Dining room closures and an industry reliance on off-premise occasions have made it somewhat difficult to remember how the industry used to talk about delivery. That is, we used to debate the incrementality of delivery occasions, whereas now fast-food chains are debating the incrementality of dining rooms
As delivery grows its role in the industry and gains a larger share of sales, perhaps we should take a fresh look at those pesky delivery fees. Because these fees were structured at a time when things functioned differently, to say the least.
While some cities have made efforts to cap third-party delivery fees, the standard has been around 30%. Thirty percent. In an industry where even 15% margins are hard to come by.
So, how was the delivery fee justified? By the 'incrementality' of the occasion.
The initial idea of third-party delivery wasn't for restaurants to necessarily focus on delivery. It was instead that a brand could serve new customers at a lower cost and without the pains and struggles of an in-house delivery infrastructure. Restaurants were already staffed for dine-in and takeout. They were already paying rent. Operational costs wouldn't be impacted too much. Indeed, delivery felt like it could add not just sales but profits to the bottom line if all operators were paying for were the costs of goods sold and delivery fees.
But such a financial approach isn't fitting today, and we could debate how fitting it was back then, as it sounded eerily similar to arguments we've heard for expanding into new dayparts. Why not open for lunch if you're already paying rent and manager salaries? Lunch margins would be high if the rent is already paid, right?
Right. So long as expenses are charged to dinner, lunch will look pretty good. And as long as the majority of costs are covered by dine-in and takeout, delivery margins will look pretty good.
But dine-in isn't making much money right now, and it's delivery's turn to pay a larger share of the bills. That initial analysis of delivery doesn't work anymore as delivery orders are covering rent, labor, COGS, and more, not to mention those fees.
So, it's not surprising that things are changing. Restaurants, and even some industry groups and publications, have encouraged customers to support restaurants directly, bypassing third-party apps so restaurants keep more of the money. Others are raising prices for items ordered through such services.
Together, these raise a question: if third-party delivery is more expensive for the customer and less profitable for the operator, how sustainable is the current model?
Consumers demand for delivery certainly appears sustainable, as does operators' willingness to offer the service. But the logistics behind it all are ever-changing. And it all ties back to those high fees based on an analysis that wanted to make delivery look profitable. That should've been a warning sign.
Nevertheless, new models will continue to emerge. Maybe money saved by smaller dining rooms and streamlined menus will make delivery fees easier to swallow. Or maybe more restaurants will handle their own deliveries. Driver-less cars could be a thing, too, reducing delivery costs. Or, perhaps we'll see more virtual brands at existing restaurants, a model that more closely aligns with the initial idea of delivery incrementality to supplement takeout and delivery.