Doordash, Seamless and the other Online Ordering Platforms: Friend or Foe?
Online ordering is everywhere. Seamless, Grubhub (acquired by Seamless in 2013), Ubereats, and Doordash, being the largest.
In the old days, if you wanted to order food to be delivered to your door, you were pretty much limited to Chinese food and pizza. I grew up in Manhattan and we considered ourselves the mecca for being able to order food at any time of day or night. Today, customers in urban areas all over the US can order anything from ice cream, to sushi or a juice cleanse delivered to your door in under an hour for a relatively modest upcharge. You don’t even have to get out of your pajamas.
Customers are embracing the trend. It’s convenient and you don’t have to cook or clean any dishes. As a Morgan Stanley report on the explosion of online ordering put it: “There may never have been a better time to be a homebody.”
In 2016, deliveries accounted for only 7 percent of US restaurant sales. According to a Morgan Stanley report published in June of 2017, deliveries now account for as much as 40 percent of restaurant sales.
And that is just the beginning. With investors pouring money into these aggregators, they are rapidly expanding. Softbank invested $535 million into Doordash, which Doordash announced would allow it to expand from the 600 cities it is in now to as many as 1800 cities by the end of 2018. And, never one to dismiss, Amazon in 2016 launched Amazon Restaurants – allowing Prime customers to order from local participating restaurants. And Amazon is clearly making a big push into the food space with its recent acquisition of Whole Foods.
From the restaurant point of view, what’s not to like? You get additional customers and you don’t have the hassle of building your own ordering system or hiring drivers to deliver the food. But the truth is a lot more complicated. Yes, you get exposure to a lot more customers and you get new business, but at what cost?
The Hidden Costs: High Fees and Loss of Customer Data
The appeal for restaurants in partnering with one of these apps is real: you get exposure and additional business, without the expense of building your own app and marketing it. But the costs are also very real. Let’s start with the most obvious cost: the fees you are charged.
While the percentages vary, with any of these apps, you pay a percentage of the total order cost for each order. In addition, you pay additional fees if you want make sure your restaurant is listed prominently – on the first two pages. And what is the point of being on there if no one is going to see you?
The fees are going to take a serious chunk out of any possible profit for the restaurants. And remember, these customers are not ordering alcohol, so you get none of that profit either.
Modern Restaurant Management put together a great graphic illustrating the cut from several aggregators:
Amazon is reputed to charge as much as 30% of each order for participating restaurants. Doordash and Postmates charge between 15-23%.
In addition to the outright fees you are paying, you have to be able to manage your inventory and staffing to make the orders.
On top of that, you are not getting the data on your customers- the aggregator is. If you are not getting the email addresses and contact info for all these new customers, how are you going to market to them to make them repeat customers?
Will You Get New Customers or is it really Cannibalizing Your Existing Business:
This is the scariest prospect for restaurants. According to the Morgan Stanley report from last year, 43% of consumers who ordered food for delivery say it replaced a meal at a restaurant, up from 38% in 2016, suggesting incremental cannibalization of dine-in meals.
Is it Worth the Cost?
The New Yorker did a great article on the huge toll of these aggregator services. To be fair, most of these online ordering companies themselves are not yet profitable – expecting more volume and consolidation in the industry over time to allow them to turn to the black. But the margins they are charging restaurants take a real toll.
The New Yorker article quotes one restaurant operator in New York noting that in the past three years, her profit margin had shrunk by one third – a drop she attributed to deliveries.
The problem for restaurants is a kind of catch 22. You want to be on the aggregator apps to drive business and potentially acquire new customers, but are you really getting new customers? And at what cost?
One New York restauranteur, quoted in the New Yorker article linked above, captured this dilemma perfectly:
“sometimes it seems like we’re making food to make Seamless profitable.” At the same time, she said, “it’s really becoming a bulk part of our business, so it’s not something we can cut.”
So what’s the answer? The jury is still out. In an ideal world, you would have your own proprietary app so that you are capturing your own customers. (Companies like ChowNow and TableUp offer that service.) But most restaurants cannot afford to make that investment and many customers will not be willing to download a new app for each restaurant they want to order from.
At the very least, if you do partner with one of the aggregators:
1. pay close attention to the fees you’re paying and the margins you are making and
2. try to measure how many new and repeat customers you are actually getting and finally
3. keep an eye on it over time.