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Restaurants rethink third-party delivery partnerships

The rising cost of third-party services is spurring more restaurants to rethink the way they deliver food and invest in strategies that make sure their brand doesn’t fade into the background.

6 min read

Restaurant and Foodservice

Restaurants rethink third-party delivery partnerships [Image: Man ordering tacos on a tablet]

(Image: Pixabay)

As off-premise dining continues to grow across restaurant segments from quickservice to fine dining, operators can’t ignore the importance of making their menu available for takeout and delivery. Digital orders have grown at an average yearly rate of 23% since 2013 and will triple in volume by the end of next year, according to the findings of The NPD Group’s recently released Delivering Digital Convenience report.

Delivery offers customers the convenience they crave and drives higher checks, but getting food to diners’ doors can be a costly proposition. Partnering with third-party delivery services such as Grubhub or Uber Eats can be simpler than building out an in-house solution, but the high cost of using these services can eat into restaurants’ already thin margins. As fees from delivery companies increase — sometimes costing restaurants upwards of 30% of each order — some eateries are exploring other options.

Some take a page from pizza or think outside the box with in-house delivery

An in-house approach, with all deliveries made by restaurant employees, is the original form of restaurant delivery as pioneered by pizzerias. Some pizza chains have expanded delivery to include third-party drivers, but others have stuck with the in-house approach that’s worked for decades. Domino’s CEO Richard Allison has been very vocal about the chain’s refusal to outsource delivery, saying it helps the chain maintain quality and control costs.

Panera Bread went with an in-house approach when it launched delivery. Adding delivery costs the chain about $15,000 for each new location, according to a report by Inc., but having a fleet of delivery drivers allowed Panera to create about 13,000 jobs and have total control of its delivery operation. Delivery has been a success for Panera, and the chain expanded delivery hours to include breakfast at 381 locations last year.

Burger chain Wayback Burgers recently unveiled its answer to delivery in the form of a food truck that delivers orders placed via a proprietary app, QSR reported. The company also created a truck for its sister barbecue concept, Uncle Willie’s, and Wayback President John Eucalitto said he sees opportunities to license the technology to other concepts.

While in-house delivery works for some concepts, the idea of having to hire more employees to work as drivers can be “a tall order in this labor environment,” said Noah Glass, founder and CEO of Olo, a mobile ordering platform used by chains including Wingstop, Chipotle and Five Guys. “Recruiting, training those drivers, managing logistics, managing the insurance implications of doing delivery, there’s just a whole lot there,” said Glass. For brands that can’t justify those costs, he said the delivery-as-a-service model can be a more economical way for restaurants to approach delivery.

Tapping into the delivery network

Olo’s Dispatch platform relies on a network of delivery service providers to deliver orders placed on a restaurant’s own app or website. Rather than paying a commission to the third-party company, the restaurant can transfer the cost of delivery– or a portion of it — to the customer.

Olo also offers a platform called Rails, which helps restaurants fulfill orders placed through third-party marketplaces that collect a commission on each sale. About 50,000 restaurants work with Olo for digital ordering, Glass said, and around two-thirds use both the Rails and Dispatch platforms.

Restaurants that use Dispatch can choose which third-party delivery companies they assign orders to, and the delivery surcharge paid by the customer can cover the entire cost of delivery or subsidize it. Tapping into a larger network of delivery drivers allows restaurants to get the best price, but it also creates some separation between the restaurant brand and the delivery company, which can be a good thing.

Digital orders put loyalty on the line

As more consumers turn to Postmates and Grubhub to deliver their food, the relationship between diners and these companies is getting stronger, often at restaurant brands’ expense.

Olo developed an index called the Delivery Search Score, which measures how many online searches for a restaurant’s name plus the word ‘delivery’ direct customers to the restaurant’s own site. According to the index, the top 300 brands are performing at less than 30% of their potential with searches for their own keywords, allowing marketplaces to capture a major share of their delivery traffic. Not a single brand in the top 300 has unlocked 100% of its potential for delivery discovery, according to Olo’s findings.

Glass pointed out that this takeover by third-party marketplaces is exactly what happened in the hotel industry as booking sites such as Hotwire and Travelocity became consumers’ go-to when booking rooms. While NPD research found that a restaurant’s app or website represents 70% of digital orders, that percentage could quickly slip if restaurants don’t do more to make their own apps more appealing than those of the delivery companies.

“We take it as our solemn responsibility at Olo that we need to help our brands to be the beneficiaries of this digital shift, but not throw their profits out along the way. They need to retain their profits, they need to drive sales through their direct sales channels while meeting the needs of the on-demand consumer,” Glass said.

Restaurants can take a cue from hotels by offering price guarantees or loyalty perks through their own sites that aren’t available through the marketplaces, Glass said. Another option is “making their full menu and full customization and modification options available only on their site, and on the marketplace’s it’s a subset of the menu or a subset of the customization options. So the idea is you get a sample on the marketplace, you get a taste of the brand, but … the only way to get it just the way that you like it is to go through the brand’s direct channel,” he said. “I think that’s really smart and I think you’ll see more brands experimenting with that.”

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