Hard Bargain: Third-party delivery may be costly, but restaurateurs can’t afford not to engage with it

By Jeff Dover

Delivery is the fastest-growing segment in Canada’s foodservice industry. According to Ipsos Foodservice Monitor, delivery foodservice sales were $4.3 billion in Canada in 2018, an increase of 44 per cent over the previous year, with delivery now accounting for 8 per cent of QSR and 6 per cent of FSR meals. In a 2019 study, BrandSpark, a marketing agency, reported that 27 per cent of Canadians ordered food delivery at least once per month directly from a restaurant, while 15 per cent ordered from a third-party delivery service. Younger consumers, the largest consumers of restaurant meals, are even more likely to use third party delivery, with 23 per cent doing so at least once per month.

Service Management Group, a consumer research firm, found that awareness of third-party delivery increased 24 per cent from 2017 to 2018, and usage increased 14 per cent in this same period. The same survey found that 85 per cent of respondents will use third-party delivery in the future. Users average 10.5 per cent more restaurant visits than typical consumers. Clearly, this is a distribution channel that restaurateurs should seriously consider, despite the slimmer margins. Failing to do so could put them at a competitive disadvantage.

Cost of business

Delivery isn’t exactly new. It has been around in Canada for decades, primarily in the pizza and Chinese food segments, but most restaurants do not generate enough business or can’t find the drivers to do their own delivery. Third party delivery, for many, is a necessary evil. The commissions are significant — up to 30 per cent — and even for large chains the commissions can exceed 20 per cent. Considering the average restaurant profit is 3.4 per cent of gross sales for full-service restaurants and 4.3 per cent for quick-service restaurants, managing that high commission is key challenge.

Other challenges, such as the third party “owning” the customer (and not sharing this with the restaurant) and the lack of integration between ordering platforms and the restaurant’s POS, commonly referred to as “tablet hell,” post logistical challenges. Customers are likely to blame the restaurant (as opposed to the delivery company) for mistakes in the order and for longer delivery times than promised. According to Technomic, restaurants experience three times as many order issues with third party delivery than with dine-in or takeout orders.

Stress test

Third party delivery can be difficult for any restaurant, but research repeatedly shows that it’s becoming a key factor for success in the restaurant business. A survey by TDn2K, a restaurant analytics provider, found that 89 per cent of restaurateurs believe delivery to be incremental business. A Service Management Group survey indicated that if customers had not ordered food for delivery, only 10 per cent would have visited a restaurant for that meal occasion. Third party delivery generates incremental business; it is not cannibalizing in-store or takeout sales. That incremental demand is also greatest when in-restaurant demand is lowest. Research by Ipsos shows that delivery demand spikes during snowstorms and heavy rain — unsurprisingly, the same times potential guests decide to stay indoors.

The TDn2K survey also found 89 per cent of limited-service restaurants and 51 per cent of full-service restaurants generate greater check averages through third-party delivery over to-go orders. This is not surprising, since remote ordering provides more comfort to customers when upsizing their orders — there’s no face-to-face guilt from upsizing that order of fries, for example — and, unlike human order takers, technology never forgets to upsell.

Damned if you don’t

Third-party delivery is vital for reaching the Millennial and Gen Z demographics, which have overtaken Boomers in money spent and visits to restaurants. Netflix, Youtube and similar streaming services have resulted in the younger generation cocooning earlier; however, they want to eat what they want, when they want it and delivery appeals to such needs. The primary reasons delivery is used, according to a Services Management Group survey, is inability to travel (18 per cent), preference to not to cook (17 per cent), ease of ordering (17 per cent) and time savings (12 per cent).

Third-party delivery can be costly, but restaurateurs can’t afford to ignore it. Many Canadian operators are adjusting their menus, modifying products and sourcing packaging that maintains food quality during delivery. Some are including only their most profitable menu items on delivery platforms or offering delivery items at greater prices (although not all platforms allow for it). That shouldn’t be a problem, though. Like the demand for delivery, the number of providers has exploded.

fsSTRATEGY believes the growth in off-restaurant consumption, both takeout and delivery, will continue. Third-party delivery will increasingly become an important channel that restaurants will need to navigate to be successful. Now, with so many out there, restaurateurs can make delivery services work for them.

Jeff Dover is Principal and Managing Director with fsSTRATEGY Inc. fsSTRATEGY Inc. a niche consulting firm based in Toronto focused on assisting foodservice operators to enhance customer satisfaction, revenues and return on investment. For additional information on fsSTRATEGY services, contact us at nextsteps@fsstrategy.com or 416-229-2290.

One thought on “Hard Bargain: Third-party delivery may be costly, but restaurateurs can’t afford not to engage with it

Leave a Reply

Your email address will not be published. Required fields are marked *