Why Restaurant Third Party Delivery Is So Much Worse Than The Hotel/Airline OTA Analogy

Zach Goldstein, Thanx’s founder and CEO, wrote an article articulating the problems with third party delivery (3PD) and what could be done to change the tide for the restaurant industry. Zach’s main point is that 3PD’s should be further legislated.

Until third party delivery platforms grant restaurants their currently-withheld customer data, I encourage further government action to protect restaurants from excessive fees.

Zach Goldstein

Pursuant to this, Zach is collecting signatures to lobby legislators to make some changes.

This is a bit of a libertarian’s dilemma. We hated it when the federal government mandated that food manufacturers put nutrition labels on their goods, but damn if we don’t use them daily. The libertarian’s argument would be that the manufacturer’s would have invested the capital to display the nutritional information on their own accord if consumers really wanted it, it just might have taken longer.

I think here’s where we’re confilicted.

Let’s use the online travel agencies (OTAs) as the appropriate analogue for the 3PDs. The OTAs effectively “stole” the customer relationship from the airlines and hotels, building direct rapports with consumers by providing an improved customer experience (aggregation) for what could otherwise be described as a very commoditized service. In other words, the ability to quickly compare prices against economic substitutes was a far improved user experience.

But here’s where there’s a bit of a difference. In the hotel and airline industries, the end service provider (i.e. the hotel or the airline) knows who the customer is. They get the customer’s phone, email, and credit card information from the OTA, or directly from the guest upon arrival. Restaurants get none of this from the 3PDs.

Airlines clearly need customer data for security purposes, and hotels want this data so they can chase the guest down if they trash the room (except, we guess, for those really seedy hotels where low budget pornos are filmed and guests pay in cash). Even if the OTAs wanted to withhold this information, they couldn’t due to systemic risks for the end service provider.

Restaurants clearly don’t face the same systemic risks in not knowing who their customers are: customers ordering to go aren’t at risk to hijack the restaurant and crash it into a building, nor are they going to throw an extravagant party on the restaurant’s premises, racking up tens of thousands of dollars in damage.

But Zach’s point, which we ourselves stated in January of 2018, is that restaurants are at a triple disadvantage relative to the OTA analogy:

1. With interest rates at effectively 0%, there’s a plethora of money awash in private markets. This means the 3PDs have access to nearly unlimited capital (which seeks to earn higher returns in equity as opposed to the zero return in credit markets) to subsidize the true economic costs of delivery, rapidly expanding their marketshare. Every restaurant is thus effectively forced to accept 3PD.
2. Massive fragmentation of the restaurant industry means that the long tail is even more exposed. Hoteliers often run under the banners of eight marquee brands, and domestic airlines have consolidated substantially, giving these markets a fat tail where there exists brand power and resources to fight back.
3. Lastly, as mentioned above, restaurants have no systemic need to get any of the customer data. Yes, we understand if they don’t have customer data for direct marketing they face annihilation, but that doesn’t carry as much weight as someone-could-crash-my-assets-into-a-building-and-kill-the-president type of argument.

Unfortunately all of this has been accelerated by COVID, which couldn’t come at a worse time for the restaurant industry when you consider the toll “free money” has already had on 3PD (and POS) distribution.

In a perfect world prices would be transparent. Restaurants and their consumers would know the costs of 3PD services, and payments processing couldn’t underwrite the crookery of POS companies. But the average person can’t do math, even if the numbers are put right in front of their faces.

Legislation isn’t going to make people less dumb (unless you’re talking about eliminating the department of education, but that’s a whole other topic) and it’s not going to fix this problem; the 3PDs count employees from consulting groups, investment banks, Harvard, Stanford, and some of the most respected institutions in the world. Sans Amazon, these caliber of professionals don’t often find themselves working in retail. It’s an asymmetric advantage that will not be fixed with legislation.

One can legislate all they want, but the 3PDs are just so. much. smarter than your average SMB that they’re going to figure out how to make their numbers work. Our prediction:

• The SMB restaurant industry collapses in the face of COVID. 3PDs/ghost kitchens were going to do this to the industry anyhow, it’s just that the timeline has been pulled forward
• People get tired of eating undifferentiated chain/ghost kitchen food (seriously, how many fried chicken wings do you think people want?) and demand arises for unique SMB fare
• New SMBs open, but the ones that survive learn to pass along the costs of the 3PD to the end consumers, who are benefiting from the convenience of delivery and should be paying for it anyhow. (Note: If you don’t think your customers will pay for the convenience of the delivery of your food then you’re not differentiated enough and perhaps you should consider being a faceless ghost kitchen pumping out fried chicken wings)
• SMBs that are smart enough to learn how to pass along the 3PD costs are smart enough to learn how to get first party data to retarget customers directly. We think this looks a lot more like spending marketing on social (Facebook) and search (Google) where you can collect better customer information to put into your own CRMs (more on this in coming articles)

That’s just our opinion, of course, and you’re entitled to your own. If you think legislation will fix the issue, we’ve provided you with the link to sign Zach’s petition.