Commentary

Firehouse CEO on 'surviving the era of the aggregators'

Firehouse Subs' CEO Don Fox weighs in on some of the opportunities and challenges in the era of third-party delivery.

August 24, 2018

By George Orlin, COO, Intelligent Transactions

Over the last couple of years, while many brands grappled with high-priority initiatives such as Order Ahead, third-party delivery services including Uber Eats, GrubHub, and DoorDash increasingly became a preferred commerce channel for the average American. These delivery services, often referred to as "aggregators", were quickly becoming what Amazon had become to retail. The on-demand "Era of the Aggregators" had descended upon the foodservice industry with overwhelming adoption from guests.

Today, many brands are faced with the unique challenge of adjusting the very essence of how they engage with their guests, prepare their food, and manage their operations.

Firehouse Subs, a fast casual franchise brand with more than 1,140 restaurants in 45 states, Puerto Rico and Canada, understands the vital importance of navigating the correct path during this new era. Firehouse Subs's Chief Executive Officer Don Fox weighs in on some of the opportunities and challenges for foodservice brands:

Q: What is your reaction to the rise of delivery?

Fox: There is a very interesting dynamic at work that I don't think anyone has fully explained yet; at this point, delivery is here, and it is here to stay. Many trade magazines write about the growth of off-premise, but the real underlying story is the decline of dine-in. The decline of on-premise dine-in continues unabated; the big question is where it stops. I can't imagine a theoretical world where there is no dine-in business, but I have also not discovered one brand that is an exception to this phenomenon. Understanding the degree to which dine-in drops is going to be of fundamental importance to brands' business models.

Q: What benefits do you see in participating with these aggregators?

Don Fox

Fox: Now that there are more delivery options available, more customers are availing themselves to third-party services. While data from the industry points to negative overall traffic (thus leading to the conclusion that delivery orders in sum total are not incremental for the industry) when participating with delivery services, we have found that it is incremental for our brand (and the same seems to be true for most brands). Despite the fact that there is an added cost for taking on that business (around a 25-33 percent per order fee), its incremental nature makes it a profitable exercise for us. The consumer is in a need-state; once they are in the need state of wanting to have food delivered that need-state won't magically change. At this point, as they scroll through UberEats or GrubHub, they are not thinking brand-first, they are thinking delivery-first.

Q: What are some of the keys to success in offering a delivery function?

Fox: Participating with aggregators is certainly the easiest port of entry to get into the game. There are different processes by which you get your placement on these apps. I love the one where brands are placed by rating, so that you have to earn your way to the top of the list as opposed to paying your way to the top; we have very high-profile placements in some apps because of the rating that we get from the consumer. Additionally, we have realized that each available delivery service has its own unique user base which tells us that people tend to choose one service instead of several. This furthers the argument that, as a restaurant operator, you should use all that are available.

However, as the delivery programs mature, more and more people will think brand-first. If you can continuously provide a good delivery experience, the users will settle in with your brand. Of course, when this starts occurring on a larger scale, it makes the case for you to have your own delivery function. Given a choice, a lot of restaurateurs would prefer to be more like Dominos given the fact that in-house delivery provides a level of immunity against competitive intrusion via other brands available on the screen of an app. However, with the in-house model, it can be harder to be profitable if your internal delivery business doesn't reach a certain sales threshold (due to the associated fixed costs and the general difficulty of hiring good drivers).

Q: What is Firehouse's current position on delivery?

Fox: The consumer has clearly shown that they have a strong appetite and need for delivery services. The consumer that is using third-party delivery services are shopping; that is where they are going to make their selection. If you are not there, you will not get their business. We believe that internal delivery can co-exist with third-party delivery. We do our own in-house delivery in some markets (in a few dozen restaurants), but we are still aggressively utilizing third-party aggregators where we can; about 70 percent of our system is using at least one third-party service. Filling the remaining 30 percent gap is more of a matter of access to third-party services (i.e., services are not yet available). After some packaging changes we implemented last year, we are in a great position to exploit the opportunity that delivery represents.

Delivery