Meeting the Demand: How the Restaurant Industry Has Responded to Online Ordering
Americans are eating out less than they used to, and Maxim Group analyst Stephen Anderson expects this to continue throughout 2017. In the early months of the year, same-store sales dropped 1.1 percent, while foot traffic passing through restaurants fell by 3.4 percent, according to Nation’s Restaurant News.
This doesn’t mean everyone’s cooking at home. It’s just that they’re just choosing to eat there instead.
The Delivery Startup Party is Over
US consumers order 1.7 billion meals online each year, writes NPD Group. The best way for restaurants to stay relevant in an on-demand economy is to reinvent how they get their food to customers, rather than hoping to fill empty seats.
Indeed, as Anderson says, the chains most likely to excel during this downward trend are places such as Domino’s Pizza Inc. and Panera Bread Co. He calls these chains tech firms that serve food.
For the past decade, the on-demand food delivery was a booming market. Consider that companies Sequoia and Kleiner Perkins Caufield & Byers — venture investors from Silicon Valley — invested $9 billion into 125 on-demand delivery companies over that time, including $2.5 billion in 2016.
A heavily saturated market has slowed that kind of investing in startups, and it’s the established brands that are now looking for ways to tap into a changing landscape. Kate Taylor at Business Insider writes that chains such as McDonald’s, Wendy’s and Panera Bread are currently testing delivery options.
While those fast food chains are all outsourcing deliveries, each approach is different. McDonald’s has teamed up with UberEats in multiple cities across the US, for instance; Wendy’s, on the other hand, launched delivery through DoorDash at 135 locations in Ohio. Panera Bread is adding delivery services to nearly 40 percent of its locations.
Casual dining establishments have also seen the value of this medium, partnering with delivery services such as Grubhub and DoorDash, Taylor writes. Laura Michaels at Food on Demand agrees, writing that Cheesecake Factory is expanding delivery to half of its 194 US locations through DoorDash, while T.G.I. Fridays, Chili’s and Maggiano’s are using Grubhub.
“There is an opportunity to redefine local commerce in cities,” DoorDash co-founder Stanley Tang tells Fortune, but operational challenges need to be ironed out before these types of services can be upscaled.
Postmates is another on-demand delivery service. About 30 percent of its business comes from restaurant and retail partners, although it does not operate on a partnership-only basis. Anand Dass, a former director of business development at Postmates, explains the company matches customer with courier (called Postmates) to get products (including restaurant food) to those customers in under an hour.
The shift to on-demand delivery services has been monumental. Writing at The Telegraph, James Titcomb talks about how companies such as Deliveroo and UberEATS are disrupting the food delivery space the same way Uber and Airbnb changed how taxi companies and hotels operate.
Indeed, Steve Schlafman of RRE calls this the “uberification of our service economy” thanks to connected consumers, secure purchase flows, and location-based services.
Third-party delivery means restaurant operators can avoid costs such as liability insurance and hiring drivers, Riggs says. But not all restaurants are leaving it to third parties to drive deliveries.
Outback Steakhouse is opting for a hybrid solution, using third-party services while building its own, Taylor at Business Insider reports. And that may be the right move. Citing a Smart Brief report, Renee Lee writes that as many as 70 percent of consumers say they have ordered pick-up or delivery directly from operators rather than third-party services.
Room to Grow
Eric Kim at TechCrunch refers to a Morgan Stanley report that says of the $210 billion restaurant spend, online food delivery comprises $10 billion or less than 5 percent. He writes that online food delivery is still in its nascency with plenty room to grow.
Pizza won’t dominate forever. NPD Group restaurant analyst Bonnie Riggs puts pizza at 64 percent, but says full-service restaurants are where growth is happening. Remove pizza data from the whole picture and the numbers reveal delivery is up 26 percent and 21 percent for casual-dining restaurants in particular.
Deliveroo is one company taking advantage of the growth opportunities in food delivery. Titcomb writes that the company will expand its reach by opening 30 kitchen hubs in the UK with further growth in Hong Kong, Singapore, France, Australia and Dubai.
The company will partner with independent restaurants to offer takeaway food through its network of delivery drivers. At the same time, it will provide kitchen space for extra chefs from about five restaurants to meet demand.
Deliveroo will provide restaurants access into areas in which they are not yet physically present. This mitigates some of the risk restaurants face when testing new locations.
Tech is Good for Business
“Tech will continue to be the driver of change in the food delivery space,” Beth Daniel at UKTN writes. She says many believe full-service restaurants with eat-in premises may be at the mercy of delivery companies.
Titcomb sees it being more of a blessing than a curse, as third-party services may be helping full-service restaurants reach previously unavailable customers. In 2015, for example, growth in home delivery sales for full-service restaurants reached 118 percent.
Time-strapped people like what restaurants have to offer, and want to enjoy the product at home, writes Anna Tauzin, senior marketing and innovation manager at the NRA. A recent report from her company notes that restaurant sales have even surpassed grocery sales.
Desire for good quality restaurant food is the premise of a startup called Delivery Hero. CEO Niklas Östberg tells Juggernaut how his company (now in 33 countries since opening in 2011) enables restaurants to focus on offering great food to people, and not worry about delivery services and the marketing required.
The service allows customers to choose their favourite food from a local restaurant and, with one click, the online order goes straight to the restaurant kitchen.
New Flavor Of Restaurants
Neal Ungerleider at Fast Company writes that New Yorkers are ordering everything from meatballs and sushi to tacos and burgers through online services like Seamless and Eat24. The real difference is that they’re getting their food from a new kind of venue, which he calls “ghost restaurants.”
Leafage and Butcher Block, for instance, “aren’t restaurants at all,” Ungerleider writes. These virtual eateries have been created by the Green Summit Group, which operates food-delivery services in Manhattan, Brooklyn and Chicago.
Co-founder Peter Schatzberg tells Fast Company that chains such as Chipotle or Pret A Manger dedicate 75 percent of their space to seating, while 90 percent of their customers just grab and go. Green Summit, on the other hand, can open a 200 square foot kitchen and “operate a viable restaurant business with a minimal footprint.”
Schatzberg says these are just like restaurant kitchens with sectioned areas designated for different tasks. Food is made to order, and stations are set up by category. There is just nowhere for customers to sit and multiple ‘restaurant’ brands are operating from within the same kitchen space.
In New York, customers ordering from Green Summit’s restaurants need to go through Seamless/GrubHub (which merged in 2013) to get their food delivered.
Ungerleider calls delivery services such as Seamless, Eat24, UberEats and Doordash “gatekeepers” for urban restaurants looking to build a delivery business in 2017. Without tapping into these powerful new delivery mediums, restaurants will battle to make a dent in the market.
These fresh models to make and deliver food will continue to be tested, tweaked and improved. Consider Good Uncle, a New York-based startup test-marketing at Syracuse University.
The company has bought licenses for recipes from established restaurants such as Croxley’s Ale House, Ess-A-Bagel, Joe’s Pizza, Sticky’s Chicken Fingers and No. 7 Subs. These places lack the necessary delivery service options and Good Uncle fills this void. The startup has bought the rights to recreate these well-known meals in its commissary.
Whether it’s partnerships with third parties or restaurants building their own delivery services, the trend is set to continue: People are eating at restaurants less frequently than they used to. The good news is that consumers still want the variety of choices provided by their favorite establishments, as well as tasting the offerings from many more previously unvisited eateries.
Established restaurant operators will need to reinvent how they get food on tables, even if those tables are inside consumers’ homes.
Images by: Zach Inglis, Alexandra Gorn, Rami Al-zayat, Alex Holyoake