BANGKOK – Not long ago, if you wanted to order delivery from a restaurant, assuming they even supported it, you would have to first know that restaurant exists, find their contact information, fight through an outdated paper menu, and manage some type of payment and delivery.
Food delivery services entered the scene as part of a second wave of mobile digital services in mid-2010. In the beginning, these services focused on reaching critical mass with a large enough selection of options for consumers to recognize them as a viable alternative to dining in.
As they grew, their business shifted from one driven to acquire restaurants to one driven to acquire customers and finally one driven to maximize profits. Currently, rather than be courted by these services, restaurants are often left fighting over poor service, hefty fees, and a bizarre gamified marketplace of price manipulation that limits the agility of restaurants.
First meetings with nearly all major operators (i.e. Grab, Uber, FoodPanda, Gojek) are largely the same.
Coming armed with exclusivity contracts that limit a restaurants ability to be listed on competitive platforms and cement pricing in such a way that restaurants are not allowed to offer different prices between food delivery listings and on-site, food delivery services have managed to worm their way into a key position in the daily lives of consumers at the angst of restaurateurs.
A typical food delivery contract includes a fee of 30% or more of revenue from the restaurant sales, a commitment to not underprice, and an exclusivity clause limiting fair competition. In exchange, restaurants can get a basic listing among hundreds of competitors that provide search, payment and delivery processing.
Years ago when these services were growing, it was possible to reliably contact them to resolve issues and many even provided packaging for food, something that today comes at extra cost.
Fast-forward to today and most restaurants are listed on multiple sites, free delivery packaging has disappeared, and food delivery services are pushing to increase their fees from 30% to 40%.
All this while restaurants struggle due to social distancing measures and food delivery experiencing explosive growth.
To put things in perspective, let’s quickly look at some basic global benchmarks for operating a restaurant. According to 7Shifts, a leading employee scheduling software vendor for restaurants, the following monthly operating costs are typical:
- Rent and utilities (electricity, water, internet, cable, and phone): 5% – 10% of revenue
- Food cost: 25% – 40% of food sales
- Labor cost: Roughly 30% of revenue
iChefClubSG says “The 3 major costs (i.e. manpower, rent and cost of goods) should not exceed 70% of overall revenue.”
Now throw in branding and marketing, packaging, IT, maintenance, training, etc. and many restaurants are very likely running below 10% profit. Apply that math to the food delivery service model and many restaurants are losing money just to be listed.
In nearly all cases, it is better for restaurants to do their own direct deliveries, even if that means losing the exposure that a food delivery service listing can offer.
With just a fraction of the money saved, a restaurant can use Google and Facebook ads to promote and provide greater quality control. If you’re lucky enough to have a distinct brand or product, customers may well come directly to you anyway.
Remember that listing on a food delivery service puts every restaurant in direct competition where consumers are driven primarily by price and selection over quality and brand. Often this means established brick and mortar businesses are left competing with cloud or dark kitchens that have been specifically optimized for low-cost structures. Even darker, some of these cloud kitchens are owned by the food delivery services themselves.
Food delivery services use gamification, incentives and discounts to distort restaurant listings and prioritize companies willing to pay even more. This is in direct opposition to their own contract terms that prevent restaurants from having lower prices on-site than those listed on the food delivery service app or website, and all but restrict restaurants from listing on multiple platforms.
Food delivery services were not birthed in the F&B industry. Rather, they are the brainchild of a tech industry that is hungry to turn every possible industry into a marketplace and secure the role of aggregator, IT expert and middleman.
The very business model of marketplaces is to be large enough to manipulate businesses and become a necessary evil, turning views and clicks into profit. Do not fall for the classic startup line that they are in it to bridge the gap between buyers and sellers.
That may be the opportunity, but as businesses, they exist to attract VC investment and ultimately a tidy buyout. This is business after all.
While perceivably easy for the consumer, food delivery services stage their fight where brick and mortar business is the weakest, the digital world. Many customers don’t recognize the sacrifice restaurants need to make to even be listed.
In addition to limiting profitability to the point of forcing restaurants into the red, purchasing from food delivery services directly impacts the livelihoods of all team members including waitresses, chefs, line cooks, owners and more.
When restaurants push hard to encourage direct delivery, they are doing it out of survival. Remember this isn’t a new industry that was built from the ground up around digital precepts. Rather, F&B follows clearly established cost models that cannot sustain webheads stealing their lunch.
Here’s some food for thought for your next future delivery order. Consider that whatever you order, 30% or more is going towards the food delivery service simply to allow you to discover that restaurant, process a payment, and organize a delivery. Many restaurants have now built up their own digital platforms to process payments and delivery in much the same way.
If you truly love the food you’re ordering, do that restaurant a solid and order direct, knowing you’re helping them stay in business and keeping that money where it should be: in the F&B, not the tech, industry.