Food Delivery Gets More Complicated

ALEXANDRIA, Va.—Food delivery is a big business. By 2022, food delivery is set to become a $75.9 billion business, more than triple the $23.2 billion recorded in delivery sales in 2011, reports Business Insider. But the booming business also is creating some massive problems, according to a 2018 report from Cowen & Company, the financial services firm.

"Delivery is still a mess," said Fred LeFranc, the CEO of the restaurant-industry consulting firm Results Thru Strategy. He hopes 2020 will be the year that restaurants sort out their delivery strategy.

Currently, he said, delivery is getting the most attention as a growth channel in the restaurant industry, even though it accounts for a relatively small proportion of sales. While chains like Chipotle and McDonald's have reported double and triple digit increases in delivery sales, a reckoning seems to be set for 2020. 

"The restaurants are in pain because they have incremental revenue, but not incremental profits," LeFranc said. "The delivery companies are beginning to shake down." 

Delivery companies are being pressured to boost profits, Fortune reports. Grubhub stock fell by more than 30% in 2019, while Uber Eats is exiting certain markets, and Postmates delayed plans for an IPO in October. Chains are tired of the fees charged by delivery partners, and many are renegotiating deals. Exclusive partnerships also seem to be a thing of the past.

The most fundamental problem is that the current economics of delivery are "not sustainable," according to LeFranc. Currently, most restaurants or delivery partners subsidize delivery. But enjoying delivered food simply costs more, and it may be time for customers to start paying more for the convenience. 

In October, Grubhub, the only major delivery player that is profitable, wrote in a shareholder letter to shareholders that it does not believe a company can "generate significant profits on just the logistics component of the business.

"Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner," the letter reads. "That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time."

Restaurants are beginning to ask customers to pay more. That doesn't mean simply charging or upping delivery fees. It could also mean listing higher prices on online menus than customers would find in stores. 

"For a long time, [third-party delivery] marketplaces were saying, you must charge what you charge in the restaurant on your marketplace version of the menu," Noah Glass, CEO of Olo, a mobile and online food ordering platform. "Now you see brands charging more through the marketplace. They're charging more through direct [delivery] channels than the ordinary store."

Category Management Transportation