While the pandemic introduced its fair share of challenges for the foodservice industry, restaurant delivery became a boon for some operators, with digital ordering and third-party delivery leading the way.
Between 2015 and 2020, food delivery revenue more than tripled from $8.7 billion to $26.5 billion and delivery users grew from 65 million to 110 million. Prior to the pandemic, third-party delivery services increased restaurant sales volumes between 10 and 20 percent and now it represents 40 percent.
Despite the fact that 67 percent of Americans prefer to order directly from restaurants, 38 percent order takeout using a third party, with 23 percent doing it more often than they were last year.
Increased demand for digital ordering via third parties like Uber Eats, Grubhub, Postmates and DoorDash, offers restaurants access to a deep market of loyal app users. Uber Eats, alone, had 83 million app users in 2021.
The NPD Group and its CREST® database tracked the Canadian foodservice industry daily. For a year ending November 2022, its results show digital orders for takeout and delivery were up over the pandemic.
Vince Sgabellone, the Canada foodservice industry analyst with NPD explained, “Delivery share occasions doubled from three to six percent between 2019 and 2022, and there was only a slight dip of one percent between 2021 and 2022, with projected delivery occasions expected to grow from one to three percent between 2023 and 2025.”
Convenience is the number one driver of these trends and one of the most convenient ways for consumers to order is via their mobile phones. On average, mobile orders represent 14 percent of a restaurant’s total revenue.
Restaurant bills have more than tripled, as diners are likely to have a higher minimum spend, and as Sgabellone noted, “When consumers place a delivery order, thirty percent of them are seeking a special food item or satisfying a craving. This is about ten points higher than average. Operators can tap into this impulse and craving with upselling opportunities.”
This is especially true of third-party marketplaces, or what Sgabellone referred to as “virtual food courts” which offer choice and convenience at a diner’s fingertips. However, with the many advantages of these partnerships, there also comes a fair share of challenges.
The pros of third-party delivery marketplaces:
Third parties help restaurants do more with less.
The cost of operating in-house or direct-to-consumer delivery (D2C) is insurmountable for some restaurant operators, so third-party delivery platforms are the way to go. They offer access to a wide market of diners who are hungry for their next meal, and they want it fast!
One-third of Americans use third-party delivery applications, so being listed comes with greater visibility in a highly competitive and saturated market. It also helps restauranteurs scale their operations with less investment and overhead.
TIP: While you can pay for advertising and promotions like free delivery to move to the top of the listings, there are other things restaurants can do to take advantage of this market. It is important to build your own brand and optimize your web presence, in addition to delivering quality to attract customers and keep them coming back.
Third parties help restaurants overcome market challenges.
During the pandemic, off-premises meals (OPMs) were normalized, and third-party delivery became an invaluable revenue stream that kept many operations alive. A study from Raydiant showed that 37.5 percent of operators were of the belief that they would not have survived the pandemic without the service of third-party delivery providers.
Now, post-pandemic, the cost of doing business is greater than ever. While third parties can’t do anything about rising food costs, they bear the brunt of rising fuel prices and labor shortages by providing the capital-intensive, scale-driven delivery infrastructure so restaurants can focus on their core business.
TIP: A good relationship with a third party means there will be greater opportunity to work with them to reduce fees, lock in incentives, improve your listing and help you get the most out of your partnership and market.
Third parties offer ready-made infrastructure and support.
Customers want convenience and nothing is more convenient than digital ordering, especially when the experience is optimized, integrated and user-friendly. Third parties streamline the digital customer experience through ease of integration with existing point of sales (POS) systems.
Since listings are based on relevance, distance and reputation, it is important to make yourself known. Third-party marketplaces are unique because while major players have more capacity to “pay-to-play,” there is still room for smaller restaurants to secure their share of the market.
TIP: Start with menu engineering: use data to customize menus and increase opportunistic sales, order value and conversion rates. Trim menus and focus on items that travel well. Be sure to add product categories, well-written item descriptions and photos, and don’t underestimate the power of reviews. Offer quality, convenience and choice.
The cons of third-party delivery marketplaces:
Third parties can lead to a loss of control.
When restaurants hand their orders off to a third-party delivery service, they are relinquishing control of the customer experience. And, when something goes wrong, 80 percent of people will still blame the restaurant, even when they know it is not the restaurant’s fault.
All accountability and control can go out the window when it comes to delivery speed, quality of the handoff, presentation and quality, and overall driver personality. All this amounts to a loss of customer connection and customer loyalty cannot be understated.
TIP: Personalized touches, messages or complimentary items for large spends are great ways to say thank you to the customer and let them know they are valued. It is also a step towards developing a loyal customer that will continue to come back time and again.
(There is also the loss of ownership of data, but we’ll get to that one later.)
Third parties offer value, but at a premium.
Third-party delivery partnerships come with built-in experience, resources and expertise that connects restaurants to customers, but it comes at a cost. Commissions can range up to 30 percent per order, which eats into an already tight margin for restaurants.
Beyond commission fees, there may also be issues of reconciliation: when you receive payments weekly, it is hard to balance your books. Third-party delivery platforms also have the discretion and authority to offer customers full discounts, which is a major hit to restaurant operators that leaves them with little recourse.
While the food delivery market has had exponential growth, the economic and regulatory structure is still catching up. Some cities are drafting legislation to implement fee caps to create a more amicable fee structure that will better manage these third-party relationships for the long term.
TIP: An article from Forbes showed that restaurant owners should begin to view third-party delivery providers as an operational and marketing cost. Some restaurants have increased menu prices to offset the commission charges, but this increases the customer cost, in addition to paying service fees and delivery fees. Customers, however, are willing to pay higher fees for faster delivery.
Restaurants are paying to give away a competitive advantage.
One of the most significant disadvantages of third-party delivery services is the loss of ownership of data. Knowing that the top five percent of restaurant customers drive 28 percent of total sales, this enables the third party to create digital ties with customers that could have been leveraged by the restaurant for its own benefit.
It is hard to put a value on data, but having intimate customer information related to guest frequency, average spend, preference, and a bridge to those relationships can be invaluable when used correctly, and many restaurants are paying a commission to give this information away.
TIP: Some restaurants are investing in their own apps and white-label delivery services (DaaS), which offer customers the convenience of delivery using first-party platforms with more affordable, fixed-rate commission fees. DaaS is a perfect solution for restaurants who want to scale their business but also desire to keep operational costs related to this investment low.
McDonald’s is one of the latest to take advantage of DaaS. McDelivery is available through the company’s app and enables it to benefit from its own customer data while also benefiting from the expansive reach of third-party delivery infrastructure.
Making Third Parties Work for You
The best way to manage relationships with third-party delivery providers is to weigh the pros and cons from the outset just as you would vet any other vendor to ensure the partnership will support the restaurant’s business goals.
Third-party marketplaces don’t make sense for everyone, but there are many tangible reasons why a partnership makes sense. It is a market rich with potential that can help restaurants scale their reach without making capital investments to grow their infrastructure and capacity.