Online ordering technology has completely transformed the restaurant industry. However, with its widespread use, problems have developed and these problems can financially break a business.
The situation reminds me of a conversation that a business owner once had with a banker to get a loan:
Owner: “We make the best widgets and we sell them at a competitive price.”
Banker: “So, how much does one of your widgets cost to buy?”
Owner: “Only two dollars!”
Banker: “How much does it cost to make one of your widgets?”
Owner: “Each widget only costs three dollars to make.”
Banker: “So, you’re losing a buck for every widget you sell! How do you plan to make money?”
Owner: “Volume!”
Unfortunately, this mindset mirrors that of many restaurant owners who use large third-party portals to process their online takeout and delivery orders, where it’s possible to lose more money with each order.
The quest to get more customers can be obsessive for restaurant owners. Meanwhile, the increasing demand for convenience is pushing customers to order more and more online, for both takeout and delivery. Research by Morgan Stanley projects that “40% of total restaurant sales -- or $220 billion could be up for grabs by 2020, compared with current sales of around $30 billion.”
Restaurant owners are, therefore, compelled to join these portals in fear their competitors will steal their customers and the revenues they represent. The catch: These portals generally charge restaurants anywhere between 15% and 30% per order.
Measuring The Current Model
Why would restaurants pay such huge fees? Well, the sales pitch from portals is often that “it’s incremental business” and restaurants can afford high fees on orders they wouldn’t have otherwise received.
In theory, any incremental business will help a restaurant’s bottom line. But what if it’s not really incremental? What happens when a customer who already knows about a restaurant, and has previously ordered there, orders again using a third-party portal? While the customer is still technically ordering from the restaurant, the restaurant just lost a customer.
Restaurants are cannibalizing their own business. It’s simple: The higher the volume a restaurant has through a portal, the lower the profit percentage they make. If 25% of a restaurant’s total business is done through an online portal that charges 25%, that strips 6.25% away from its revenue. This can break a restaurant.
Unfortunately, the cost to attract more customers isn’t always factored into the decision making process. For many restaurants, the fees portals charge are unsustainable. Period.
So, why don’t restaurants just charge higher prices on a portal? Well, the ability of a restaurant to increase their pricing on a portal is virtually impossible. To the defense of third-party sites, it actually makes sense. How long would customers continue ordering from a portal if they knew they were paying substantially higher prices (to make up for the high service fees)? Not long, and poof -- the portal’s business would evaporate.
These financial challenges cause some restaurant owners to have a “love-hate” relationship with these big online portals. Restaurants love the “additional” customers, but they hate the high fees. Other restaurant owners simply have a “hate-hate” relationship with these sites. They hate the feeling of being compelled to join and hate the high fees.
I’ve personally spoken with many restaurant owners about this. In just about every single case, the topic generates some very not-suitable-for-work language. Since my company, NetWaiter, provides a platform on which to integrate ordering systems (primarily non-portals) into a network of restaurant sites, we have had a front-row seat to the frustrations portals have caused restaurant owners.
Things aren’t all that bad though. For instance, if a restaurant doesn’t currently offer delivery, a service that provides delivery could expand the restaurant’s reach and accommodate customers they wouldn’t normally serve. The per-order economics are better because a restaurant doesn’t have the costs associated with paying delivery drivers (which can be horrendously expensive).
But before you relax, there’s a little more bad news: It’s hard for delivery services to make money by only charging customers a small delivery fee. The only way they can make money on an order is by offsetting the delivery fee with the sizable service fees charged to restaurants.
From my perspective, to accommodate restaurants, portals may need to shift their fees. Easier said than done because the only other party involved in this transaction is the customer. Customers can only absorb so much. Paying a $15 delivery fee on a $15 order isn’t going to work.
The Solution May Involve All Parties
An ideal solution may be for everyone to budge a little. Portals (or delivery services) lower their service fees to restaurants, customers pay higher delivery fees and larger minimum order sizes are put in place so the per-order economics can work out better for the portal (and restaurant).
Competitive forces may keep that type of shift from happening, though, because portals spend a lot of money to entice customers to use their service over any other. Charging customers higher delivery fees isn’t an attractive offer. Alternatively, some portals are offering lower rates to restaurants for online exclusivity. Essentially, if a restaurant agrees to only use one service, that service will lower the restaurant’s service fees.
Online ordering provides restaurants with huge benefits, and portals can have a place at the table, but some changes clearly need to be made for everyone to be happy. The online ordering market is only getting bigger. As such, this problem can’t be ignored.
There is a solution out there, and once it’s found, it will likely be valuable for all parties. In the meantime, no business owner should implement technology if it could break their business.
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