YOUR BUSINESS AUTHORITY
Springfield, MO
YOUR BUSINESS AUTHORITY
Springfield, MO
It can be hard math for a restaurant owner: A third-party delivery service can eat up a quarter of the eatery’s sale.
Particularly since the coronavirus pandemic, customers have come to expect the ease of online ordering and home or office delivery of meals by services like DoorDash, Uber Eats and Grubhub. It’s a trend that amplifies the dilemma restaurant owners face in deciding whether to contract with third-party delivery services.
Third-party delivery services allow businesses to outsource delivery of their products, typically by charging a fee. Though charges vary by state, the U.S. Chamber of Commerce reports DoorDash takes a cut of 20%-25% per order, and restaurants can pay more to increase business visibility on its ordering platform. Grubhub asks restaurants for 3.05%, plus a 30-cent processing fee and a 10% delivery fee. Uber Eats requires a one-time fee of $350 for processing and a 20%-30% commission charge per transaction.
Locally, Michael Cho, co-owner of Craft Sushi Rolls & Bowls, said there is a trade-off with the use of third-party delivery services.
Craft Sushi offers fast-casual sushi rolls and poke bowls with a focus on locally sourced ingredients. It’s food that travels well, Cho said, and 15%-20% of the restaurants’ daily sales is through delivery apps.
“Obviously, it’s a great service for the public to have all of these delivery options now available,” Cho said.
Cho said he signed on to both DoorDash and Grubhub about a year before COVID-19 hit.
“I looked into doing delivery on my own, but the cost of insurance for that, plus being able to hire reliable drivers and have them on a day-to-day basis – that was almost too much to deal with at the time,” he said. “We do take a deep cut.”
Cho notes restaurants’ profit margins are famously narrow. Sometimes restaurants don’t even hit 10%, he said. He added that the delivery services discourage restaurants from raising their prices to make up the difference, but his wife and co-owner, Jenny Cho, said Craft Sushi does increase the prices of some of its more expensive menu offerings by 50 cents to a dollar to offset the cost.
“To have a delivery partner that straight-up takes 20%-25% off the top – that’s the going rate – is difficult to absorb,” Michael said. “Frankly, it’s impossible for a lot of restaurants.”
Third-party market
Market research firm Statista reports worldwide revenue in the online food delivery market is projected to reach $1.02 trillion in 2023 with an annual growth rate of almost 13%. By 2027, the projected market volume is $1.65 trillion.
This year, Statista reports user penetration in the meal delivery segment is anticipated to reach 25.2%, and by 2027, there will be an estimated 2.45 billion meal delivery users out of a world population of 8.33 billion.
Bloomberg Second Measure reporting shows the pandemic was a high-powered engine for delivery service growth in the United States, with combined sales for major meal delivery services growing 162% year over year in April 2020 and 59% compared with the previous month. In May 2023, growth had slowed considerably, and sales for major meal delivery services had increased 4% year over year.
As far as market share, DoorDash leads the way, claiming a 65% share of U.S. sales in May. Uber Eats came in second at 23%, with Grubhub claiming a 9% share.
To app or not to app
Many restaurant owners see advantages to signing on with a delivery service. Others use them reluctantly or not at all.
Anne Baker, co-owner of Finnegan’s Wake, Civil Kitchen and Tinga Tacos, said she would rather have a delivery option than not, and the advertising element is helpful.
“Because of the fee that they charge, anywhere between 20% and 30%, it’s not the most profitable thing,” she said.
But Baker said once someone tries a restaurant for the first time through a delivery app, they may be more likely to walk into that business or try its catering service.
“We’re hoping we’ll be top of mind,” she said.
Baker said her restaurants appear high in the listings of the delivery services.
“We’re a top user for them – we’re always getting good stars, and we’re always timely with deliveries and earning top dollars with revenue,” she said.
Baker said about 20% of the Tinga Tacos business comes from delivery apps, compared with only 5% at Civil Kitchen. This is because Tinga Tacos is a speedier carry-out model that delivers well, while Civil Kitchen’s fare is geared toward dine-in customers. She added that she frequently turns off ordering from the app for Civil Kitchen customers so the restaurant can focus on serving fresh foods to its in-person customers. Whether ordering online or in person, the prices are set the same, she noted.
While it is possible to pay more money to be more visible within an app, Baker said that’s something she declines.
Baker said she no longer sees delivery services as optional for restaurants.
“It’s a necessity in the world today, with how things have changed over the last three years,” she said. “If we didn’t think it was worth it, we wouldn’t be doing it.”
Lauren Brown, co-owner of Neighbor’s Mill Bakery & Cafe, did the math a little differently than Cho and Baker and has opted against using a delivery service.
“It’s so hard for restaurants when we have such a thin profit margin already,” she said.
Brown said things can go wrong. For instance, a delivery person may show up late, the food may be allowed to get cold, or it may be thrown in the car upside down.
“The customer doesn’t always understand that,” she said. “They say, ‘My order’s a mess,’ or ‘My order’s cold,’ and they think it’s the restaurant’s fault, but it’s hard to control those things.”
She said the latest fee she was offered to join a delivery service was 25%-30% of the order total, while her food costs run 32%-34% of sales.
Jenny Cho of Craft Sushi said the issue of third-party delivery services is a topic she is passionate about as a restaurant owner. She noted she takes a less rosy view of the service than her husband does.
“I see my staff struggle every day,” she said. “I never would have done it if I would have known what I was getting into.”
Customers are often confused about the prices they pay on delivery service apps, she said.
“Customers are constantly coming to me and saying, ‘I would support you more through DoorDash, but your prices are phenomenally high,’” she said. “But those aren’t our prices.”
Services often carry extra fees that are not from the restaurant, she said, and DoorDash increases tip amounts if the order keeps getting rejected by its drivers.
She said that although Craft Sushi was an early adopter of delivery services, its fees have never been lowered by the companies.
“Most days we are maybe breaking even,” she said. “We do it for the marketing. Financially, it very much does not help us.”
A cautious approach
Baker said some third-party services will post a menu without a restaurant’s consent and even place orders as if they are the customer.
“I wish more customers were aware,” she said.
She suggests that if a customer is ordering delivery for the first time, they check with the restaurant to verify they work with the platform.
Brown, too, has had the experience of having a menu posted by a delivery service without permission. In the beginning, that was OK – it was exposure, she said, and the restaurant benefitted from the order without having to pay for a service.
“It became a little unmanageable because we weren’t partners and they didn’t know our business,” she said. “They’d put our breakfast menu on their website, but we only serve breakfast until 10:30 a.m. We were getting breakfast orders during our lunch rush when we didn’t even have our grill station set up to do them.”
Michael Cho said this is particularly problematic for a restaurant like Craft Sushi with an unconventional menu. A rogue delivery company, operating outside of a contract, that answers the phone as Craft Sushi might have a hard time explaining menu offerings.
“You have to be well-versed in explaining exactly what we are and doing that in the right way,” he said.
He suggests vigilance by restaurateurs.
“Small-business owners need protection,” Cho said. “You are entering an agreement with them initially, and you have to go into it with your eyes open. It’s important to keep them accountable.”
Moseley’s Discount Office Products was purchased; Side Chick opened in Branson; and the Springfield franchise store of NoBaked Cookie Dough changed ownership.
