Order Digital Blog June 2022
Does the traditional Food Portal business model still make sense? What other options could a Restaurant operator turn to?
In our last blog, we referenced several studies that have looked at the food delivery market, including the legacy of the pandemic and the market changes this ushered in.
While these reports concentrated primarily on the more prominent operators, there is much food for thought that we can apply to those who wisely choose to use a dedicated food app.
Of particular relevance was The rapid evolution of food delivery by McKinsey, around which we'll dedicate a series of blogs based on the insights this team have uncovered.
Change Is Still Underway
A key theme in all the reports we've reviewed is that despite the recent growth, the business models of food delivery portals are still in flux. Everything from products, premises, marketing, processes and client behaviour is still under consideration.
Despite everything over the last couple of years, many of the major players in the market are struggling to make workable profits.
Restaurants need to consider the long term viability on making their restaurant soley dependent on food portals that are loss making.
For example, consider the £857m loss Just Eat reported for 2021. While some of this was due to acquisitions of smaller players, this company is still looking for ways to lock in value for investors and find pathways to consistent operating profits.
As Christopher Payne, DoorDash's chief operating officer, commented to the Wall Street Journal: "This is a cost-intensive business that is low-margin and scale driven."
In the coming years, growing competition for drivers, inevitable market consolidation and the development of new revenue streams (grocery delivery, for example) will become increasingly common as major platforms search for value.
Costs Are Spiralling
A common theme we've discussed on our blogs are the commissions and delivery fees that giant aggregators charge their clients to squeeze out as much revenue as possible.
Of course, this always has implications for how their clients price their offer as they look to get adequately paid for their efforts, not to mention the new pressures from ballooning global inflation.
In the US, some states passed local legislation during the pandemic putting caps on portal commissions; such were the implications for at-risk client businesses.
Now that we are post-pandemic, these caps, in some cases, may be lifted. Whether such regulation will appear in the UK is yet to be seen.
The Last Mile
The challenge of cost-effectively moving orders from the kitchen to the client is an ongoing issue for larger restaurant chains.
This can be a particular problem when covering more remote locations. Most readers will know that bigger aggregators use zero-hour contract riders or leave it to restaurants to charge or cover the costs.
This issue adversely affects the overall pricing model of the restaurant, transforming what should be an enhanced service into a costly headache.
As Jack Hartung, CFO of US chain Chipotle said to Yahoo Finance:
"It's no surprise that delivery comes with an added cost. Our belief has been that it's a premium experience from a convenience standpoint. We want to make sure that channel covers the cost."
We've all seen the big portals' star-studded ads as they strive for market share. But, unfortunately, this marketing doesn't come cheap. Whether it's rappers, pop stars, footballers or national treasures, they all want a handsome fee.
Then there are the premium advertising slots on TV, search engines and social media.
The portals to cover these costs will filter them down into the commissions and expenses they extract from client restaurants which are ultimately passed to end-users.
As competition in the market increases, so will the need to promote platforms, creating a perpetual cycle of cost increases to the detriment of both restaurants and their clients.
You might wonder what these issues have to do with a local takeaway? Unfortunately, if you're on one of these big platforms, you might already be seeing some detrimental effects on your business.
Alternatively, if you've opted for a dedicated food ordering app, you will recognise that all the above issues reduce significantly. This is because you're fully in control of your business model and the promotion of your app to your customers.
With a dedicated app, you will pay lower commissions. You handle the delivery. You market to your local community. You define your brand.
You're free to build client loyalty by getting all the details right and not subcontracting to a faceless platform that is just as happy to promote your competitors.
In short, why would you work to build the balance sheets of these indebted corporations when you can concentrate on working exclusively for your benefit?
The current economic environment is predicted to weaken considerably, so you'll need to use your resources carefully. Don’t give them away unnecessarily to money-hungry organisations that care more about their brand than yours, it’s just not good business.
And the only real way to do this efficiently is to invest in a branded food delivery app.
In the next blog, we'll look at how big portals are trying to improve and develop their operating models and what this might mean for community food businesses.