Article
A Necessary Evil? Independent Operators Speak Out on Third-Party Delivery
Editor's Note: At the time of this writing, my restaurant industry news feed lighted up with updates to a lawsuit filed in December in the US. District Court for the Eastern District of Pennsylvania by Tiffin Indian Cuisine, a restaurant chain in Philadelphia and New Jersey. The lawsuit alleges GrubHub charges commissions "without verifying whether the calls generated actual food orders and has instead relied solely on the length of the call to justify its withholding of revenues and prof its that belong to restaurants…" According to reports, GrubHub has denied the allegations.
You can learn more about the lawsuit from a number of news reports filed online in both general and restaurant industry trade media. For the purpose of Lindsey's feature article below, the GrubHub lawsuit underscores the "uneasy relationship" (as noted by Nation's Restaurant News reporter Gloria Dawson in a May 28 article on the lawsuit) operators have with third-party delivery services. As noted in the article, this lawsuit is not the first-time operators have claimed that third-party delivery services engaged in unethical business practices.
That's the news. Here's the deal: Whether you love it or hate it, consumer demand for restaurant food delivery is not going away. In 2018, revenue from online food delivery topped $20 billion. Through 2022, revenue is on pace to grow by more than 9 percent per year. We hope this feature article helps you make the best of these services and pick one that works for your concept.
"Necessary evil"
That phrase came up time and again in RestaurantOwner.com's 2019 Delivery Survey, with restaurant operators seeming to believe they have no choice but to embrace third-party delivery systems if they want to stay relevant.
Of the 993 survey respondents, 31.02 percent (or 308 respondents) used only third-party delivery services, with an additional 13.49 percent (or 134 respondents) using third-party delivery services in addition to an in-house team. Just 12.19 percent of restaurant operators (or 121 respondents) do all their own delivery. While operators believe these systems are necessary, many voice serious concerns after giving third parties a try. Yet others commented that the decision was among the best they made in the 2017 year-end survey. (See below for a summary of the survey results.)
The Big 3: DoorDash, Uber Eats, and GrubHub
With a network of more than 200,000 on-demand drivers in 800 cities across the U.S. and Canada, Door-Dash delivers far more than food. The startup partners with Chipotle, Wendy's, and other companies. Restaurants receive orders via computer, tablet, or fax, then hand orders over to Dashers or delivery drivers. DoorDash estimates that 95 percent of its orders are delivered in 30 minutes or less, with an average customer rating of 4.7 out of 5.
While third-party delivery offers independent operators many benefits, there are serious concerns to consider, most notably cost. How should restaurant operators think through this decision given the current trends to reduce risk while maximizing the benefits of third-party delivery? In this article, we suggest you explore the best-known systems, the small-fry alternatives, and lessons learned from restaurant operators who've waded into the delivery debate.
The company found itself in proverbial hot water a few years ago, however, when they listed restaurants on their website without permission, then charged higher prices to reflect the convenience of online ordering. Some restaurants enjoyed this extra business, while others were upset at being associated with a delivery startup without consent--and having customers experience tiered pricing for online versus in-house orders.
DoorDash now passes its delivery fee on to customers for restaurant partners (thus keeping menu prices consistent with in-house orders). Customers pay a service fee, local taxes, and optional tip as well.
Earlier this year, DoorDash was targeted with allegations the company used employee tips to subsidize base pay, essentially turning to customers to subsidize their low-paying gig-economy jobs. CEO Tony Xu defended the company's payment system, claiming that delivery workers deliver faster, spend more time on the app, and report greater levels of satisfaction.
Late last year, the company made headlines for turning a profit - something that few meal delivery services have managed to do.
Consider that Uber Eats updated its prospectus in April 2019, in advance of Uber's forthcoming initial public offering. According to the new prospectus, the rideshare giant grossed $7.9 billion in meal delivery revenue in 2018, yet spent more on meal delivery than it earned, in part due to an elected delivery loss for partnerships with major chains like McDonald's, who pay lower service fees than independent restaurants.
Those service fees can reach 30 percent of each order, although some restaurant operators say they've negotiated rates of 25 percent.
For that fee, Uber promotes restaurants in the Uber Eats app and on their website. Uber Eats also offers professional photography for menu items. Top restaurant partners earn an average of $6,400 per month (as of August 2016), and Uber claims orders are delivered in an average of 15 minutes, due to their vast driver network.
GrubHub allows customers to order via app or website, then sends orders to restaurants through their online app, email, fax or POS system. The delivery service also provides automated phone calls to prevent missed orders.
GrubHub allows restaurants to select the delivery radius, order times, and availability times. Restaurant operators can turn off delivery during peak hours, electing to only offer delivery during slow periods. Restaurants can use their own delivery driver or have GrubHub send a driver, in which case there's a delivery fee, deducted as a percentage of the order.
While it's free to be listed on GrubHub, the service takes a marketing commission, a phone commission (for orders placed via the routing number in their listing), and a processing fee for each order. GrubHub rewards restaurants who elect to pay higher marketing fees with better placement in the app and website, with the potential for broader customer exposure.
Per-order fees can quickly get out of hand, as Eater illustrates with the story of Delilah's Steaks, a now-defunct cheesesteak business in Greenpoint, NY. The cheesesteak shop received over 50 percent of their orders from delivery. A side effect of the popularity: their monthly GrubHub fees were triple their rent.
Operators who are most satisfied with delivery often find ways to justify the expense. "It's another advertising channel for us," says one operator, who uses Waitr. Another operator, noting the high fees, chalks it up to the cost of doing business in a high-regulatory market like New York City. Indeed, a 30-percent take is expensive, but given the cost of delivery employees and city regulations, he finds third-party services less of a hassle.
The Small Fries
While DoorDash, Uber Eats, and GrubHub have the majority of business, there are other meal delivery services out there - and several have points of difference that might appeal to operators who are tentative about partnering with big tech companies. Waitr, which launched in Louisiana in 2015, made news as the second publicly traded third-party delivery service. Founded by an entrepreneur with (admittedly, failed) restaurant experience, Waitr focuses on smaller markets, hoping to be the only meal delivery service in cities of 50,000 to 70,000. And unlike other meal delivery apps, Waitr actually hires its drivers instead of contracting through the gig economy.
Operators considering working with third-party delivery services should consider how well their menu items hold. Something that won't look or taste great after a 15-minute car ride (and that's if everything goes as planned) won't impress the customer, who-rightly or wrongly-may take it out on the restaurant in the form of a bad review or request a refund from the delivery service.
By employing drivers, Waitr keeps their costs fixed and passes a cash savings on to restaurant partners with per transaction fees of 15 percent. As founder Christopher Meaux told Skift, he wanted to keep fees low on purpose, because he knew firsthand how thin margins were for restaurants in smaller markets.
Waitr does charge a flat signup fee for restaurant partners of $2,000, which includes a professional photo shoot of the entire menu, menu management tools, and software.
While the small meal delivery service solves one top problem - unreliable (and unprofessional) drivers - it's not without glitches. Consider a Valentine's Day debacle, in which the service didn't schedule enough drivers on the Tuesday night to keep up with demand. Admitting overwhelm, Waitr wants to reduce order errors and get a better handle on delivery time management before expanding.
Foodsby, a Minneapolis-based lunch ordering and delivery platform, offers many perks of meal delivery, save one: the driver.
The platform connects workers in remote office parks, which may lack nearby restaurants, with restaurants that are willing to deliver, in a fashion. There's no upfront cost or binding contract for restaurant operators, and fees are less than 10 percent.
"Foodsby enables [restaurants] to enter the delivery space without having to hire people or pay those large fees that others in the space charge," says founder Ben Cattoor. "Because they can pick the times they are scheduling deliveries, they can select where they are going to go, the order will feel more like a catering order, [and] they can send out an existing employee," Catoor adds.
Foodsby offers granular control for restaurant owners, allowing them to select a delivery radius, order cutoff time, order drop time, and the number of drops on a route.
Foodsby recently launched in San Diego and Orange County, California. They hope to be in thirty markets by year end, with expansion planned into Philadelphia, Seattle, Boston and the metro New York area. Given their target audience of office park employees, the app starts on the outskirts of the city, and then moves in toward the downtown area, partnering with office buildings to build trust into the system.
Says Cattoor, "If a restaurant were to get only one order, they would have to deliver it, but that never happens when you get enough people in a building that all eat lunch around the same time."
Cattoor, who compares the service to "being in the delivery space, with one foot in and one foot out," says that "rather than give food to the driver and who knows what happens in between, the restaurant is doing delivery, so they control experience, quality and time."
Loss of Control
Third-party delivery services lure restaurant operators with the promise of more: More orders during slow periods, more exposure to a brand-new audience, and more revenue without needing to invest in their own delivery fleet. Yet the partnership effectively changes a restaurant's relationship with customers and invites risks that restaurateurs must manage themselves.
"I don't care for third parties. I think they're parasites," says Mark Gold, owner of Pizza Shuttle, who started working with GrubHub and Uber Eats one to two years ago. Gold has his own delivery fleet, something he prefers to third parties.
Gold, who compares these partnerships to "working with the devil," says "I get my money, and if I want to be competitive, I have to get in bed with [third-party delivery services] because so many people use them, but to me it makes no sense whatsoever if you can order directly from me or pick up directly from me."
Noting the way these apps change the customer relationship, Gold worries about what happens if the apps take a restaurant's data. "You lose all your customers then and you're just a kitchen," he says.
The whole freelance gig of using your vehicle to make money attracts anyone from anywhere," Roeger notes. The restaurant used to work with a local delivery service, but that company went out of business the minute GrubHub came to town.
Carrie Roeger, who co-owns Semper Fi Bar & Grille in Woodstock, Georgia with her husband Ralph, expresses a similar fear: "All we are is another commodity," she says. "No matter what service we use, we know we can't drive traffic [to the restaurant]."
Roeger signed up with GrubHub due to their aggressive promotional offers, where anyone who ordered through GrubHub would get 50 percent off for the first month. "We tried to negotiate [the fees] but we got a quoted rate. They said they don't negotiate. [We ended up with] something in the twenties," she recalls.
Roeger admits the service didn't have the benefits they originally thought it would. "Using GrubHub or Uber Eats is not cost-effective for us," she says, explaining that they originally wanted to boost incremental income during downtime by using discounts or specials. "We realized it took all our margins away and we were just sending out food. Then the question became, was that really going to create any value for us?" she asks.
Now Roeger feels like she needs to have delivery to stay relevant, even if it's not cost-effective. Gold, who has thirty drivers and uses delivery apps to get extra sales, says app transactions are less profitable, but thinks they're "better than nothing." Gold views the apps like happy hour. They bring some business at a time when the restaurant might not have any other traffic.
Yet Gold isn't as forgiving of the quality control issues he sees pervasive in the third-party delivery space. One pet peeve is that drivers never bring bags. "They say they're supposed to, [but] the service doesn't give them a bag because it costs too much money," he says. Without a bag to insulate food en route, he worries about control of the food once it goes out the door with the driver - "an independent contractor who is focused on making it worthwhile for them."
Gold recalls when a delivery guy came in during a cold spell, with temperatures of 20 below, carrying only "a red bag that looks like your grandma's old shopping bag." He wonders, "When he leaves my store, I have no idea where he's going. Is he really going to my customer's house? Is he going to pick up four more orders while mine sits in the car?"
Gold continues the what-if game, asking himself if the restaurant would be liable if a driver poisons food, gets in an auto accident, or attacks someone while delivering his food. He's inquired about such scenarios with both companies but says, "I can't get a straight answer."
Operators considering working with third-party delivery services should consider how well their menu items hold. Something that won't look or taste great after a 15-minute car ride (and that's if everything goes as planned) won't impress the customer, who-rightly or wrongly-may take it out on the restaurant in the form of a bad review or request a refund from the delivery service.
Packaging and presentation choices, such as keeping sauce on the side, may help in some cases. In other circumstances, it's a better choice to keep items that don't travel well off the delivery menu.
No-Shows and No Accountability
For Roeger, the biggest issue with drivers is interpersonal. She recounts an angry driver who, after arriving ten minutes early to pick up an order, "[created a scene in the restaurant]" because the food wasn't ready, and then posted a one-star Yelp review that contained white supremacist references.
"The whole freelance gig of using your vehicle to make money attracts anyone from anywhere," Roeger notes. The restaurant used to work with a local delivery service, but that company went out of business the minute GrubHub came to town. Roeger believes the fact that delivery had been locally-based held drivers accountable: "What [we] had was functioning very well. [Drivers] were very professional, [and] didn't have the same feedback mechanisms."
When they worked with the local company, they could provide feedback or fire drivers for bad behavior. With GrubHub, there's no accountability - not even banning a driver for discriminatory actions that would get an employee fired.
With third-party apps, "the drivers are all working for everyone," she says. While Roeger isn't happy with GrubHub, she has no plans to switch to another delivery service due to the energy and effort of switching - and the fact that the same problematic drivers are likely to show up. Instead, she plans to wait and see which companies remain as the delivery model moves forward.
Where local companies are available, operators report satisfaction. Notes one: "We partner with local delivery services that we hand-pick and vet to provide the highest quality service to our guest. The two that we partner with in the Austin market have done a phenomenal job thus far."
One small-town operator tried a creative approach to delivery, which customers wanted, but which wasn't offered in the area. The operator notes, "Using a taxi service works for us. I collect the net sale price, a flat fee and gratuity is included but paid by the customer. The car and driver costs are incurred and paid by the taxi company."
Realizing that drivers have a choice of whether to accept an order, one savvy operator took a gamble on improving quality by appealing to the on-duty drivers. The operator says, "We have an area for them to park, and a spot to pick up orders. When we started providing a soft drink if they had to wait, the delivery folks were quick to get here. That is great for our customers and moved us to a preferred place for many. [A] simple hack that costs a nickel."
"When I hire someone, I interview them and do a background check," says Gold. "You have no idea who's delivering your food" with these apps.
The lack of accountability means that on some nights, delivery drivers don't show up. Gold estimates that he throws out $50 of food a night when DoorDash drivers no-show. DoorDash declined to comment on the allegations.
Roeger recently lost money from DoorDash orders, too. Someone representing themselves as DoorDash called with an order. While DoorDash doesn't do phone orders, the server who answered the call was unaware and placed the order. A driver picked up the food, and the restaurant never got paid. Says Roeger, "Now we're getting repeat calls from people representing themselves as working for DoorDash," in hopes of getting a free meal. She warns other operators, "If you're not training everyone [on how to handle these orders], you will get scammed."
'It's Like Calling the Cable Company…'
Something else operators underestimate is the time it takes to track finances from third-party delivery apps.
Gold says that GrubHub pays him once a week, but he has to go through each order, check off their deposit, and see if it went through. Even though the pizza shop is open until three a.m., GrubHub's day ends at midnight. Comparing the financial tracking is akin to the pain of calling the cable company, Gold says that for each delivery partner, "You gotta dedicate five hours a week to make sure they're doing the stuff right...You can't trust them."
Gold claims GrubHub routinely dings him for things, saying that a customer canceled the order, or an order wasn't correct. "We spend hours each week auditing the paperwork to make sure we get our money," he says.
Roeger hopes other restaurant operators can learn from her story. When she signed up, GrubHub was new to town. "Everyone was encouraged and excited, but no one had any experience," she recalls. "I don't think we had a clear picture of what we thought we would accomplish [with third-party delivery] and what we thought we were going to use this tool for, and once we got past the honeymoon and started looking at the numbers, we realized it would not be a strong tool. It doesn't add to the bottom line."
Adds Roeger, "I kind of feel held hostage. If we're not in this, we're out of the market. If we're seen it's a don't jump for joy every time an order comes in."
DO IT YOURSELF?
With third-party delivery providers charging hefty fees, you might be tempted to provide your own delivery services. Here are a few things you need to consider in your business plan:
Are you going to assign hourly employees to the position or enter into an independent contractor agreement, paying a fee for service? If you are hiring an employee to handle delivery services, you would likely provide a vehicle and insurance. If you are hoping to manage the service with independent contractors, you would be advised to have them use their own vehicle and cover their own insurance. One of the ways businesses are penalized for misclassification of workers is hiring them as independent contractors but controlling them and providing necessary resources, which is indicative of an employer-employee relationship.
You need to factor the overhead and incremental expenses in this decision. The advantage of having an employee handle the service is he or she can work at other roles in the restaurant when not driving and might have greater commitment to and knowledge of the concept. If you own and maintain the vehicle, you can control its condition and maintenance. Of course, whether you hire a driver as an employee or independent contractor, you want to assure the drivers have clean driving records.
How much are you charging for delivery services? Free delivery would be an attractive incentive indeed, but it comes with significant downsides. The most obvious, of course, is you have no revenue to cover the additional costs. That said, you should also consider that your customers might be weighing delivery against dining in or take out. An important question to ask is whether delivery drives incremental sales in your business. In other words, are you generating additional business with delivery services, or are they "cannibalizing" dine-in sales? You also need to be clear with customers how far you are willing to travel to deliver food. This will influence your labor and overhead costs.
SURVEY SAYS…
The RestaurantOwner.com Members Speak Out on Third-party Delivery Services
According to 993 respondents in the RestaurantOwner.com "Third-party Delivery Service Survey", the most popular third- party delivery services among members are GrubHub (40.19 percent or 172 users), DoorDash (47.20 percent or 202 users), and Uber Eats (43.46 percent or 186 users).
Postmates has 19.39 percent market share (with 83 users), while the remaining restaurant operators rely on smaller platforms, including Amazon Restaurants (5.84%), Seamless (4.67%), Caviar (6.54%), and Waitr. Here is what they love, loathe, and suggest:
What Survey Respondents Love…
- "It satisfies me when a customer orders from their home and chooses my food. It means a lot."
- "Uber Eats marketing strategy helps to not only promote the restaurant, but increase sales."
- "It has boosted our sales by 15% and has increased our brand awareness."
- "Uber Eats is fantastic because of their robust systems and service."
- "While commission rates are pretty high, delivery is the most challenging part of the business in terms of staffing and logistics, so outsourcing some of it is nice."
What Survey Respondents Loathe…
- "Often we wait for drivers and the food gets cold. The customer blames us, the restaurant."
- "They make it very easy for a customer to receive a credit on a delivery with no verification from us. They always automatically give the customer a credit then we have to fight it."
- "They are hard to manage and the house accounting process is time-consuming."
- "Have serious concerns about appearance and attitude of drivers."
- "Any issues with delivery are a reflection of the restaurant even though we are not the delivery service."
- "Sometimes there aren't enough drivers to go around and food is never delivered."
- "Getting more difficult and time-consuming to deal with menu changes and updates to tablets."
- "If you're able to bump your prices up then it's ok, but still just glorified marketing.
- "Main benefit is helping new people become aware of our restaurant that may have not known about us otherwise."
- "As a new restaurant it has provided extra exposure. But I see it as a short term option."
- "We were doing [delivery] in-house. We stopped that and now only do third party. It helps keep our labor cost down."
- "With the volume of business we are doing it breaks down to less than NYC minimum wage and no benefits."
- "We only offer it during the week Monday through Thursday."
- "We have in-house delivery. We use third party when traffic is horrific, off-hours. We like to control our in-house delivery during our big delivery days, Friday & Saturday."
- "During busy times we will turn it off and focus on our full-paying guests in the restaurant."
- "We only turn on the delivery during non-peak hours so it generates sales in downtime making our labor force more efficient."
- "Bite Squad dresses in a uniform, shows up on time if not early, and rarely has any issues."
- "We have tried GrubHub and Uber Eats. We are now exclusively with DoorDash. Happy with the trained drivers, the speed of service, and a lower commission rate."
- "We stopped using DoorDash due to communication issues and the length of time it took for the food to be picked up."
- "Uber Eats seems to work the best. They are the most organized. They seem to work well, are organized, and hire quality individuals. DoorDash has terrible customer service and we do not contract with them although we are on their website. GrubHub/Seamless/Eat24 send us orders, but we do the deliveries because of the poor delivery times and customer service."
- "They have boosted our sales tremendously without the cost of insuring and having an extra person on the payroll."
- "Not thrilled at having a third party handle our food, but we have been able to take steps to ensure guest satisfaction, food quality, and food safety (tamper proof packaging)."
- "We actually stopped all 3rd party delivery services as it brings no additional revenue to us. For them to take 30% of each order is an actual loss."
- "I did raise the prices on my food to compensate the 27% commission they charge."
- "I have been trying to reconsider if I should keep this type of service because of the high fees. Is it really profitable to me?"
What Survey Respondents Recommend to Fellow Operators…
1. Know your ROI - What do you want to get out of the partnership?
2. Schedule delivery when you want it, and turn it off when you don't.
3. Test-drive a few third-party delivery systems - what works for the other guy might not work for you.
4. Measure the value you receive and make changes if it's not worthwhile for you.
