Restaurants around the world have turned to delivery/to-go (we’ll group them together and call it off-premises) as a final attempt to stay afloat as governments mandate social distancing and declare restaurants to be more dangerous than other public meeting places, like grocery stores (still waiting for the evidence on this one).
But there’ a long list of considerations that must be made when stepping into the off-premises fray, and we don’t think restaurants have done so in any methodical way, leaving both themselves exposed, and consumers with an unrealistic expectation of things to come.
For starters, restaurants aren’t accurately pricing their menus to be economic. We’ve noticed that many to-go items are significantly less than they would be in-store. When you eliminate the front of house expenses that makes sense, but are the off-premises prices even profitable? Lately the average check at still-open restaurants has ballooned as families order food together. But if a family of four can order four to-go meals at 40% of the price of dining in, is the restaurant making money?
For example, there’s an upscale restaurant by us that has decided to remain open during COVID-19. Here are pictures of their usual menu:
Now here are some pictures of their current to-go family style (serves four) menu:
For comparison, a beet salad for one was $12. Now it’s $20 for four, or $5 per person. That’s a nearly 60% price reduction.
A chicken breast was $24 for a single serving, now you can order a chicken meal for four for an additional dollar, making the per-serving cost $6.25, or a 74% price reduction.
Even if you subtract the front of houses costs, which one could estimate at 20% of total expenditures, it doesn’t justify the precipitous reduction in prices, and we’d bet these operators are losing money hand over fist. But the point is that consumers are being spoiled by the desperation of operators, and these prices are unsustainable. No, you cannot expect to continue ordering Michelin-star food to-go for $10 per person. This is totally crazy.
Second, third party delivery companies have lowered fees to pump more volume through their systems and collect more consumer data. The tradeoff here is a hit to third party balance sheets – which would have happened anyway during the pandemic – in exchange for good PR and more consumer data. So instead of all those consumers shopping at grocery stores, what if third party delivery companies gin up some PR, lower fees, and push more volume through their platforms? It’s a win-win for them. Grubhub’s predatory terms notwithstanding, this is what companies like DoorDash are doing.
Once again, this results in unnatural and uneconomic incentives for the consumer: instead of paying $10 per delivery (which could be on the low side), consumers are paying nothing. This is not sustainable either, and only compounds unrealistic consumer expectations in a post-COVID world.
Prior to COVID, there was a a rising cacophony around delivery, and politicians were ironing their suits and donning their shiniest pairs of shoes to step into the limelight. Never let a crisis go to waste, right?
First the legislators whipped out their pens to start changing the definition of a contractor; in California gig economy workers are now considered employees and entitled to all sorts of benefits. This will put a lot of strain on third party delivery if the law becomes adopted in additional states.
Then legislators sought to put a ceiling on the fees delivery providers could charge. Here’s a proposal in NYC that’s capped delivery fees at 10%. In San Francisco the mayor put the cap at 15%. Of course it doesn’t take a genius to understand that if delivery companies aren’t making money at 30% commissions they’re sure as hell not going to make money at a 10% limit; in this event the cost would need to be borne by the consumer, who might have already been feeling the pinch pre-COVID.
Legislators can scribble legalese all they want but they’re not going to solve the real problem. Here’s the dirty secret….
Brick and mortar merchants are unsophisticated.
No amount of legislation is going to teach a merchant how to read a contract, do basic profit and loss math, or understand how they’re getting sodomized on payments processing. The rapid rise (and eventual fall) of parasitic services on the backs of brick and mortar is not new, and it will continue to happen so long as the demographics of brick and mortar operators remains the same.
Larger chains will eventually adapt, bringing in external talent that prioritizes data and objective decision making, but so long as the cost to open a SMB remains low, SMB will mint suckers by the minute. Our menu pricing example is wood on that fire.
Legislators can try all they want, but you can’t fix stupid. Yet there is obviously a limit to any operator’s balance sheet. So the question becomes, how long will consumers be spoiled at the expense of the operator?
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