The stock market for restaurant food - A story of profitability and affordability
For the past couple of years, my team and I have been pouring our lives into making Gebni a reality and had three simple missions in mind: to increase affordability of high quality food for the average New Yorker, improve the profitability of restaurants, and to prevent food waste.
It all began when my brother Sid and I were busy students in New York living on a small budget and constantly looking for ways to save money on anything we could. Food was a considerable part of where our money went — especially takeout & delivery. We decided we needed to figure out ways to lower that expense.
Like many New Yorkers, we relied on online takeout platforms. We loved the convenience of ordering food through the push of a button. However, we both had a background in economics, and began thinking about how demand for food in the city worked.
We knew that restaurants had peak and off-peak hour patterns throughout the day and that for a business that deals with as much fixed costs as a restaurant does, we thought there were better ways to go about solving the lack of orders during off-peak hours. Since most of our orders happened to be during said off-peak hours due to our busy schedules, we would experience some serious savings if we could figure out a solution to the problem.
We also knew that even during peak hours, not everything on a restaurant’s menu would be ordered. In order to help even out demand across all menu items, we thought that restaurants could be smarter about that and offer lower prices for low-demand meals. These price changes would help create sales for less popular items, as well as reduce food waste from the ingredients that would be thrown out at the end of the night if those items weren’t ordered enough.
We began researching the space and talking to the restaurants we ordered from. In the beginning, we thought it was going to be as simple as them asking the ordering platforms they used to allow them to change prices in real time according to demand and other factors.
What we learned next was going to change the way we saw the space forever and open our eyes to a real opportunity to change things for the better.
Over the next few months, we talked to 300+ restaurant owners and managers around Manhattan, Brooklyn, and Queens. As we began to research more, we came up with one question we couldn’t find an answer to. Many restaurants offer heavy discounts to people that walk in at certain times of the day, and sometimes to any orders done at their brick and mortar locations. We wanted to find out why were these restaurants offering discounted meals to pretty much anyone who walked in during specific hours of the day but the same deals were nowhere to be found on their respective ordering platforms?
After all, online orders were where the real opportunity laid; the ability to reach virtually tens of thousands of customers at once was invaluable for a business. It was a more efficient way to reach customers than the paper menu specials and chalk board could ever be.
It turned out that the biggest reason restaurants were not doing any sort of “dynamic pricing” (offering lower prices when demand dropped) with their online menus was that 3rd party ordering platforms did not offer the technology. In fact, most restaurants we spoke to expressed frustration about how long it took for them to get their menus and prices updated on some of the most prominent ordering platforms.
But that answer alone was not enough for us. We knew those platforms are tech-savvy enough to be able to implement a dynamic pricing technology, so why did it not occur to them to do so? After all, it was going to be a win-win-win for everyone. Customers were set to save money on orders when demand was not high enough, restaurants could target new customers and gain incremental revenue, the restaurant marketplace (the online ordering platform) was going to see an increase in order volumes and frequencies due to price-based incentives, and we’d be reducing the impact on the environment through curtailed food waste.
Not until we asked those same restaurants if they would consider offering dynamic pricing that we learned the real answer to our question.
See, the business model of most food ordering platforms is to make money by charging restaurants a fee, usually a percentage of the order total, on each order they send a restaurant. These “commission” fees vary between 10–42%, with the average NYC restaurant paying 20–25% per order.
My colleague Misheel wrote a nice piece discussing the economics of online restaurant orders so keep an eye out for it if you’re interested in learning more about the topic.
Restaurants have razor-thin margins. A 20–25% cut per order is a huge loss to their gross margins resulting in 40–65% lower-margin orders relative to offline orders. This was the biggest reason almost all restaurants we spoke to said they would not offer any lower prices on such platforms because they’d lose money on orders. Many restaurants already do lose money on orders from these platforms because they make so little money off a certain menu item that when you add the high commission fees + credit card processing fees, they can barely manager to break even.
In fact, we learned that many of them marked up their online prices to better cope with the high commission fees, which would unknowingly hurt them and their customers because an increase in price would reduce their target customer base and lower order volumes.
These conversations were instrumental to the creation of Gebni and shaped much of what we would later hold dear inside our organization. Very often conversations with restaurant owners were emotional, with them opening up about the struggles of running a restaurant and being profitable. Many owners shared old anecdotes, and it felt as though the era where restaurants could be thriving businesses was a thing of the past. It seemed as if there was a radical change that took place that made it harder for restaurants to get back to those golden times and no one could really put their finger on what might have caused that.
In the past, delivery orders used to be offline (over the phone) and mostly dealt with in cash which meant restaurants kept 100% of the profit on each order. Food, labor, and other overhead costs (like rent) have also steadily risen over time. Unlike the rising costs, profitability plateaued, with delivery platforms taking a huge chunk of their earnings. From our conversations with restauranteurs, there was a silent cry-for-help to find more tangible solutions to this crisis, one that really took into consideration the restaurant and did not sacrifice their profitability to please customers and shareholders.
This made us think at length about the kind of company we were going to build. Deep down, we believed that there was a way to create value for both restaurants and customers without having to sacrifice one side for the sake of the other. A model that solved this would have both sides of the marketplace, customers (demand) & restaurants (supply), coming together for a solution.
The idea of real time demand-adjusted pricing came to us after an iteration of a previous approach we had applied and was one that we realized made total sense from the beginning.
We thought that charging restaurants lower commission fees was going to leave them with stronger margins and enough room for them to offer dynamic menu prices. Prices would go up as demand for meals got higher and dropped as soon as demand decreased ensuring restaurants are always serving the right price to the right customer at the right time. Restaurants would also decide on the price floor for each item, ensuring that every order at any price level still made economic sense. After all, no one knows a restaurant’s margins better than them.
Our algorithms would analyze demand and update pricing of each meal accordingly so that customers are always paying fairer prices and saving money. In the meantime, restaurants would be generating revenue during slow times and garnering demand for unpopular items.
Let’s say your favorite burger always sells at $15 on other platforms. On Gebni, it would sell from anywhere in between $12 and $15 as an example. However, say you are a lucky customer who just locked a price of $12 and saved $3 — a few minutes later the price would go up to $12.15 (due to the increase in demand) so that the next customer who orders the same burger pays a slightly higher price brining higher margins to the restaurant due to the increase in demand.
In a world where every online order comes at a guaranteed 15–40% discount to the restaurant (due to high commission fees) while customers pay full prices, a real time yield management approach combined with a low commission fee might just be the solution to restaurant margins. It would ensure that orders for high demand items would bring in strong enough margins to make up for lower-margin orders received off-peak hours or for low-demand items. Both customers who were previously priced-out and existing online customers would benefit from this. Priced-out customers would benefit from the lower entry barriers, and existing online customers would benefit more disposable income. Regardless, it would result in higher revenues for the restaurant due to an increase in ordering frequencies and volumes.
Gebni launched publicly in January of this year and has been growing ever since. We’re excited that we are now trusted by hundreds of restaurants offering smart prices saving thousands of New Yorkers money on takeout and delivery orders.
The feedback we keep hearing from users and restaurants continues fuels our passion to help create an ecosystem where both sides are truly happy with what they’re getting out of each other.
We can’t wait to see what the future holds for Gebni and look forward to bringing more affordable and profitable orders to the millions of us who can’t always afford the $20-lunch orders every single day.
