Third party delivery companies (3PDs) like DoorDash and UberEats come with very heft commission fees for restaurant operators. Larger brands can and do negotiate lower fees (along with access to the customer data), but even those are punishing. Look no further than big-chain Chipotle, which is publicly discussing the need to increase the cost of their food to cover the expenses that come with 3PD.
Chipotle Mexican Grill Inc. is testing delivery menu price increases to offset higher costs related to delivery operations.
Chipotle’s delivery expenses were elevated on a year-over-year basis, pushing the company to try out the delivery menu price increases. The company had previously reduced delivery fees from $3 per order before the pandemic to $1. The company expects the net increase to its customers to be 2% to 3%. The new delivery menu pricing strategy will evolve over time as the company gauges consumer responses, and adjustments could made market by market.
“When customers choose a premium convenience channel that attracts higher cost, our objective is to largely cover those costs within that channel,” John Hartung, Chipotle’s CFO, said during an Oct. 21 earnings call.
Chipotle’s margins were hit because about 15% of its in-store customers opted for delivery due to the coronavirus crisis, Hartung said. If delivery sales shift to in-store, order-ahead and pickup sales, it will improve Chipotle’s margins, Hartung said.
And by the way, this is totally sensical: if customers are the ones benefitting from the convenience of delivery then they should be on the hook to pay for that convenience. Asking the operator to foot the bill is not only nonsensical, it’s unsustainable.
The below data comes from a 10-unit sit down restaurant in a major metropolitan area. Like all other table service operators, they were hit hard during COVID and became reliant on off-premises dining to survive. A lot of this business was understandably driven by the 3PDs.
This group took 6 of their stores and tested price increases to see what would happen. They took 3 stores (Group A) and increased prices to cover delivery costs for three weeks. Then they took the stores where they didn’t increase prices (Group B) and increased prices to cover delivery costs while simultaneously dropping the prices for Group A back to what they were for two weeks.
Unfortunately there was no real standard percentage price increase, but instead the brand made different price increases depending on what they thought each menu item could support.
We changed prices based on what we thought each item could support, but the weighted average was a 14% price increase. Order quantity dropped 9%. It ended up being a per-order weighted price increase of 10% because customers started moving towards lower priced items.
Ultimately we saw the number of orders decrease by almost the exact amount required to match the price increase, so in the end we received just about the same net income.
10-unit operator
Here’s a summary table of the weekly averages across all 5 weeks.
| A/B Test Group | ||
| No Price Increase | Price Increase | |
| Net Sales | $ 17,900 | $ 17,300 |
| GST / HST on Food Sales | $ 900 | $ 870 |
| Delivery Fee | $ 3,000 | $ 3,150 |
| Uber’s Fee to Restaurant | $ 5,760 | $ 5,765 |
| Total Cost of Delivery | $ 5,200 | $ 4,700 |
| Payout to Restaurant | $ 16,000 | $ 15,600 |
| Approx Food and Labour | $ 9,100 | $ 8,700 |
| Restaurant’s Gross | $ 6,000 | $ 6,030 |
| Uber’s Gross | $ 3,560 | $ 4,215 |
As you can see, their “Gross” was just about the same as before the price increases.
Higher prices have the benefit of lowering labor costs, since it would appear that we’re through-putting less volume. It would also produce less wear and tear and lowers the depreciation of fixed assets. On the other hand, lower costs may result in winning more mindshare from consumers.
We haven’t decided which way we’ll go in the long run. I suspect we’ll increase prices and really try to push our branded ordering channel.
10-unit operator
As we had hoped, the operator recognized the need to cover third party costs AND invest in their own first party channels. This is paramount as the customer data generated from your own first party ordering can be used to build retargeting campaigns, complete with ROI measurement, and further optimized to do so at much lower costs than 30% commissions.
The silver lining to COVID is all the customer data being generated. Will merchants take advantage?
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