Now that pandemic quarantines are over and life gets back to normal, one of the biggest questions for delivery drivers is: what will happen to gig delivery companies in 2023 and beyond? Senior RSG contributor Sergio Avedian has the unique perspective of being not only a delivery driver but also someone who has developed close relationships with local restaurants. What are these restaurants saying about the impact of delivery apps on their bottom lines? Is delivery viable in 2023? Sergio answers these questions and more.
Over the past four months, I have added food delivery to my toolbox as a driver. Multi-apping is necessary these days to keep a driver’s Utilization Rate (UR) high as well as increase earnings.
Frankly, I have enjoyed doing deliveries more than rideshare since food does not get drunk and puke in your car, ask for a charger before they even close the door, and it is a quiet trip. As a delivery driver, my job is easy. I get the ping, go to the restaurant, pick up the food and take it to someone’s doorstep. Hopefully, the customer tipped well since base pay on all third-party delivery companies is horrible, as low as $2.50 per order.
Having done over 700 deliveries in the past few months, I’ve met many wonderful people, from owners to managers of restaurants. As I kept introducing myself by handing out my RSG cards, these owners started to open up and show me another side of the delivery business, their side.
A few weeks ago, I decided to interview a few restaurant owners to get a better understanding of the pressures they faced during the pandemic as well as now. Below is a condensed conversation with Bernadette of The Pizza Cookery.
From my conversation and experience as a delivery driver myself, I was then able to connect the dots between the longevity of delivery apps, their relationship with local businesses, and how it all works together for delivery drivers. Will delivery, the way it looks right now, survive in the future?
The Story of The Pizza Cookery
During those shut-down months of the pandemic, consumers learned about DoorDash, Uber Eats, and Grubhub by the millions. This opportunity was too good to pass on, from mom-and-pop shops to established chains.
Some were already set up to provide this service without a glitch, but some older establishments like the 30-year-old The Pizza Cookery, located in Granada Hills (San Fernando Valley), a suburb of Los Angeles, were caught off guard.
Bernadette is the daughter of the owner of the establishment, and she could not pass on a vital revenue stream. She clearly remembers how difficult those days were but to her credit, she took out a Paycheck Protection Program (PPP) small business loan to not only give the 30 year old restaurant a facelift but to keep all her staff without letting anyone go. I say we need more Bernadette’s in this world, as she also dove right into the third-party delivery game.
The business is doing well today since the renovated dining room is much more inviting to customers. But without third-party delivery apps, I don’t think they would have survived. Bernadette is thankful that she was able to keep the doors open, unlike hundreds of thousands of restaurants that were forced to shut down.
But she also warns of the pitfalls of these apps in the form of chargebacks due to customer fraud and the high commission rates Doordash, and Uber Eats charge, to the tune of 30%. She says these high commissions eat most of her profit margin. Still, she considers using these apps as part of her advertising budget in the hopes of hosting the delivery customers as dine-in patrons in the future.
How Does Third-Party Delivery Work?
Third-party delivery refers to hiring another business to handle restaurant food delivery services on their behalf. They pay these companies a fee, typically a percentage of the sale, up to 30%. The driving (or biking) and hand-off of the order to the consumers are the responsibility of IC workers.
The restaurant is still in charge of making and packaging the food. Unfortunately, most of the kitchens are not equipped to handle the order flow for dine-in patrons as well as online transactions. If orders get delayed, consumers, with a few clicks, can ask for a refund, and restaurants are on the hook, resulting in massive losses for the establishment.
The on-demand app companies process payments and then make payouts to the restaurant, typically weekly. The biggest players in the third-party delivery game are Uber Eats, DoorDash, Grubhub, ChowNow, Postmates, Caviar, and Seamless. Restaurants choose one or more as delivery partners based on their budget, target customers, and needs. A lot of restaurants I pick up from work with several of these platforms.
Now that you’ve got the broad strokes of third-party delivery and how it works, it’s time to take a closer look at the pros and cons.
Pros of third-party delivery
There are many reasons why so many restaurants are partnering with third parties to deliver their meals to people.
- Ease. Convenience is the biggest perk of partnering with a third-party delivery service. The partner handles the delivery so you can focus on running a restaurant.
- Speed. Provided you choose a partner that integrates with your Point of Sale (POS) system, restaurants can be up and running quickly.
- Fewer upfront costs. This route also offers upfront savings over creating their custom digital ordering system.
- Staffing. Restaurants don’t need to find employees to work as delivery drivers.
- Visibility. These platforms can help restaurants reach new diners and grow their business. Often people come to their ordering app with a craving for Chinese, Mexican, Italian, or simply burgers and will search accordingly. It’s not uncommon for consumers to find their new favorite restaurant this way.
Cons of third-party delivery
Some third-party delivery businesses have been in the news for their high fees and questionable business practices. Here are some reasons restaurants are seeking out alternative options for delivery.
- High fees (service, transaction, credit card, etc.) This is the biggest con. Fees can sometimes account for over 30% of sales by some estimates, cutting into already low profit margins.
- Broken trust. There have also been reports of these companies taking unsavory actions, like setting up a fake version of a restaurant and obscuring the facts about their fee structures. In response, restaurants in some areas have banded together to create delivery co-ops owned by the restaurants themselves to bypass using these third-party partners.
- Low profits. Restaurants, especially mom-and-pop shops like The Pizza Cookery, aren’t making nearly enough profits to survive in the long run. Their operations suffer from managing multiple third-party delivery apps while running their kitchens, dealing with staffing issues, and taking care of customers who are dining indoors.
While third-party delivery apps may have been a lifesaver for many restaurants during the pandemic, the continued demand for takeout and delivery is a big opportunity for restaurants that can make delivery work efficiently and profitably. While large restaurant chains can leverage serious economies of scale, data, and technology, smaller restaurants are less fortunate.
Establishments like The Pizza Cookery are built for dining in, not delivery at scale. Online food delivery is projected to account for 40% of overall restaurant revenue by 2025, but restaurant owners haven’t adjusted to this new reality. Restaurants can’t survive if they continue to break even or even lose money on every delivery order, and they likely can’t make up the revenue loss through order volume.
The high demand for online orders and the pressure to manage in-person diners has become a difficult balancing act for restaurant owners such as Bernadette. Most mom-and-pop restaurants do not have the right tools to manage existing resources efficiently so that they can take care of the dine-in side of the business and the online/delivery side.
During my deliveries, I have discovered that the most successful restaurants are the ones that designate a separate staff between third-party app orders vs. dine-in patrons.
Most restaurants are more passionate about food, not technology. Small restaurants have a lot of pans in the fire, pun not intended. Asking them to manage and monitor multiple online ordering tablets for multiple delivery platforms that don’t work together is a lot to ask.
The bottom line is that the current state of the industry is unsustainable. Delivery platforms haven’t successfully shown a profit in their bottom lines yet. Even the largest player, DoorDash, has not been able to turn a profit.
The third-party apps keep increasing service and delivery fees on the consumer, but when a burrito costs $25 to deliver, the demand may face stiff headwinds. Charging up to 30% in commissions while restaurants barely get by with their operational inefficiencies is a challenge going forward, as restaurant delivery is projected to continue to grow.
What do you think about the sustainability of delivery apps? Do you think they’ll be able to turn a profit in 2023? How do you think smaller restaurants could better compete in this changing landscape?
-Sergio @ RSG