How Delivery Services Impact your Restaurant’s Bottom Line

February 8 2019

Delivery is the hottest trend in restaurants, and third-party services like UberEats and GrubHub are helping multi-unit operators grab their share. But as with so many facets of restaurant operations, operators should proceed with caution.

That was made abundantly clear in the findings of Chicago-based Technomic Inc.’s On Demand Delivery: Disrupting the Future of Foodservice study, which confirms that for restaurants with a formal agreement with third-party ordering portals and delivery services, more than three-quarters of consumers — 76% — hold the restaurant at least partially responsible for any errors.  “This puts operators’ brand reputation at risk each time a customer orders delivery through these services,” said Technomic principal Melissa Wilson in announcing those findings. “Even if delivery is not a current strategic initiative, operators should educate themselves about and understand the dynamics of the third-party delivery market so they can put guardrails in place to maintain quality and brand reputation.”

Add to that the extra cost, potential for mishandling, food safety issues, late deliveries, unprofessional drivers, order discrepancies, financial miscues and outright fraud and it becomes clear the possibility exists for a lot more going out a restaurant’s doors than just food. “Initial results suggest that even at the very high cost that some third parties charge, restaurants benefit from these types of services,” says Juan Martinez, PhD, PE, FCSI, the principal of Profitality, a foodservice consultancy in Miami, FL. “This is the plus. The negative is that it is expensive. Another minus is that you put the brand in the hands of a third party, since they are the last point of contact with the guests.”

“If you can add incremental sales you would not normally get, it might be worth it,” suggests Alex M. Susskind, Associate Professor at the School of Hotel Administration and a member of the Graduate Field of Communication at Cornell University. “The downside is that not all food travels well. You can hurt your brand image if the products aren’t right when they arrive through the delivery.”

Geography also plays a role. Speaking at January’s ICR Conference in Grande Lakes Orlando, FL, Domino’s CFO Jeff Lawrence noted that only a minority of markets can support delivery. “The whole world is not San Francisco and New York,” he noted.

“Third-party delivery services do better in certain areas of the country, and with certain food choices,” agrees Debra Blanchard, the owner of Boudreau & Thibodeau’s Cajun Cookin’ in Houma, LA.

Keeping the Books

Just as critical is knowing how best to interface with delivery services and systematically record these additional transactions – whether, for example, they constitute a marketing or operations expense — something even the most experienced operators may well need help with. Blanchard points out that while the fees could be viewed as a marketing investment to reach new customers, “the operations expense would incorporate the increase in to-go products associated with the delivery process.”

Bob Ansara, President and owner of Ricardo’s Mexican Restaurant, Cantina, and Catering Company in Las Vegas, NV, acknowledges that the fees “are hard to swallow, pun intended. Regardless of where you rationalize them or put them on the P&L, they’re tough. The delivery companies argue that we don’t have the marketing costs, the credit card discount fee costs, the added cost of doing business with the guest not eating in the restaurant, and finally, the labor saved.”

“The up-to-30% fee these services take for delivery orders, and charging customers $4.99, makes the service more a marketing tool due to the number of customers it exposes to your restaurant, as opposed to the amount of money the restaurant earns,” says Nicholas K. Makris, MBA, DBA-ABD, Assistant Professor at the College of Hospitality Management, Food & Beverage Management at Johnson & Wales University in Providence, RI.

Third-party fees could be passed on to guests, as many concepts do, Martinez suggests. “Others just absorb it into their cost structure. To accept the latter, the financial model that the concept has to accept is one that these sales are additive, and that no additional labor costs, or any other fixed costs, are added. Otherwise, the financials of a third-party delivery service that charges 30% would not work after you include labor, food and other costs.”

Rick LeSage, President of Northwest Consultants, LLC in Bend, OR, says he views it as marketing for any fees and material. “It’s a sales builder; I see many doing it because sales have been slipping.”

Approaches vary, but the bottom line is this: expert advice in handling this complex relationship can make or break a restaurant’s delivery program — and quite possibly, the restaurant itself.

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