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Incre-MENTAL: The heated debate over third-party delivery

Operators are asking themselves, "Does the delivery sale add or simply replace dining room visits?"

June 13, 2019

By Jim Collins, CEO, Kitchen United

I never realized that "incrementality" could be such a controversial topic. It's a simple concept, really: "is this element additive?" Right now, in the restaurant industry there is a lot of heated conversation around whether delivery sales are incremental. Operators are asking themselves "Does the delivery sale add or simply replace dining room visits?"

I get why it's a heated discussion. There is an average 25% (and for most restaurants, 30%) charge associated with taking orders from delivery marketplaces. Applied to the fundamental economics of most restaurants, that charge makes the sale through the marketplace breakeven at best. Since most restaurants already flirt with the fine line of profitability, it's a burden that can easily break an already stressed operation.

This is where the problem starts…In conversations with restauranteurs I hear a lot of people say they won't allow delivery or online ordering because they want the diners to visit their dining rooms.

Think about that statement a bit…

Here's another way to look at it that might help.

A consumer gets home and decides that he wants to binge a new series on Netflix. He talks to his life partner and the two decide to "order in" because neither wants to cook. They decide on a restaurant and find it online (searching the restaurant) to place an order. If the restaurant has an online order engine that works well, perfect, if it doesn't and it's on the marketplaces, fine. If the restaurant doesn't allow online ordering they seek an alternative.

What I've just described above, with only cosmetic differences, is how the vast majority of restaurant marketplace delivery orders occur. 

Most national studies scream loudly and clearly that in this context, "delivery" or "marketplace" orders are almost 80% incremental. Honestly, I have a problem believing it's not closer to 100%.

So why is there so much controversy? Two reasons.

One reason is because there are a lot of dining rooms that used to be full that aren't full anymore. Some of these restaurants take marketplace orders, so the owners are assuming a cause and effect between the two. The assumption appears to be logical: "People aren't coming in anymore because they're ordering at home." That's a much more comfortable assumption than the alternative: "People aren't coming because they don't want to come."

This is going to hurt a bit, but I think people are not coming because they don't want to come. The fact is that most situations where this is occurring are casual dining chains that are struggling with relevance in an increasingly changing demographic landscape. In these cases the actual problem might not be delivery, it might be the brand. Delivery is just an easy scapegoat.

The other reason is a little controversial but equally important. That is that there has been a slight decline in recent years in the percentage of "fullness" of dining rooms around the country. This is one of those situations where the numbers can "lie." There are two possible reasons why "percentage full dining rooms" could be lower. One is that less people are going out to eat. The other is that there are more dining rooms. In this case, the answer appears to be that there are more dining rooms.

The restaurant industry has been on a building binge for the last several years, adding 75,000 restaurants between 2016 and 2018 for a total of 660,000 in the U.S. today, or 9% growth (that's roughly 9X the speed of population growth). New brands abound. The challenge is that the population that used to frequent casual dining chains is actually shrinking as they move into fixed income, And while the chains continue to spend wildly on building, marketing, portion size, bundles and enticements, they have been challenged to connect to younger diners who are more interested in understanding food sourcing, mission, and who are interested in personally tailored dining experiences (gluten-free, organic, keto, etc.).

It's unpopular for me to say this, but most models predict that the dining room footprint will shrink like the retail footprint over the next several years. One recent study suggests that as many as 100,000 restaurants will close. The population is actually growing, so on a macro, or global level, is delivery incremental? On a macro level the answer appears to be no. Mathematically delivery can't grow dramatically without having some global impact on dining room visits.

So what to do?

With regard to casual dining the answer entails definitive, strategic strokes. And it's actually pretty basic. Espouse consumer demand for delivery. Use the marketplaces as a marketing channel to attract new customers either to your restaurant or to your direct ordering platform. Be sure you're refining food to meet new consumer demand. And find a way to translate those delivery orders into a way to regain affinity for your brand, so that you reenter the decision set for when a consumer seeks out an opportunity to go out, socialize and enjoy a dining out occasion outside the four walls of their home.  If you can build that interest back up, that is truly where you find the incremental opportunity for your brand. 

Onward.

Cover photo:iStock