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Jun102019

Why not Delivery?

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RR Voice of the Operator: Why not Delivery?

 

Base Case

 

  • Today, the sales mix for a typical QSR chain might look something like this.
  • With just $42k per year coming from delivery, there is less scrutiny into the profitability of 3rd party delivery.
  • After all, it is the way of the new world and if you don’t jump-in with at least one foot in the water you are certain to miss out on the fastest growing industry channel (well at least for the independents up to this point).

 

 

Delivery mix grows to 10%

 

  • What happens when delivery mix grows to 10%?
  • It is not inconceivable that this happens, especially if the operator eats the entire delivery charge like we see in some 3rd party arrangements.
  • Who would be surprised that some consumers would prefer to have their food delivered to their door without any additional cost to them?
  • Now, at this point, the outrageous 30% delivery fee born by the operator is beginning to inflict pain as it will drive a -$29k loss if there is no incrementality from these delivery sales.
  • Maybe delivery sales are all incremental, but operators better be sure at this point.

 

Delivery mix grows to 10% but 30% fee negotiated down to 15%

 

  • Nobody is going to stand for 30% delivery fees for very long. Certainly not the operators and very likely not the cash constrained consumer.
  • So the operators band together and use their scale to re-negotiate their fees down to 15% which they will eat because they want to be competitive in this fast growing channel.
  • The consumers still must pay a $3 - $4 delivery fee and tip to the service provider, but at least there is no menu sticker shock for the consumer.
  • Now we can get more comfortable with the idea that delivery may not be incremental because its just costing us $8k/year to be in the game.

 

 

Can we afford a 30% fee if delivery sales are 50% incremental?

 

  • Maybe the service providers are telling us that their 30% fee is chump change because they are helping us to reach brand new consumers.
  • You know, a DoorDash foodie who wants to try Burger King for the first time...
  • Let’s play along, but only so far. What if 3rd party delivery sales are really 50% incremental?
  • Can we afford to absorb 30% fees now?
  • Not happening! Our top-line grows some, but we still lose -$10k+/year.

 

Can we afford a 15% fee if delivery sales are 50% incremental?

 

  • We finally find the magic sauce.
  • We negotiate our delivery fee down to 15%, which we eat, and we get ourselves comfortable that around half of delivery sales are incremental.
  • At least we are in the game while we grow our bottom line by +$10k.
  • Well, at least this works for us operators even if we are not sure how this model works for 3rd party delivery platforms paying their drivers $15/hr. Not our problem and self driving cars are right around the corner in any case.

 

 

Does the Model Capture All the Costs?

 

  • There are other intangibles about 3rd party delivery that must be considered.
  • Do these sales come during peak operating hours or do they help fill-in low capacity dayparts like late-night? Nothing like slowing dine-in service speeds during dinner…
  • Does this channel upset in-house staff who must prepare the food for delivery but do not receive any tips typically associated with take-out?
  • Is your customer’s brand experience degraded by 3rd party delivery drivers and/or food that was prepared 40 minutes earlier? How do customers feel about a bunch of drivers waiting around in the store for their orders?
  • What are the 3rd party platforms doing with all your precious new found customer data? Hopefully not selling it to your competitors…
  • Are you fueling the next Amazon effect by helping to build a value-added intermediary between you and the consumer?

 

Suggestions

 

  • Recognize that Domino’s maybe correct when it points out that if 3rd party delivery sales were really incremental, then why is the overall industry still growing at the same rate? In other words, it doesn’t seem like this channel is really stealing share from the grocery stores.
  • Negotiate 3rd party delivery fees down to 15%. Also, consider adding your own $5 delivery fee payable by the customer to every order to cover some of your soft costs and use part of it to pay a tip to your own staff.
  • Make the consumer pay sufficiently more for delivery such that they have a greater incentive to dine-in or take-out. That’s better for your business and the industry.
  • In any case, don’t inflate your menu prices on 3rd party delivery apps and tell customers that delivery is free…

 

RR Roundtable: 1Q19 Investor Call

 

 

 

 

Please pass on to your colleagues

 

Disclaimer of Liability: Although the information in this report has been obtained from sources Restaurant Research® LLC believes to be reliable, RR does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. Restaurant Research’s analysis and opinions are not a guarantee of the future performance of any company or individual franchisee.  RR disclaims all liability for any misstatements or omissions that occur in the publication of this report. In making this report available, no client, advisory, fiduciary or professional relationship is implied or established. This report is intended to provide an overview of the restaurant industry, but cannot be used as a substitute for independent investigations and sound business judgment. Copyright 2019.