Americans will spend $260 billion on takeout this year — and most savvy restaurant owners understand that, as so many consumers place orders via mobile, offering digital ordering is a must for a successful run. That’s why giants like Grubhub, Seamless and UberEats have popped up, promising to work with restaurants to deliver their food to hungry paying customers.
Building a restaurant business on the shoulders of the delivery industry is a recipe for failure
If one of the best-run restaurant groups in the country walks away with a 12 percent margin, imagine how your local restaurant is doing.
But the thorn in the side of this burgeoning market is the business model — because, frankly, it’s not sustainable. The majority of restaurants already operate on some pretty thin margins, and building their businesses atop the shoulders of the delivery industry is only a recipe for failure.
The combination of an industry that has very thin margins (restaurant) with an industry that has upside-down margins (delivery) is not a wise nor healthy combination.
Let me tell you about the delivery industry today. While it may seem like it’s in its relative infancy — thanks to increased attention on the first string of venture capital-backed upstarts — delivery has been around for decades. The only difference is that restaurants handled it on their own, employing a small fleet of couriers to run pizzas to family homes in their private vehicles. We’ve all seen the Honda Civic with the glowing “Domino’s” sign on top.
To their credit, companies like Postmates, Grubhub and UberEats recognized the potential for overhaul. Most restaurants have a hard enough time staying in business as it is (something like 80 percent of restaurants fail in the first five years) — if someone could come in and handle a difficult section of the business for them, why would they say no?
That was a few years ago. Now these delivery companies have built their businesses on the backs of restaurants, gaining billions of dollars from venture capital firms to provide courier services, customer acquisition and advertising.
But today, the system is in a dangerous place.
Something’s gotta give
Recently, at the TechTable Summit in New York, Kevin Boehm, co-founder of Boka Restaurant Group (they’re behind some of the most successful spots in Chicago) spoke about just how severe this issue really is.
According to Boehm, unlike many establishments in the country, Boka Group actually owns many of the properties at all of their restaurants and thus has very few real estate costs. Despite this, the group’s profit margins are around 12 percent — which isn’t much. If one of the best-run restaurant groups in the country walks away with a 12 percent margin, imagine how your local restaurant is doing.
The recent delivery model has only been sustainable up until this point thanks to venture capital money.
The tech companies behind delivery aren’t doing any better. If fact, their margins are much worse. UberEats, which the New York Times recently called the “surprise success of Uber,” is only profitable in 27 of the 108 cities where it’s offered — meaning they are actively losing money in approximately 70 percent of their markets. That’s with Uber taking 30 percent to 40 percent of every order from the restaurant and charging the customer a $5 delivery fee.
So with profitability in, let’s say, 30 percent of their markets, money has to come from somewhere. To date, the negative margins have been covered by investor dollars — but when that money runs out and relationships become fraught, something has to give. The combination of an industry that has very thin margins (restaurant) with an industry that has upside-down margins (delivery) is not a wise nor healthy combination.
Ultimately, with restaurants having no margin to spare and delivery companies like Uber, Postmates and DoorDash all losing money while charging higher and higher fees, we’re on a path that will end badly for many. The current situation is not sustainable.
Where do we go from here?
Delivery is most successful when localized. Restaurants with their own drivers — or contracting with smaller local courier companies — can better control their businesses and aren’t forced to pay unnecessary fees. And with a rise in minimum wage coming Jan. 1, this could very well be the “straw that will break the delivery industry’s back,” as it were.
Restaurants should be wary of building too much of their business on the shoulders of venture-capital-fueled delivery companies.
Restaurant delivery was never designed to become a standalone multi-billion dollar industry. The recent delivery model has only been sustainable up until this point thanks to venture capital money. Now investor appetite for funding delivery companies is going away, just as courier wages are going up.
As the foundation starts to crumble, restaurants and the people who love them need to be prepared for what’s to come. Operational costs and commissions are going up, and these delivery companies will need to offset costs somewhere — most likely, that will look like hiking up customer delivery fees. If we’re not prepared to pay the price, we’ll have to become our own delivery drivers.
And for the restaurants grappling with this market: Be wary of building too much of your business on the shoulders of these venture-capital-fueled delivery companies. Because eventually, they will run out of gas.
Chris Webb is the CEO of ChowNow, an online ordering system and marketing platform for restaurants. At just 19 years old, his interest in markets and trading led him to start his career at Bear Stearns and then Lehman Brothers. While working in the financial sector, Webb made a founding investment in the now popular Tender Greens restaurant chain in Southern California. His experience with Tender Greens brought to light the gap in the market for online ordering solutions for local groups and independent restaurants. From that discovery came ChowNow, which today powers online ordering at more than 9,000 restaurants across the country and recently launched its own app. Reach him @ChrisChowNow.
This article originally appeared on Recode.net.
