Financial Advice

Food Delivery Apps: The Pros and Cons For Restaurants

By May 2021June 21st, 2021No Comments
Food Delivery Apps The Pros and Cons For Restaurants - Beyond Accounting

Success in the restaurant industry is far from guaranteed. Although most of the statistics available are for the US, and seem to vary a lot, it is true that the majority of restaurants only stay in business for a few years. Based on the research available and our own knowledge of this sector, I would estimate that less than 20% of Irish restaurants become stable, long-term businesses.

If you decide to launch into this fickle and changing sector, you’ll want to make sure to stack the odds in your favour. This includes minimising your startup costs, managing staff efficiency, reducing waste, improving turnaround times, and driving demand with great reviews and brand awareness. One more area that can change your business outcomes is technology.

The restaurant business model

The basic business model of a restaurant or takeaway is simple. You sell two things: food and drink. Your two main costs are ingredients and staff. If you can keep these costs somewhere around 50% – 60% of revenue, you’ll have enough to pay your other overheads and make a profit. If you can make efficiencies using technology, you’ll keep your overheads down and obviously have more profit (read more about the metrics to track to make your restaurant more profitable).

Technologies that should help improve your bottom line are point of sale systems, scheduling tools, inventory and purchasing solutions, plus the various food delivery apps that have become so popular in recent years and fairly exploded in 2020 during the lockdowns. Traditionally, you either had a takeaway or an eat-in business, but these lines have blurred, and you now have lots of options if you want to add food delivery to your business.

Managing orders, payments, and deliveries

Deliveroo and Just Eat are probably the best-known delivery services in Ireland. There are two main services they offer restaurants/takeaways: the first is to bring (new) customers to you, for which they charge around 15%, and the second is to deliver orders for you, which costs around 25%. The exact costs depend on the contract you negotiate, so there are not exact comparisons, but if you use these larger platforms for both ordering and delivery you could be sending them 40% or more of your revenue. As we can see from the business model breakdown above, that will wipe out your profit.

Clients that may have come directly to you in the past are now placing their order through a delivery app instead. You are effectively cannibalising your own orders via a third party.

The messaging of delivery app services is that they bring you extra business, and why wouldn’t you want that?! But if you’re a takeaway business, it’s arguable that you’d be better off having your own website or app where people can place orders. In lots of cases I see, restaurants have their own online presence and then also sign up to a delivery platform – sometimes more than one. This results in the delivery platform ranking above you in search engines. Clients that may have come directly to you in the past are now placing their order through a delivery app instead. You are effectively cannibalising your own orders via a third party.

I don’t feel that the margins these online ordering platforms leave the restaurant with are enough to be sustainable. That said, many restaurants and takeaways are using these services. You need to think strategically about doing this. Let’s take a look at some of the things you should consider when deciding how to proceed.

Are delivery apps worth the cost?

Internal competition

These companies make it seem like their only goal in life is to help your business do better. But remember that their business model is to have as many restaurants as possible as clients. This means ever-increasing numbers of restaurants selling what you sell and competing against you within the system. They also create tiers within their own client base, meaning that if you want to appear at the top of the listings, you will be nudged to pay for a premium level service. All you’ve done is exchange battling your competitors on Google with battling them on Delivroo, Just Eat, Uber Eats, et al. Rankings on these systems are down to undisclosed algorithms but do appear to be biased towards factors such as volume and speed, which may not be how your business operates.

Keeping on top of your systems

If you do use a third-party platform, you must be prepared to put time into ensuring everything is working smoothly. I recently tried to order from a local restaurant through their own app and couldn’t complete the purchase because I wasn’t in their delivery zone. But when I looked them up on Just Eat, it said I could get delivery. When my order arrived, it was the restaurant’s own delivery driver who brought it, so basically the restaurant had lost the order fee on my order because of conflicting information in the systems it is using.  

Just like with other marketplace platforms (Amazon comes to mind) algorithms and best practice change constantly and you have to be on top of it on a nearly full-time basis – tweaking pricing, changing listings, creating promotions, driving reviews, replying to feedback, and on, and on. Don’t make the mistake of thinking you can simply activate your account and walk away; on top of the fees payable you will have to allocate resources at your end to keep them working for you.

Ghost kitchens and virtual restaurants

Online delivery platforms have enabled the rise of the virtual restaurant. These establishments do not have a walk-in high street presence. They are more likely to be based in an industrial estate somewhere as they only sell online. Locations like this don’t have the kinds of overheads that a traditional restaurant has so they can undercut on price and create yet another disadvantage for the smaller local takeaway.

Similar to this are the ghost kitchens, or dark kitchens, that allow takeaway brands to produce food at scale without the need for front of house staff or dining areas. Delivery platforms like Deliveroo have been increasingly investing in dark kitchens, with some forecasts predicting that they will make up 38% of their revenue in the future. Renting a space like this can be a great way to test out new concepts, brands, or markets but are also putting pressure on high street restaurants.

Control over cash flow

Cash flow is another thing to consider if you’re looking into using online ordering services. When a customer places an order through these third parties, it’s the platform that receives the money and then passes it onto you (minus fees) at a later date. This means you’re no longer in control of your own cash.

Overlapping technology

Another complication can come from the technology itself. In a typical restaurant, you’ll have a point-of-sale solution that connects to the kitchen, and that’s where in-person or phone orders are inputted. If you then sign up for one of the delivery platforms, those orders are coming in through a website, which isn’t connected to anything else. I’ve seen situations in restaurants where a member of staff has been stuck permanently at the point-of-sale, transferring orders manually from the delivery platform to the restaurant’s existing system. You’ll have to take account of the added labour required to keep on top of all the ordering channels you opt for.

Customer relationships and data

If you use a third-party ordering system, customer data stays with them. This means they get all the competitive advantage of the accumulated data they are processing, while you miss out on the opportunity to understand your customers better – which would make it easier to optimise menus, pricing, and specials – and built repeat business through loyalty programmes and direct communication about promotions and new products. In fact, if you go all in and only take orders through a third party, do you even have a customer base? It’s arguable that they aren’t your customers at all but customers of the delivery app.

Controversy

Third-party ordering and delivery services court the kinds of controversy that even celebrity endorsements and cool TV ads can’t shake. Ethical considerations aside, it’s possible that legislative changes beyond their control will change how they operate overnight. Who will pay the bill if they are suddenly required to employ their delivery drivers and ensure they take home a living wage? Possibilities include that the platform you have invested all your marketing resources in disappears or that the percentage you are charged goes up even more. Would your business survive that?

Delivery: nice to have or mission-critical?

It might be easy to look at the numbers and conclude that making a profit from a pure delivery model is impossible thanks to the predatory pricing these platforms have implemented. But delivery has become an expectation of most customers, so this is no longer a decision that restaurant owners can ignore or put on the long finger. I see a lot of restaurants that have their own online presence and also use a delivery platform. Typically, this is not profitable because you are doubling up on costs.

But delivery has become an expectation of most customers, so this is no longer a decision that restaurant owners can ignore or put on the long finger.

For your marketing to be effective, you have to maintain a website and perhaps an app, keep up a social media presence, run advertising campaigns, work on PR, and have regular print promotions… as a minimum. If you then also go for one of the ordering platforms, you are potentially paying twice for any given customer. So, do you join the trend or fight against it through your own marketing presence?

Challenges and opportunities in tech

Food delivery is another example where the biggest players in the industry do not produce anything themselves. Companies like Deliveroo and Just Eat are in the tech business, not the restaurant business. They seem to be both helping and threatening the industry at the same time. On the flip side, these apps are hugely convenient for the consumer. For very little cost, you can order from your favourite restaurants and save yourself the time, travel, and inconvenience of going to collect your food.

This is a hard choice, and what you decide will probably depend on what kind of restaurant or takeaway you run, where you’re based, who your customers are, what your revenue streams are, and what your finances look like. If you’d like support weighing up the pros and cons of the channels available, get in touch.

If you would like to work with an accountant that understands your sector and can deliver a full range of outsourced accounting services, contact us today.
Rory