Restaurants Beware: Amazon Moment Ahead

The Trouble

COVID has teleported the restaurant industry to the cross-roads it was slowly getting to over the last 5–10 years. The industry is having its Amazon moment right now, and it’s up to restaurants to recognize that and decide their fate — be completely commoditized and pressured out of the business or take control of the relationships with diners back from digital marketplaces and find a way to serve diners on terms that work for restaurants.

Big food delivery marketplaces are playing the Amazon game for a while now. They brought convenience and low prices to diners at the expense of restaurants’ and their own profitability, hoping one day to get to scale where economics can be changed in their favor with a click of a button. To get there, marketplaces had to put diners at the center and control the relationships with them at all costs — not unlike in Amazon case, it’s the consumer who dictates their rise and fall.

And that’s a total disaster for restaurants. The promise of incremental sales, that sounded so appealing 5–10 years ago, turned out to be a way to loose brand identity in front of a digital consumer and to pay for that loss with a significant fraction of revenue and sometimes more than 100% of profits.

For majority of restaurants, being on a marketplace means being a square box with a name in a long list of almost identical options for a diner, who priorities delivery time and prices. Few have a luxury of a strong offline brand or a marketing budget to stand out. And building a digital brand from scratch on a marketplace restaurant have no influence over is nearly impossible.

This is still relatively early days of trouble, there’s still revenue flowing in, and though it’s unfair in a sense that it’s often not incremental or profitable, it still helps to pay the bills. But not for much longer. With delivery quickly growing in scale, even more so due to COVID, and marketplaces losing money on every order, they will have to find a way to turn their business around sooner than later.

There’s a few ways they can try to do that — running more of their own virtual brands out of dark kitchens, directly competing with their restaurant partners, or raising the prices for restaurants and diners. Given how sensitive the diners are to pricing after being lured for years with coupons and promotions and how important their growing engagement is for marketplaces to survive, it looks more likely that the major part of the the increased fee burden will fall on the restaurants again, and only the strongest brands and largest operations will be able to survive.

We know that Amazon succeed in this model a while ago. We know about the miserable fate of Amazon suppliers, commoditized and competing fiercely for a few percentage points of profits with other suppliers and Amazon own brands. In the world of e-commerce, a business of selling commodities at a large scale, it can still make sense.

But I can’t imagine how restaurant business can be done this way. I think the industry is shooting itself in the foot every day it keeps working through existing marketplaces and I think it’s only a few years way from being forced to quickly loose its hospitality roots. COVID has accelerated this process dramatically by making digital channels overwhelmingly important.

The Solution

Diners preferences for omni-channel convenience are not going away any time soon, so there’s probably no going back from marketplace aggregation model. Restaurants have to find a way to meet diners needs and prevent commoditization at the same time.

I salute the attempts to establish direct connections with diners and promote their own delivery and pickup services, that hundreds of restaurants all over the country are trying to do today. I salute initiatives like Tock 20 that try to reinvent fee structures and data ownership rights for restaurants.

But I’m afraid those efforts are just not enough anymore, because diners will keep requesting convenience of choice and lower prices, and marketplaces will keep providing it at a huge scale, incomparable to capabilities of any given restaurant brand, even if it’s McDonalds.

What restaurants really need is a new marketplace, that serves diners at least as good as the existing ones, but also puts restaurants in the center. The economics of such a marketplace would prioritize restaurants, having diners preferences as requirements and keeping little to its own benefit. The only way to incentives a model like that is to build one.

I call for all restaurants to collectively form a new co-op-like marketplace, that would be serving diners and restaurants more than itself and would facilitate and nourish direct diner-restaurant relationships, building digital brands for restaurants and keeping diners happy with the prices and service.

It’s not impossible — it’s just a matter of taking a stand. And it’s now or never for the industry to do that.