: losing money isn't the reason any of us got into this business.
Charging 20 to 30 percent of the check is common for third-party delivery services. Delivery has a high cost, whether you work with a third-party delivery partner or develop your own cadre of delivery personnel. You can tack on a fixed fee per delivery, but, of course,that brings the overall price point up.
Besides the delivery fee, there are other costs that are difficult to measure but just as important to consider.
There will be an increase in complexity in terms of order management / flow and fulfillment (which location should fulfill, when should cooking and prep begin, how should delivery order pickup traffic be handled, and so on). The cost here is the labor cost of figuring all of this out and making it run smoothly for everyone, including minimizing impact on in-store customers. This last point is an important one, and not to be overlooked. If delivery orders and in-store orders peak at the same time, will store customers walk away or not even bother to come in, in the first place, causing in-store sales to drop off, offsetting the advances you've made in your delivery business sales?
The cost of losing business to competitors.
When you work with a delivery service (or several), you may end up losing customers to competitors. Say a customer starts out hungry for burgers when they start to browse through the delivery service's offerings, and an ad pops up for 2-for-1 nachos from the local taco place. Suddenly, nachos sound pretty good, they forget about burgers, and you've lost business.
The cost of a rift between your brand and the customer.
When you introduce a third party, branding and customer experiences can become fractured. What was your ‘customer' becomes the delivery service's customer, and you, as the restaurateur, become one step removed – a supplier, of sorts. You will find it harder to maintain an ongoing relationship with the customer, market to them, (re) engage them through your loyalty/rewards program, etc.
Whether you can make the numbers work for the franchisee is questionable.
In quick-serve and fast casual, margins have shrunk considerably in the last decade. Franchisees that used to enjoy 15 percent margins are now lucky to hit 7 percent. Imagine cutting that further by adding a third-party delivery fee of 20 percent to 30 percent of each ticket. You would probably face backlash, with a lot of unhappy franchise owners, few new owners willing to come onboard.
One factor that large systems have in their favor: sheer scale may help the system negotiate a lower cut for the delivery service, by signing up an entire franchise system versus store-by-store.
To analyze the cost versus return, it's important to have a POS system that tracks delivery orders right alongside eat-in, drive thru and pick-up. That way, you'll have a 360-degree view of ordering channels and can compare whether delivery makes dollars and sense.
Companies: Xenial, Inc.