The Digitally-Native Restaurant Era

The early days of online food delivery brought significant benefits to consumers by providing enhanced variety and frictionless ordering. As platforms matured, fulfillment improved, delivery times shrank, and customers enjoyed take-out more and more.

In the first phase of the food delivery revolution, online platforms succeeded through excellence in selection, price, and service. Food Delivery 2.0 will be about the full transformation of the restaurant business as part of the fourth industrial revolution.

Are today’s restaurants and online platforms ready for what’s next?

While food delivery services are still pretty niche, per figure 8, people are getting more used to on-demand services and food delivery apps are only becoming more popular. Source: Business Insider, “UBS says Uber Eats-obsessed millennials could kill the kitchen,” June 2018 (based on UBS report: “Is The Kitchen Dead?” June 2018)

The Challenge For Restaurants: Digital-Native Consumers

Before the Internet, restaurants were classified by economists as experience goods- services that could only be evaluated after consumption (e.g. haircuts and medicine).

As the Internet empowered consumers to share experiences and write reviews, however, restaurants have become search goods- services that are easy to evaluate prior to purchase (e.g. furniture and clothing).

With this new status, and as more and more eyes have shifted to the digital space, restaurants now face a new challenge: they need to be better and more consistent for everyone, rather than just for a handful of food critics. A restaurant business is now compared to dozens, if not hundreds, of others to choose from.

In order to compete as Search Goods, restaurants need to:

Be seen

Give customers what they want

Make sure they remain profitable

These needs have led to the rise of businesses such as UberEATS and Grubhub. These platforms improve customer experience service through aggregation and provide restaurants with opportunities to easily showcase their menus. In theory, restaurants should get new customers that bring incremental revenue.

But, in reality:

Most restaurants struggle to be seen on the platforms, which use algorithms that are generally favorable to high volume restaurants. As a result, long-tail restaurants lose business to those that enjoy more exposure on the platforms.

Platforms are reluctant to share the data they collect on their customers. As a result of losing the direct relationship with their customers, restaurants find it hard to give customers what they want.

Restaurants need to make sure they remain profitable as their dine-in patrons order from home instead, cutting into the restaurant’s margins.

Restaurants are facing quite a dilemma:

• If they don’t offer a delivery service, they will die, as the delivery segment is growing at the expense of on-premise consumption.
• If they do offer delivery, they will die slowly, as restaurants earn less than half of what they did beforehand from the same customers.

On this topic, I’ve written a piece on the effects of cannibalization and have designed a tool to help restaurants and platforms measure and better understand these implications. (Source: WSJ, “Consumers Love Food Delivery. Restaurants and Grocers Hate It.” March 2019)

In summary, the long tail of restaurants (your favorite mom and pops) find themselves caught between a rock and a hard place.

Surprisingly, as we’ll see later on, the same platforms that are squeezing these small businesses might also end up being their lifelines…

The Challenge For Platforms: Differentiation And Customer Loyalty

Online delivery platforms need to have differentiated product offerings. Otherwise, customers switch between platforms based on discounts and promotions, a phenomenon originally coined in the ridesharing business as “multi-homing”. This hurts the platforms’ bottom lines as they can’t lock in customers and have to compete on price.

In order to differentiate themselves, platforms have started to focus their efforts on forming unique partnerships with well-known brands that consumers trust, such as McDonald’s and Starbucks. Platforms are willing to bleed money to close these exclusive partnerships, reportedly offering extremely low service fee rates.

And yet these partnerships don’t last.

Just last month, McDonald’s ended its exclusive deal with UberEATS and started working with DoorDash. So now, even restaurants are multi-homing, logging into multiple platforms at the same time instead of providing exclusivity.

Restaurant “multi-homing” is now common

Without any unique selling points, food delivery platforms have to find ways to attract and retain customers.

One option could be to build their own restaurant chains “in-house” using the enormous amounts of data they collect on customer preferences. Another strategy would be to identify and sign exclusives with promising small restaurants, assist them with marketing, and provide operational support. The challenge with both of these approaches is that food delivery platforms don’t have the expertise or the tools to manage “back of the house” operations.

What’s on the Menu?

Platforms need to differentiate themselves with unique and compelling menus but aren’t able to help restaurants thrive in this period of transformation.

A solution that enables restaurants to successfully compete in the digitally-native era is needed, and some interesting players emerged to address this need.

I’ll discuss some of these contenders in my next blog post!

Note: Special thanks to Jeff Weinstein, Kelly Anne Tully, Oded Golan, Estefanía de Sosa Cadete, Johnathan Simon, David Apfelbaum, Nancy Dong, Andrea Xu, Lilian Chen, Will Nichols, Vivian Graves, and Agapitos Diakogiannis for their thoughts and contributions to the making of this blog post.