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Restaurant Insights: Have We Reached the Tipping Point in Third Party Delivery?

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After attending numerous conferences in the restaurant industry including MURTEC, FSTEC, RES, RIS, RFIS, and National Restaurant Association Show, there is always one topic that is consistently raised, either from the stage or from the audience. It always evokes an intense, emotional mix of frustration, futility, and anger: Third-Party Delivery. (Related: Managed IT services for restaurants)

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Everyone knows this is what the customer wants, yet no one knows how to thrive with such a cannibalistic offering that leaves the business so financially exposed. Putting aside basic issues of food quality and customer service, how can a restaurateur succeed when an outsider has so much control, both directly and financially, over their relationship with the customer? In addition to evoking extreme hostility, there is also genuine confusion as to how to proceed. 

After years of listening to the same arguments repeatedly regurgitated, I was shocked to hear a very different tone at the Restaurant Franchising and Innovation Summit 2019 in Louisville, KY. Frustration was turning into confidence. Instead of fear feeding upon itself, there was an entirely new attitude permeating the conference. Restaurateurs expressed great confidence and were offering practical guidance on how to move forward.  For the first time, there was a sense of hope.

You don’t have to do much research to understand the problem. The Amazonian/Uberization of our social existence has resulted in a consumer with extremely high expectations. For the restaurant industry, the most significant area of growth is shifting to outside of the four walls of the restaurant. While consumers still want quality food, they are willing to trade some of that quality for convenience. This phenomenon has given rise to numerous platforms, such as GrubHub, DoorDash, UberEats, and many others. With a commitment to a single app, the consumer has frictionless access to all types of foods, wherever they happen to be. (Related: Managed SD-WAN and application assurance, the secret weapon in the app-driven world.)

The fundamental problem with third party delivery is the business model. The third-party delivery platforms typical charge 20-30% for their contribution to the customer experience. Even at these rates, many 3rd party delivery providers are struggling to turn a profit, which means the rates are not expected to decline any time soon. This leaves the restaurateurs stuck between a rock and hard place. Paying third party delivery fees is not a sustainable way to run the business. However, not participating in 3rd party delivery means losing access to the primary channel by which today’s consumer finds their next favorite restaurant. What should a restaurateur do?

At RFIS 2019, a surprising number of restaurateurs were providing similar, but unconventional guidance. 

“Negotiate aggressively with 3rd party delivery companies.”

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“Either charge different prices for delivery or charge a delivery fee.”

“Maintain separate menus. One for delivery. One for the restaurant.”

When I asked, “Doesn’t this advice violate the typical contract terms with 3rd party delivery companies?”       

The responses collected from the keynote panels, small group workshop, and several individual conversations were quite consistent. “Yes, but we did it anyways and all we got was a slap on the wrist. They need us just as much as we need them.”

I was surprised. However, with so many restaurateurs saying essentially the same thing, the new attitude was too difficult to ignore. Beyond the bold advice, there was also best practices on how to manage the business of 3rd party delivery.

“Only offer higher margin food items that travel well.”

“Manage profit margins by capping 3rd party delivery to 20% of total restaurant sales.”

“Aggressively brand your packaging to convert customer loyalty.”

“Focus on your loyalty program.”

The goal is to grow direct relationships with customers. While 3rd party delivery provides access to a broader customer base, restaurants do not want a long-term, indirect relationship with customers. The margins on each order are either far too low or as in many cases, the restaurants are losing money. 

The restaurant’s loyalty program is the key to converting a 3rd party delivery customer into a direct customer. Instead of paying 20-30% to the 3rd party delivery, restaurants should generously reward the customer to encourage a direct order.  However, for a customer to make a direct order, they sacrifice real estate on their cell phone to install the restaurateur’s app.  Each time the customer wants food, the restaurants need them to make a conscious choice to open their app with their menu, instead of the 3rd party delivery’s app with a multitude of options. To covert the 3rd party customer into a direct customer, the restaurant’s reward program must overcome these customer experience barriers.

The market tides are shifting in 3rd party delivery. Restaurants are negotiating aggressively with 3rd party delivery companies. They are redefining onerous business practices into reasonable one with a much greater opportunity for successful market growth. With aggressive loyalty programs, restaurateurs are finally finding ways to expand their business with 3rd party delivery.

 

About the Author

 
Tim Tang

Tim Tang helps distributed organizations achieve the promise of digital transformation by sharing ideas across industries and helping customers stay ahead of the ever-increasing pace of change.