It’s been said that a rising tide lifts all ships. Does a falling tide sink what’s left?
The US restaurant industry is overbuilt. Saturated. Economically speaking we’ve reached the land of perfect substitutes. The nominal top line growth seen on charts is mostly an industry grappling with inflation, not new economic demand.
Chicago, February 14, 2018 ─ The U.S. restaurant count reached 647,288 in fall of 2017, a two percent decrease in units from a year ago, based on a recent restaurant census conducted by The NPD Group, a leading global information company. The primary source of the decline in U.S. restaurant units was a three percent drop in independent restaurant units compared to a stable restaurant chain count, reports NPD’s Fall 2017 ReCount®, a census of commercial restaurant locations in the United States compiled in the spring and fall each year.
NPD
Desperate times call for desperate measures. And since we’ve learned Groupon was a horrible business idea we’ll try something new.
Enter the third party ordering and delivery companies.
These companies predicate their offerings as something that brings new, incremental customers to restaurants. Their reasoning is that there are willing consumers who have few restaurant choices when it comes to dining off premises. These people are not willing to dine at your restaurant for any handful of reasons. By offering online ordering and delivery, these customers can transact with your business, thus bringing you customers you wouldn’t have otherwise served.
There are several problems with this theory.
First, customers have plenty of to-go options. As we opened in this article, the US restaurant market is saturated. Most restaurants have to-go options, and some even have their own delivery services.
Second, nobody has even proven these are net new or “incremental” customers. We’d bet that these ordering and delivery options are actually cannibalizing in-store sales. We have the sales data to prove this, and will work on a separate report so this becomes more concrete than a simple conjecture.
Third, these third parties are usurping the online presence for restaurants. Customers that might have been ordering directly from a restaurant website previously are now being routed through a third party app that comes with 20%+ commissions at the restaurant’s expense. This can be proven with customer card data but the third parties intentionally won’t share this data, we suspect, because they know it’s highly likely to be against their best interests (i.e. card data would prove that there are no net new customers and that customers who used to dine at a restaurant are using the third party as their touchpoint instead.)
But nobody ever accused merchants of being rational actors.
So what happens is that merchants on the far end of the bellcurve of rationality (i.e. irrational) view these third party ordering/delivery companies just as their 2008 forebears viewed Groupon: a panacea. Because the secret to success is putting all your eggs into a black box that promises unicorns and rainbows, right?
As these irrational actors throw money at the third parties the rational actors can’t simply stand on the sidelines. Why? Well, the restaurant market is saturated. So if a competitor is willing to offer their food for a 30% discount (which is effectively what these online ordering and delivery companies are doing) the rational actor with a full-priced menu is going to lose customers. (Remember, the restaurant market has perfect substitutes in its current state.)
So now the rational actor must figure out how to participate or attrit customers to his irrational competitors that he knows are not making any money. Talk about a dilemma.
And just like that a flywheel starts: irrational merchants throw money into a third party vacuum that eventually sucks in dollars from the rational actors. And since the barrier to starting a new restaurant is so low it can be stumbled over, there’s no shortage of dumb money to keep the flywheel turning.
Now you’ve got an industry roiling in a downward spiral where nobody is making any money except for the third party ordering and delivery providers.
It’s the Groupon story all over again.
Because it’s so unsustainable the market will eventually correct, but it takes time to work itself out of the system. We’re talking years. It took Groupon about 5 years before merchants learned their lessons. Unfortunately for the industry this time, there’s an absurd amount of private capital that has propped up these business models; Groupon raised $1.5B while DoorDash has raised $2B, Postmates $678M, and Uber $25B. That’s a literal order of magnitude difference.
The restaurant industry will be hurting for a long time, we suspect.
We’ve been preaching this to our VARs for some time, so they in turn can hopefully help “educate” their end-users and prospects on the “real cost” of using 3rd party OO aggregators. (Door Dash, Grub Hub, UberEats) As most operators in the f/s industry know, margins are slim enough, without having to pay an extra 10-15-20, or God forbid 30% take rate for simply having an online presence. While those aggregators who also offer delivery (which is most) DO add value for the owner, (not having to hire/staff drivers, insurance issues, etc.) they typically do NOT charge one take rate for delivery and a lower take rate on meals that the consumer chooses to pick up them self. These aggregators also do something that many independent operators either choose not to do, or do so poorly that it’s invisible: Market their product in any meaningful way. So and aggregator also “can” bring value, by exposing the owner to “potentially” new clients, at the risk of cannibalizing their existing clients. What’s an independent operator to do? USE BOTH. Contract out with as many 3rd party players as they wish, AS LONG AS THEY ALL TAKE A “CUT” OF THE ORDER, AND DON’T CHARGE A MINIMUM. But then, flip the table on the 3rd party players, and start to cannibalize their customers. In every To-Go or Delivery order, the owners should have an offer that is appealing to their customer to use the RESTAURANT’s web site to place their next online order. Incent the customer: 1) FREE Delivery. 2) FREE Dessert. 3) Lower prices. 4) Quicker service. 5) Pay With Cash., etc., etc. As long as the owner is paying a FLAT RATE for their own integrated-into-POS OnLine Ordering, it behooves them to shift as much of the Door Dash, UberEats, and GrubHub volume that they can, over to their own site. 10 orders a month might cost $100, that’s $10 per order, outrageous! But by shifting even a small percentage of the aggegators volume over to their own website, say 100 orders, now the cost per order is reasonable, a buck an order. Shift 300 orders over, and you’re under fifty cents an order. Impossible? Nope. Our dealers have hundreds of restaurant customers that use BOTH the integrated-into-POS systems, AND, the 3rd party. Let the 3rd party players build your customer base, while you chip away at it, enticing them over to your web site, and your own OO portal, order by order by order.
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