Demand for Third-Party Delivery is Changing The Restaurant Dynamic

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THE CHALLENGE
Much has been written about the proliferation of third-party restaurant delivery and its impact — actual, perceived and potential — on the foodservice industry. As a young, evolving market segment, it poses a number of challenges for operators. “It’s not necessarily a mature market,” says Sylvain Charlebois, professor, Food Distribution and Policy, Faculties of Management and Agriculture at Dalhousie University. “Technology is affecting all sectors within foodservice. This is a disruptive phenomenon and it’s going to be interesting to see how things go.”

As operators attempt to navigate this disruption, there are concerns about putting elements of quality and guest experience into the hands of couriers. In fact, “quality/service control” was identified among the top-three negative aspects of doing business with third-party delivery services in Restaurants Canada’s Q1 2019 Restaurant Outlook Survey.

However, Alan Bekerman, founder and CEO of Toronto-based iQ Food Co., feels customers understand the compromise they’re making in order to benefit from the convenience of delivery.

“We recognize there’s an element of trust and, ultimately, risk [involved] when you have somebody you don’t know delivering food and representing your brand…[But,] customers understand this courier is just doing their job…they’re running around the city dropping things off.”

On the other side of the delivery-courier coin, the growing pains associated with the gig economy as a whole are also impacting third-party restaurant delivery.

As the couriers working under these companies are classified as independent contractors, they don’t fall under traditional labour laws and aren’t ensured standards such a minimum wage and health benefits. This has resulted in app-based workers around the world launching protests and pushing to unionize.

“People are concerned about the rights of contract workers — or workers, depending on how they’re defined in the law,” says Charlebois. “[We’re] still at the beginning of this movement and it will probably impact how the model becomes, or remains, competitive, because it will eventually have an impact on cost.”

And, ultimately, the cost of taking part in the third-party-delivery market is a chief challenge facing restaurants.

“I’ve never met a restaurateur who’s unhappy with the volume delivery represents, but I’ve also never met a restaurateur who’s happy with the economics,” says Bekerman. “Servicing delivery orders that represent lower-margin business, at peak times, out of expensive real estate, isn’t a particularly sustainable strategy.”

In an industry where margins are already tight, paying a commission of 30 per cent or more on delivery orders is a taxing endeavour. But, many operators don’t feel they can afford to ignore demand for delivery.

“The reality is, it’s not a story of delivery companies gouging restaurants, the story is that delivery is just expensive,” says Ray Reddy, CEO and co-founder of the Toronto-based mobile-ordering platform Ritual. “If you’re going to pay [someone] to move something from point-A to point-B in less than 20 minutes, that’s going to cost you a lot of money in North America, where people have a lot of choices and minimum wage is not low.”

And, with the increasing popularity of these services, the challenge of integrating these third-party platforms into a restaurant’s operations is only exacerbated. There are an increasing number of platforms available and restaurants are feeling pressure to have a presence on multiple platforms to maximize their reach. But this also means added channels to maintain and update and, if a restaurant’s POS system doesn’t support the integration of these platforms, it can result in multiple devices that need to be actively monitored.

Not to mention the majority of restaurants weren’t designed to accommodate high volumes of order-ahead meals, with limited counter space for completed orders and a structure that often forces couriers to cut through lines to reach the order-pickup area.

THE OPPORTUNITY
There’s no doubt delivery is a convenience that resonates with customers. According to Ipsos Foodservice Monitor, Canadians spent $1 billion on meal-delivery apps in 2018, and Charlebois says this number is now near $2 billion.

Restaurants Canada’s Foodservice Industry Forecast 2018-2022 also indicated off-premise sales increased at both quick-service and full-service restaurants in the first half of 2018, driven by demand for delivery. During the same period, on-premise visits declined at QSRs, with off-premise orders accounting for 71 per cent of this segment’s traffic.

Having a presence on third-party platforms can expand a restaurant’s visibility and customer base. And, as Charlebois points out, can even help mitigate the industry’s sensitivity to weather conditions.

“You have the potential to connect with somebody who otherwise would never have entered your restaurant,” says Bekerman, noting this requires a bit of a balancing act. “[It requires] figuring out how to connect with people who otherwise wouldn’t come to your restaurants [without] cannibalizing yourself by turning your loyal walk-in customers into delivery-only customers.”

He points to in-restaurant incentives and limiting the modifications available on delivery orders as strategies put in place at iQ to help ensure such a balance. “Limiting modifications for delivery helps simplify order preparation and reduces the potential for errors, which are a lot easier to solve in restaurant, versus somebody who’s waited 45 minutes for their food to come to their doorstep.”

The nimble nature of digital platforms also makes them an ideal avenue for menu testing. “It’s a soft way to experiment,” says Charlebois. “You can do promotions, for example, much more [easily] with digital.”

Virtual- or “ghost-restaurant” concepts are also being examined as a way to make the most of the delivery boom. This delivery-only operating model allows restaurants to maximize existing real-estate and labour costs by delivering a secondary concept/menu on delivery platforms. This also provides an opportunity for low-risk experimentation and a chance to capitalize on diverse segments.

Toronto-based Hero Certified Burgers offers Hero Certified Seafood and Hero Certified Chicken menus exclusively on third-party platforms. And, while these brands were originally run out of Hero Burger locations, they’re now being made available to outside operators across the country to operate as virtual delivery-only concepts.

Some companies — such as U.S.-based Cloud Kitchens and Toronto-based Ghost Kitchens Canada — have even chosen to go fully virtual, taking advantage of less-expensive real estate and operating multiple concepts out of a single kitchen.

“Ghost kitchens are a very interesting phenomena,” says Charlebois. “We have 50 or 60 now in Canada and it’s growing.”

And, Bekerman adds, “[these concepts] have an opportunity to solve a part of the problem.”

iQ and others have gone yet another route, building small-footprint take-out focused concepts with very limited or no seating. There are also brands that have placed their focus on removing pain points associated with third-party delivery through in-restaurant features such as pickup portals.

All the opportunities and solutions related to third-party delivery are not yet clear — and that in itself is a source of opportunity. Those nimble businesses that can discover and successfully implement optimal operating models stand to reap the greatest rewards.

“We’re at an assessment stage,” Bekerman says. “The dynamic and the relationship has to change, but we’re [not] going to know what that really looks like for another 12 or 18 months.”

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