Third-party delivery is hurting restaurant economics

Delivery may be contributing to restaurants’ weakened economics. | Photo: Shutterstock.

Whenever we’re speaking with restaurant operators, and the topic of third-party delivery comes up, complaints almost inevitably follow.

Theft is a problem. It creates headaches for staff. There are too many discounts on the app. Customer complaints about delivery orders are often on the restaurant, even when it’s not their fault. The fees leave them with less revenue, which eats into already-thinning margins. 

Many of these complaints are the natural result of a new service format entering the picture, which can routinely lead to disputes and other concerns. Ask any operator about a POS provider, beverage company or distributor and you’ll get more than a few grumbles.

But nearly a decade since McDonald’s deal with Uber Eats signaled the explosion of third-party delivery, the service has damaged the industry’s economics at a time when average profitability isn’t exactly thriving. And it has grown too powerful, controlling a substantial percentage of the online ordering market. 

Delivery as a share of the orders at the largest chains has remained steady the past three years, accounting for around 9% of traffic at limited-service chains and just under 4% at full-service chains, according to Restaurant Business sister company Technomic.

The service clearly has its fans, and for good reason. It’s remarkably easy. You just pick up your phone, pick from a selection of restaurants, and order. The food is then delivered to your home so you do not have to leave. There is value in that, as the restaurant industry has learned over many years. Consumers love convenience, even if it costs more money and even if the food they get is substandard, which it almost always is, because it arrives well after it was ordered. 

That explains why so many consumers continue to order delivery even though they are cutting the frequency of restaurant visits. 

Yet the competitive dynamic in third-party delivery is different from almost any other service. 

Two companies, DoorDash and Uber Eats, now account for the vast majority of third-party delivery orders. That’s not necessarily a bad thing, at least when it comes to restaurants. Two competitors dominate the beverage space, for instance, yet the battle for exclusive deals with restaurant chains by Coke and Pepsi can be beneficial to the companies that sign such deals.

With third-party services, however, the perception in the industry is that they have to be on both services or they may lose out on potential customers. 

Some companies—Texas Roadhouse, for instance—can afford to avoid delivery because they don’t need that traffic. Most restaurants today can’t afford, or at least don’t think they can afford, to simply ignore a potential source of traffic. 

That puts restaurant companies at a disadvantage. They need the traffic. Being on third-party delivery apps can provide that. But the apps’ charges, which can run as high as 30%, hurt their bottom line at a time when many operators are not making money.

According to the National Restaurant Association, profitability at full-service and limited-service restaurants has declined since 2019. And 42% of operators say they are not profitable. 

Operators’ costs have increased for roughly everything, including food, labor, insurance, new openings, debt, construction, credit card swipe fees and leases. They have new technology and other fees to contend with.

Third-party delivery has been touted as an incremental addition to a restaurant’s traffic. But as that service has matured, we believe it is less incremental all the time.

Because these services are marketplaces, the pressure is on operators to provide some form of discount to get customers’ attention and get more favorable placement on the apps. Our own surveys have found that about half of the orders on these services are on some sort of deal.

Many operators raise prices on third-party apps to compensate for the charges, which is probably the right response. But there’s even pressure for them not to do that. And that has hurt the restaurant’s value perception.

Amid all this, third-party delivery puts another entity between a restaurant and a customer. A restaurant has less control over that particular order and is dependent upon another company that has its own business to worry about. It’s one thing if a worker screws up an order in the drive-thru. The manager knows who is responsible and can make it right with the customer.

But when the worker screwing up the order isn’t your employee, that makes matters more challenging, making that order subject to a dispute. 

The bigger problem with third-party delivery is with independents that have less power to negotiate with the apps and which probably need the customers. But many franchisees do not like it either. Franchisors love third-party delivery. But franchisors are not the ones paying the fees. They need to be cognizant of the service’s impact on their operators’ bottom lines.

We’re certainly not suggesting that third-party delivery go away. But the reality is that the advent of third-party delivery has made an increasingly complicated and margin-thin business that much harder and less profitable. That is just the reality.