Ghost kitchens and virtual brands represent an exciting new trend in the restaurant industry. By totally reimagining their business models, some intrepid operators have embraced a creative, nimble, an...
In part one of our Restaurants Reimagined blog series, we discussed the evolving state of the restaurant industry in 2021. In this blog post, we’ll take a step back to learn how we got where we are today.
We’ll explore how shifting consumer preferences toward off-premise dining opened the door for third-party delivery service providers to revolutionize our relationship with ordering food to-go. We’ll also examine the contentious relationship that developed between these providers and restaurant operators, and learn how healing this rift has enabled the industry to adopt tech-driven solutions to solve COVID-19-related disruptions and take the next step in the evolution of the dining experience.
- High Third-Party Delivery Fees
- Decreased Alcohol Sales
- Cannibalization of Dine-In Sales
- Reputational Risk
The Early Evolution of Off-Premise Dining
Take a trip with me back to 2018. We’d all just seen Thanos kill off half the Marvel Universe in Avengers: Infinity Wars, The Office was still on Netflix, and the words “pandemic” and “unprecedented” were not yet part of our everyday vocabulary.
Throughout the early 2000s, food trucks, catering, and other off-premise dining options had been growing in popularity. Austin, Texas—a hotspot for trendy outdoor dining—spearheaded the food truck craze when Hey Cupcake! set up shop in 2007. Fast forward ten years, and suddenly no trip to the Lone Star capital was complete without a food truck stop for gourmet lobster rolls or a chicken and waffle donut.
By 2018, consumers across the country had readily embraced the concept of off-premise dining. That year, there were 5,970 food truck establishments in the U.S. (the number has since grown to over 32,000). This early transition from in-person dining preferences paved the way for consumers to adopt other forms of non-traditional and off-premise dining.
Third-party delivery service providers like GrubHub, UberEats, and DoorDash were quick to capitalize on this trend, and by 2018, consumers were ordering online in droves.
With the rise of these services, date night no longer needed to involve driving downtown, paying for valet parking, having to watch how much champagne you have before driving home, and fighting Friday night crowds to get a table. Now, consumers had the option to order from their favorite restaurant, chill a bottle of wine in the fridge, light some candles, and put on mood music at home.
According to CNBC, “A 2011 Cornell survey of 372 U.S. restaurant operators found that less than 10% of takeout or delivery orders were done online. Since then, third-party delivery apps like DoorDash and Uber Eats have transformed the delivery market. Consumers looking for convenient meals ordered $10.2 billion from delivery aggregators in 2018, which would make the third-party delivery market the size of the fifth-largest U.S. restaurant chain.”
Third-Party Delivery Services and Restaurant Operators: A Contentious Relationship
In the years before the COVID-19 pandemic radically reshaped the industry, restaurant owners and third-party delivery service providers had developed a contentious relationship for a number of reasons. Although restaurant operators were eager to increase sales of to-go orders, partnering with delivery service providers had some steep pitfalls, including:
High Third-Party Delivery Fees
Restaurants operate on notably tight profit margins, and partnering with third-party delivery service providers has historically involved high fees. For example, in 2018, UberEats was charging small restaurants a 30% commission fee, while its large chain clients tended to pay less.
Decreased Alcohol Sales
When you go into a restaurant on a Friday night, there’s usually a bit of a wait, so you go to the bar. And what dinner is complete without a glass of wine to pair with the occasion? Restaurants rely on the sale of menu items that carry higher margins (including alcohol and other beverages) to drive profits.
In the days before new legislation in response to COVID-19 opened up the sale of alcohol to-go, customers were less likely to purchase these items when they ordered out, which cut into profit margins from delivery.
Cannibalization of Dine-In Sales
When they offer food to-go, restaurant operators risk cannibalizing their more profitable dine-in business. Party sizes tend to be larger when customers come in to eat and restaurants don't have to pay a cut to a third party to serve them.
Restaurants often have little control over their reputation when it involves to-go orders. If a delivery service provider picked up too many orders and stops take too long, food may arrive lukewarm or cold. Not knowing the delivery service was at fault, consumers can take to social media or yelp complaining about how poor the quality of the food was from the restaurant. The delivery service provider’s reputation didn’t take the fall. Meanwhile, the restaurant likely had no means of tracking that specific complaint to a delivery service order. Enough of those poor reviews, and restaurant sales may suffer.
Pandemic Necessity Helps Build a Bridge to Repair the Rift
When the COVID-19 pandemic hit in March 2020, the restaurant industry was turned upside down. Nationwide shutdowns forced many restaurant operators to come up with creative solutions quickly—and third-party delivery service providers were willing to collaborate and build a bridge to help the industry survive the downturn.
Cannibalization of dine-in sales became a non-issue as the situation forced most businesses to close their doors for a period of time and rely solely on off-premise sales. During the same time, legislation was passed in nearly all 50 states opening up the sale of alcohol for off-premise dining, which settled many restaurant owners’ qualms about to-go orders cutting into profits from alcohol sales.
Challenges caused by the COVID-19 pandemic, along with shifting consumer preferences toward off-premise dining in general, caused many restaurant owners to reexamine their relationship with the (now-essential) delivery service providers.
According to Forbes, “Prior to the pandemic, many restaurant owners and operators were weighing whether the cost of using third-party services — which sometimes hit 30% or more — made sense for their businesses. When the pandemic hit, it made third-party delivery services an essential revenue stream for many of these operators. Plus, delivery companies made extra efforts to work with restaurants to add incentives and make fees more manageable. Some major cities, including New York City and Los Angeles, even moved to temporarily cap the amount of fees third-party delivery services could charge.”
Third-party delivery service providers have also taken strides since the pandemic to meet restaurant operators halfway on their service fees. Earlier this year, Uber Eats and Postmates introduced a new three-tiered commission pricing model for operators beginning at 15% for basic plans. The new pricing options mirrors the tiered pricing model introduced by DoorDash this spring.
Making It Work By Working Together
Making it through the pandemic meant that operators and delivery providers had to come together. As a result, their working relationships have greatly improved and many restaurants are profiting from these partnerships. In fact, industry analysts predict that 25% of all restaurant sales in the next five years will occur through digital channels, with the majority of that being delivery.
Navigating this major transition in off-premise dining has been an ongoing challenge for restaurant owners. From an insurance perspective, this increased reliance on technology comes with greater and more complex risk, particularly in the area of cybersecurity and data protection. Many restaurant owners who haven’t needed cyber liability insurance in the past may need to consider obtaining a policy.
The Future of To-Go and Off-Premise Dining
Today, many restaurant operators are still struggling to cope with the toll the pandemic has taken on their business. Labor market shortages, supply chain delays, increased cost of food supplies, and continued concern about COVID-19 has created even more challenges.
But the restaurant industry is resilient, and now that the relationship with third-party delivery service providers has improved, some intrepid leaders are forging a new path forward by developing strategies that take advantage of off-premise and to-go dining.
Enter, ghost kitchens and virtual brands.
In Part III of our Restaurants Reimagined blog series, we’ll take a deep dive into this emerging trend that’s providing an alternative source of income for restaurant owners to increase profits. Be sure to subscribe to the blog so you don’t miss it!
Gina Wallisa is a Commercial Lines Producer with SWBC Insurance Services. She is dedicated to helping her clients mitigate risk by offering a wide range of comprehensive insurance solutions. Gina has an extensive background of 30+ years in the insurance industry with roles ranging from underwriting and marketing to program management. Her expertise is in the Restaurant & Hospitality Industry and she is focused on providing business owners with viable, individually tailored insurance options designed to fit their needs, budget, and risk tolerance. Gina is an officer on the Board of the Greater Austin Restaurant Association. She is an advocate for restaurant operators and works hard to bring their issues to the forefront of the insurance industry.