Restaurants vs. Aggregators in a Post-COVID World

Technology and aggregation theory were already on their way to crippling the restaurant industry; COVID is accelerating this by driving unprecedented demand for off-premise dining (takeout/delivery). Restaurant brands that don’t create a direct digital strategy will be left behind.

Much has been written about the power of owning a direct customer relationship like the disintermediation of hotels by online travel agencies like Booking.com and Expedia, the commoditization of merchants by Amazon, the vertical integration of Netflix.

A quick recap (courtesy of Ben Thompson’s Stratechery):

  • An aggregator comes along, initially helping consumers connect with existing supply either through improved discovery, easing transactions, and/or creating trust.
  • Suppliers sign on to drive top-line revenue, accepting a commission because they expect incremental sales. They consider it a marketing expense to acquire a new customer.
  • Customers increasingly rely on aggregators. That marketing expense has now become a cost of goods sold. This happens because suppliers either fail to capitalize on the referral or, more nefariously, the aggregator does not enable them to.

This is the kicker, owning demand lets an aggregator do two things:

  • (1) Squeeze suppliers because the suppliers have become commoditized, reliant, and less profitable (the sucker punch)
  • (2) Vertically integrate and become a supplier (the knockout)

The exact same thing is happening with restaurants right now, specifically as off-premise food concentrates in aggregators/marketplaces like DoorDash. A William Blair report predicts that 70% of online delivery will go through aggregators in 2022. The report ignores aggregator’s effect on takeout which is a much bigger share of off-premise, but I’ve struggled to find clear data on aggregator penetration in the category — let me know what you find in the comments.

Comparing value chains across industries

The off-premise food value chain is a bit different from the on-premise value chain. A value chain is the process by which an industry converts an idea into value to an end-customer. As an example, the value chain for news is: content creation by writers -> content delivery by publishers -> content discovery by Google/Facebook/etc.

I believe that content delivery and thus restaurants become a less valuable part of the value chain when focusing on off-premise food. Rather than being experiences, restaurants in off-premise simply become brands, like hotel companies (Hilton, Hyatt) or publishers. You can draw parallels to news (pictured below), hotels, retail and every industry disrupted by the internet. The charts below depict “smiling curves”, a helpful illustration for depicting disruption.

From Wikipedia:

“A smiling curve is an illustration of value-adding potentials of different components of the value chain in an IT-related manufacturing industry…According to Shih’s observation, in the personal computer industry, both ends of the value chain command higher values added to the product than the middle part of the value chain. If this phenomenon is presented in a graph with a Y-axis for value-added and an X-axis for value chain (stage of production), the resulting curve appears like a “smile”.

The Smiling Curve for News (left) and off-premise food (right)

You can interpret the Food side as saying: restaurants are more valuable relative to other parts of the on-premise food value chain than in the off-premise food value chain; in both cases, discovery platforms hold the most power. This isn’t to say that restaurants will go away; indeed both hotel companies (Hilton, Hyatt) and publishers (New York Times, WSJ) are still very much around, but they are…endangered, whether it’s by platforms seeking to empower individuals (Airbnb, Wordpress) or aggregators squeezing them.

While I do think we’re a way off people buying directly from start-up chefs or from giant aggregator kitchens, it seems inevitable that aggregators will gain the upper hand by integrating vertically, either directly (opening kitchen) or indirectly (building kitchens for chefs).

It comes down to following the playbook of other disintermediated industries: drive direct digital sales. Direct sales are sales where a customer goes directly to a restaurant website as opposed to going through an aggregator. As Olo CEO Noah Glass says: not all digital sales are created equal. I laid out some of the strategic reasons why above, but there are are a couple of clear tactical reasons too:

  • (1) Driving customer loyalty is impossible without a direct relationship — you can’t email a customer if you don’t know who they are!
  • (2) Lower commissions!

Take Dominos Pizza as a beacon of hope. Dominos made a strategic decision to invest heavily in their direct digital capabilities around 2010, growing digital from being 33% of the US business in 2011 to over half of the global business in 2017. It’s paid off with their stock rising 3100% since Feb 2010. Compare that to McDonald’s who recently ended their partnership with UberEats (150%), Papa Johns (400%), Chipotle (700%), Amazon (1600%), and the S&P (150%). :)

As for the how of driving direct digital sales, that’s exactly what I’ll be writing about next. I’ll be exploring what I think the food economy of “tomorrow” looks like — the rise of cloud kitchens and their corresponding “stacks” — and share some perspective from operators in the US and India.

While it may seem that COVID is giving aggregators a massive boost over restaurants, the reality is that both players are making critical strategic mistakes. Restaurants need to stay relevant, using the Stay Local movements and the increased off-premise demand as a catalyst for starting their direct digital businesses. Instead, restaurants seem focused on the high commissions that aggregators are taking during the crisis. While this is important, restaurants have bigger problems than a compressed margin.

Don’t fuck it up

On the other hand, aggregators have market dynamics in their favor. Their focus should be to be the last one standing in what will likely be a winner-take-all market. Instead, they have handled the crisis poorly, generating some poor PR and probably causing consumers to think twice. My recommendation: take the short-term hit on your business, think of it as a marketing expense…if you can afford it.

What do you think? What did I get wrong?

  • Do customers value restaurants / brands more or less when food is consumed on-premise vs. off-premise today? What about 5 years from now?
  • Can you separate value chains between on and off premise?
  • Do you see parallels between the hotel industry and restaurants? Why or why not?
  • Can restaurants stay relevant? Will we see the Airbnb’ing of food?
  • For more on the consumer demand for off-premise: https://www.restaurantbusinessonline.com/operations/what-consumers-want-premise

…and shoutout to Josh Kaplan, Allie Rubin, and Ankur Borwankar for being great thought partners and editors!

Learning through writing; Product @ Redfin