Not All that Glitters is Gold

How the Race for Private Funding is Tarnishing the Future of the Food Delivery Space

Innovation in the restaurant industry is taking place at a fast and furious pace. It is now even easier for people to get the high quality food they want, when they want it, due to efficiencies driven by digital intelligence. And as a result, restaurants are seeing increases in revenue, order volume and efficiency: happy diners are more frequent customers. These successes are good for the entire industry, restaurants and technology providers alike.

Unfortunately, there is a tarnished side to this gold coin. Companies are shunning fundamentals — fundamentals critical for long-term viability — in order to juice short-term growth and capitalize on the frothy private funding market. And in the race to capture funding and subsequent headlines, these companies are burning the trust and respect of restaurants and consumers — two essential ingredients in ensuring long-term sustainability.

Restaurant (Non) Relations

The ability to outsource delivery at scale and for a reasonable fee is obviously attractive to restaurants. We’ve proven this by signing on thousands of restaurants that previously didn’t offer delivery. But when third parties force delivery upon a restaurant without knowledge or consent, the outcome can be disastrous. Unfortunately, this practice has become endemic in the food delivery space.

To inflate the number of restaurants available for delivery on their platform, some players have been “borrowing” the identities and offerings of restaurants without their consent. In fact, in an attempt to actively hide their true intentions from unsuspecting small business owners, delivery training videos shown by one company explicitly tell drivers NOT to represent themselves as affiliated with any third party service as well as, “to remove all paper receipts from all orders” and to, “never give a customer a receipt.”

There are too many ethical issues to count, so I will instead focus on the basic rights that are taken away from restaurateurs in this situation:

  • The right to choose where and how their offerings are presented
  • The right to decide whether their restaurant’s name and reputation can be used to grow another company’s business
  • The right to know how and where their food is going
  • The right to ensure quality

Restaurants are beginning to take notice of these practices. They understand how their exclusion from the process damages the diner experience and the restaurant’s reputation. It is baffling to think that any of these players expect to deliver superior returns to their investors by losing the collective respect and trust of the restaurant industry.

Perhaps most disappointing is that these companies don’t seem to see the value that comes from true partnership. When restaurants and delivery providers partner together, with full transparency and consent, both sides win. In fact, the thousands of restaurant partners that have signed on to use GrubHub Delivery are on track to do more than $175MM in annual food sales by the end of 2015. That’s $175 million that comes without restaurants losing control over their identity, the quality of their food and their reputation.

The Hidden Cost to Consumers

The food delivery space is reliant on a functioning marketplace. It follows, then, that if platforms work around restaurants, these same platforms will need to lean harder on consumers when it comes to price. This means added delivery fees and padded menus, often for services that are positioned as accessible and appealing to the masses.

Because the costs aren’t always communicated transparently (I’ll get to that in a moment), I’d like to provide an example of how this model negatively impacts consumers.

Between delivery fees, service fees and hidden menu markups, these services require consumers to pay a huge premium. In fact, Morgan Stanley’s Internet analyst Dean Prissman commented in his $GRUB research titled, “These Unicorns won’t deliver” that, “key private competitors… rely on high consumer fees, making food 45%-75% more expensive, likely limiting broad appeal.”

While these aggressive diner fees may work in small, affluent segments, they’re not an option for most Americans. Our own research and analysis has shown us that:

  • Only around five percent of people are willing to pay $6 or more for delivery, let alone the $10+ some providers are charging.
  • For every dollar the delivery fee is increased over a base of $2, diner orders drop significantly. In some markets like San Francisco and New York City, we’ve seen even steeper declines in orders when delivery fees increase from $1 to $3.
  • The standard food & beverage total for on demand restaurant orders in the U.S. is close to $20 — which means that a $6 delivery fee (a conservative number for most on demand platforms) added to tax and tip results in a total bill of ~$32 for $20 in food.

If these companies marketed themselves as a premium service, this wouldn’t be a problem. However, the lack of transparency in how these costs are passed along illustrates the unwillingness of these companies to be upfront with consumers.

Consumers have also noticed and rated these services with very poor 1 or 2 star ratings on the iTunes store. Again in the research by Morgan Stanley, Prissman comments that, “We hypothesize service issues result from highly manual order execution and high courier churn.”

By actively hiding the costs of their services — whether through menu markups or ambiguous fees that magically appear upon checkout — they insult the intelligence of today’s consumers. All it takes is a simple price comparison for a consumer to question the value and convenience of an aggregator. Seems like it would be impossible to build a loyal long-term customer base when there are cheaper options in the marketplace with the same benefits.

The Way Forward

Innovation doesn’t come in the form of shifting around the economic burden from restaurants to diners — transferring costs from one party to another is not “innovative”. Innovation comes from the use of scale to drive efficiencies, convenience, and control for diners and restaurants.

For example, delivery-only restaurants — or “virtual restaurants” — are kitchens that forgo a dine-in option to focus on highly profitable delivery orders. These brands exist only as ordering platforms and they are built to scale. Munchery, Sprig, Galley, SpoonRocket and Green Summit Group are great examples of extraordinary efficiency in meal production, many driving growth by taking orders through platforms like Seamless and GrubHub.

We’re also seeing tremendous evolution in delivery itself, as new players (including us) are evolving mobile tracking and dispatch algorithms from the ride sharing industry. Individual restaurants no longer need to bother hiring and dispatching their own delivery teams. Now they can tap into a pool of drivers mobilized automatically based on their location, and restaurant and delivery addresses. Scale will maximize the efficiency of this delivery pool and will create decreasing incremental cost for each delivery, while giving a competitive advantage to whoever can leverage the most orders over a pool of drivers.

All together, this will decrease delivery cost and delivery time, which will create happier diners who are likely to order in more frequently from local restaurants. In the long run, the ability of on demand platforms to drive order volume, revenue growth and efficiency will also make it easier for restaurateurs to try new concepts and innovate on existing ones, which will continue pushing the industry to new and interesting places.

In short, while innovation is robust and driving significant benefits to diners and restaurants, many private companies today are focusing on short-term topline growth without regard to long-term sustainability. Aggressive business practices get attention — and even appear to drive near-term volume growth — but they are unlikely to get a critical mass of repeat users and business partners in the long run. We need to remember that small business owners have a right to their reputations and intellectual property. Customers have a right to clear, transparent pricing. In the end, those that take away those rights will be left on a foundation of sand and will not generate meaningful returns for investors.