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BIG FOOD

How restaurants are reclaiming their businesses in the era of food delivery

Reuters/Mike Segar
The future is here.
  • Michelle Cheng
By Michelle Cheng

Reporter

Published Last updated on

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When Lizeth Morales took over her mother’s restaurant eight years ago, she didn’t worry much about its pick-up and delivery business. When it comes to cultural food, people prefer the sit-in experience, she says—and El Gordo, her Peruvian restaurant, didn’t break the mold. Her customers liked to linger, savoring her homestyle ceviche and rotisserie chicken.

Eventually, Morales established to-go options for the restaurant’s four locations in New Jersey. They were a steady but small part of her business. But when the pandemic hit, her restaurants went from serving customers indoors 70% of the time to zero.

Morales, 38, was prepared. She attributes it to her upbringing: Once at risk of being deported back to Peru, she knew what it is like “to hit rock bottom already.” At the height of the pandemic, she used social media platforms to make sure her community knew that her restaurant was still there to serve them—while following Covid-19 safety guidelines, of course.

What she wasn’t prepared for, though, was the commission fees. As people flocked to food delivery apps like Grubhub, DoorDash, Seamless, and Uber Eats to buy her food, the platforms’ 20% fees began to dig into El Gordo’s revenue. That was even with forgoing the additional 5% to 10% marketing fee on each order, which would have boosted her restaurant to the top of app feeds, she says.

Restaurants around the US are feeling the same pinch. As more establishments shift to delivery to stay afloat, delivery apps are wielding their power to extract revenue from food orders. Morales is relatively lucky: She lives in one of the states that introduced caps on commission fees to helps restaurants during the crisis. In other parts of the country, the platforms’ cuts can be even bigger—reportedly as high as 30%. Restauranteurs like Morales can’t bank on the cap being permanent, and the fees could easily be shifted to customers in the form of higher delivery charges.

Chipotle has said that revenue doesn’t fully cover the commission fees it pays to third-party delivery providers like DoorDash and Grubhub, CNBC reported. McDonald’s also reportedly renegotiated its Uber Eats contract, Bloomberg reports, pushing for a lower commission fee in 2019. If even Chipotle can’t afford the commission fees, how can your neighborhood restaurant get by?

So local restaurants are starting to fight back—both by finding alternatives to the food delivery apps, and finding ways to work around them. While demand for delivery may eventual soften, the pandemic is undoubtedly changing consumers’ expectations and accelerating the opportunities for the $136 million food delivery industry. The question is whether restaurant owners can adapt fast enough to extract their cut.

“Necessary evil”

For owners like Morales, delivery apps offer a previously unreachable chance at scale. “For consumers using Uber Eats or Seamless, it’s very easy because we all have it in our phones,” says Morales. “It’s just a very easy transaction.” Eight months into the pandemic, 60% of her revenue now comes from delivery. That revenue, as well as government assistance tied to the pandemic, has meant she has only had to lay off one of her eight employees.

The delivery business in the US was once dominated by pizza and Chinese food. In just the past decade, it has been commandeered by a handful of food delivery apps—including DoorDash, Grubhub, Uber Eats, and Postmates—all of which have been fueled by cash from venture capitalists. The apps have quickly expanded across the US and internationally, partnering with large chains such as Baskin Robbins and Yum Brands along the way. But an economy-crushing pandemic has changed the stakes. With many restaurants forced to battle for survival, complaints about the business model have mounted not only in the US, but in the UK and China as well.

Like ride-hailing, food delivery got big by providing a great experience to people, and expectations grew from there, says DA Davidson analyst Tom White. There’s still a lot of room for growth: Just a few weeks ago, Uber CEO Dara Khosrowshahi said in a WSJ talk that just 10% of Japan’s restaurants are on the Uber Eats platform.

Morales says she sees the Grubhub and Uber Eats of the world as a “necessary evil,” as the platforms offer access to far more customers than she can afford to reach. The restaurants can add the apps essentially overnight and let the platforms handle the hiring of delivery workers. She’s now making “about the same” as pre-pandemic, though her revenue is largely propped up by delivery.

But using a third party to deliver food can present new challenges to restaurant owners that pride themselves on quality. How will the food be presented in the end? Can the food be kept warm for the 15 minute ride?

Restaurants have had to pay up to improve the third-party delivery experience. Morales has invested more in bagging and stapling to make sure items aren’t missing. Kelly Xiao, owner of Sichuan Impression in Los Angeles, started paying to put logos on bags after customers would sometimes get mixed-up orders. And if the driver is late, delivering cold food, “we’ll say, ‘Wait a second,’ we’ll re-do it,” says Xiao.

More choices

Facing these problems over and over, restaurant owners like Xiao are looking for alternatives that let them take advantage of surging interest in delivery while maintaining control over customer experience. And there’s a new crop of delivery companies aiming to help them do it, unbundling the industry in the process.

One of those companies is Chicago-based food delivery app Chowbus. While a student at Illinois Institute of Technology in 2013, Linxin Wen, who had moved from China, was frustrated with the lack of authentic and cheap Asian restaurants on delivery apps. In 2015, he built a website and social media account to promote his new service, and after visiting up to 30 restaurants, one of them agreed to use it. Now, the company, which has raised $38.4 million to date, partners with thousands of Asian restaurants in over 20 US cities.

The company declined to provide the commission fee it charges restaurants, but says that it “is lower than what the big delivery companies charge.” According to one New York restaurant owner on Chowbus, though, it is not that much lower.

Xiao says she prefers using Chowbus over other delivery apps in part because there’s a better customer experience. There is also no marketing fee to boost a restaurant’s position in the app. The company will take high-quality photos of their best dishes, free-of-charge, to promote on the platform. In the future, she says Sichuan Impression, which uses Uber Eats, Chowbus, Postmates, and Grubhub, will likely reduce the number of delivery services to the ones that provide the best experience.

Counterintuitively, a delivery service tailored to a specific market can provide economies of scale. In many cities, Chinatown is densely populated with Asian restaurants, so Chowbus drivers can pick up multiple orders in one run. Chowbus CEO Linxin Wen says the company has been profitable since the start, due in part to high order volumes. On Chowbus, customers have the option to order individual dishes from multiple restaurants in the same area—bubble tea from one place, and mapo tofu from another—with no added fee. The more efficient the company can be, he says, the more savings it can pass to customers and restaurants.

Linxin says he feels like he can make the biggest impact with mom-and-pop Asian restaurants that can’t afford to pay to appear high up in the feed of the mainstream platforms. The density factor leads to Chowbus “not needing to subsidize” with bonuses and incentives for the 10,000 drivers on its platform the way other food delivery services do, he says. In turn, customers get access to food that can’t be found on mainstream platforms, and the bundled pick-ups can make for faster deliveries.

But like ride-hailing apps, it’s not clear that customers have a preference: Ultimately, their choice may simply come down to price.

More specialized food delivery services could become a bigger trend, whether that’s with cultural food or pizza. Delivery of alcohol may also become a bigger service, as some states have begun to loosen the liquor laws to help soften the economic blow to restaurants.

That said, delivery is still a small sliver of the off-premise orders for US restaurants, according to data from market research firm NPD. Delivery grew 106% in the third quarter over the same period last year. But out of all off-premise services, the share of delivery was just 9%, compared to carry-out’s 46%, and 44% for drive-through visits.

Forrester analyst Brendan Witcher says there will be competitive pressure from the restaurants. In most cases, restaurants are in a position to select the delivery mechanism, and if the price charged by Grubhub or Uber Eats gets too high, they will simply use their own drivers or some other service. “Food delivery does not require specialized assets—just a car and a driver; in New York City, it can even be a bicycle,” he says.

Convenience over experience?

Early in May, Morales started to see the beauty in Witcher’s argument—and took the strategy of Chowbus and other specialized delivery apps to its logical end. Frustrated by delivery app fees, she set up a website where people could place orders with the restaurant directly, to be delivered by her own drivers, and pays $50 a month to maintain it, aiming to capture some of the apps’ share.

Eight months into the pandemic, she’s honed her strategy to leverage the scale of the main apps while keeping control over profits and the customer experience. Morales will sometimes turn off the Jersey City location of El Gordo on the Uber Eats app. When a customer calls to ask what happened, Morales tells them that she is not on the platform right now—but the customer can choose to order from the restaurant’s website for delivery.

If customer interest in delivery continues to grow after the pandemic, Morales may find herself with a profitable model on her hands. A Deloitte study in late October found delivery and takeout orders increased 14% since Covid-19 began. Nearly a quarter of respondents expect that increase will be permanent, largely citing convenience. The study also found that people are willing to pay an average of 14% more on their orders for online delivery.

Restaurants that have invested in the delivery infrastructure are looking to keep it. A survey by the National Restaurant Association, which surveyed more than 3,500 restaurant operators between Aug. 26 and Sept. 1, found that of restaurants that have added off-premises options to do sales, roughly two-thirds have added third-party delivery, and 83% of those plan on keeping it, while 17% have added in-house delivery, with 58% of those planning on keeping it.

Morales says the more she get customers to use her service, the more likely—if the food delivery companies do not figure out how to reconfigure their fees—she could see herself dropping the platforms. “Should I just make them profitable and not myself?,” she says. Currently, Uber Eats and Grubhub services the majority of her food delivery; her own service is at 10%.

But the margins are razor thin: On average, customers consider a $4 delivery fee to be fair, according to the Deloitte study. (The study also found that respondents considered up to 30 minutes a reasonable wait time.)

“I think a lot of restaurants are gonna adjust [to both] to-go and delivery. If it wasn’t part of their plan before, it has to be now…whether it’s through the app, through their own online [platform],” Morales says. “I think every restaurant owner by now knows this is going to continue to be a large of our revenue.”