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Third-party delivery: How to turn a necessary defense into a meaningful offense

Restaurants would be well-served to begin building an "owned audience" of customers who they can personally interact with to drive repeat purchasing.

December 4, 2018 by Zach Goldstein — CEO, Thanx

"Third-party delivery services such as DoorDash, GrubHub and UberEats are eating the restaurant industry. They represent $9 billion in restaurant sales, growing 50 percent annually. The delivery industry will represent 5 percent of all restaurant sales within a few years, and it's not stopping there. Delivery is simultaneously an amazing growth driver and an existential crisis industry-wide — with even brands that are not participating in it being hurt by those who are. The question is, instead of just participating in what has become table stakes for the industry as a way to defend your sales, how do you turn this into a meaningful offense that drives customer loyalty and true incremental sales?

The draw is clear — a consumer clicks a few buttons and food shows up at their door. The result can be magic for customers and an immediate shot of revenue for struggling restaurants who are watching in-store traffic steadily decline — problematic for sure as we know Wall Street is no longer setting valuations based on new doors opened — it's all about traffic comps.

So then delivery arrives and it appears to be a godsend — easy revenue in an otherwise turbulent climate. But that instant hit can be a longer-term death blow for the livelihood of these businesses. For most restaurants, third-party delivery fees range from 15 to 40 percent — against a business with already challenging gross margins. So it comes as no surprise that many restaurants struggle to profit off of the relationship. A generous interpretation suggests that there are no additional fixed costs (the lease is already paid for) but the reality is different for high-volume delivery shops. As one NYC restaurant who recently shut off delivery noted, "Customer complaints are common because we have no control over the quality and timeliness of what is actually delivered. And those complaints end up coming directly to us, not the delivery provider, so we often have to remake the item and pay for a redelivery ourselves."

But the cost can be even worse than losing money on a single redone order. This author recently experienced an hour-long in-restaurant wait (for my first course) in San Francisco because, in the manager's words, "we're unexpectedly backed up with delivery orders." That one experience will result in me never returning to this neighborhood haunt — lost regular revenue is a deathblow for restaurants in competitive markets. It never comes back.

When you add it all up, there is no doubt that many restaurants are net-negative on delivery. Said one Texas-based Fast Casual CEO, "We just don't know [if we're making any money] but with the fees we pay, we would need almost all of it to be truly incremental revenue for it to be worthwhile. I don't know the answer to that though." He added, "but it feels scary to not be playing in delivery marketplaces."

This same Fear Of Missing Out is crippling the industry. And no one is talking about the biggest risk of all. It's one we've seen in other industries.

From travel agents to musical artists, the disaggregation of businesses from their customers (by online travel aggregators like Expedia and by digital music subscription platforms like Spotify) have resulted in massive shake-ups in otherwise mature profit pools. A decade after the introduction of these interlopers, profits had shifted to the new players and the "creators" had been completely sidelined. The parallel with restaurants losing out to consumer-facing delivery brands is not so hard to imagine. After all, even if a customer returns to UberEats to reorder from the brand that served them great food last time, they're greeted with a smorgasbord of options and an interface designed to get them to try something new. It's an anti-loyalty program. Because you don't have a direct relationship with the customer and delivery sites won't share that data, restaurants don't have control over the experience or even knowledge of who that person was.

To combat this trend, restaurants would be well-served to begin building an "owned audience" of customers who they can personally interact with to drive repeat purchasing. This has been the magic of online retail which uses previous transaction and browsing history to personally and selectively target new items at existing customers. The days of "cold" new customer acquisition are gone; it's too expensive. This guidance is consistent with the 80/20 rule — disproportionately, the majority of revenue comes from a small number of customers. Third-party aggregators make it impossible to know who those people are and if they stop purchasing. Based on what we've seen with restaurants at Thanx, being able to engage customers personally can double or triple sales. It's mind-blowing: a 5 percent increase in customer retention can increase profitability by 90 percent.

Personalized customer engagement is a critical defense in a world where GrubHub is trying to own your customer — restaurants need to evolve from basic email functionality to personalized communication that offers timely promotions personalized based on behavioral triggers — and yes, sometimes it may even make sense to drive customers to delivery (hint: during slow times of day or inclement weather, but not at peak hours).

Ultimately, delivery is here to stay, but restaurants must work hard to confirm the incremental delivery revenue (not taking away from people who would come on-site otherwise), win back personal relationships with delivery customers so you can market to them directly, and market to that customer personally so loyalists keep coming back.

Otherwise, it may be impossible to ever get back to same-store sales growth. We at Thanx, are seeing success stories and believe they can happen industry-wide — but a conservative approach to delivery is an important starting point until the economics become more restaurant-friendly.

Photo: iStock