The Reality of Food on Demand Delivery Costs

Food delivery can be EXPENSIVE! Restaurant operators are all too familiar with increasing costs and shrinking margins. Don’t let delivery drain your bottom line. Don’t be afraid to innovate. For example, there are ongoing market tests in which restaurants contract with third-party companies such as Grubhub, Uber Eats, Doordash and others to deliver the restaurant’s food as independent contractors, rather than allowing the customers to order directly from the delivery company’s website. In other words, customers order food directly from the restaurant via their computer, cell phone or device, and the food is delivered by either the restaurant’s employees or by a third-party food delivery company. When the food is ordered directly from the restaurant and delivered by a third-party delivery company, this is called “last mile delivery.” This model gives the restaurant a tremendous amount of flexibility and control regarding delivery, especially for those restaurants that already employ their own delivery drivers.

The “Real Costs” of Food Delivery: The ADF Restaurant Group Study

Spencer Manke, CFO of our client ADF Restaurant Group, a large Pizza Hut and Panera franchisee, has studied the “real costs” of food delivery for (a) restaurants that employ delivery drivers themselves (traditional “offline” delivery), (b) restaurants that rely solely on third-party delivery companies, and (c) restaurants that use a blend of both. The results are fascinating.

Assume a restaurant employs a delivery driver. Assume this delivery driver can deliver two orders per hour. If minimum wage is $15.00 per hour, you begin with $7.50 per delivery to cover wages alone (two deliveries per hour). This is before taking into account liability insurance, driver reimbursement, and potential additional employment benefits offered by the restaurant. In markets with a $15.00 per hour minimum wage, Mr. Manke estimates hard costs to the restaurant to be in excess of $12.00 per delivery. According to customer surveys, customer feedback, and available data, food delivery consumers are not willing to pay $12.00 in delivery fees unless the cost of their food order is substantial. In order for delivery to make economic sense, something has to give.

How Restaurants Cope with Delivery Costs

What’s a restaurant operator to do? Currently, most restaurants are charging a lower delivery fee and doing their best to absorb a reduced margin on delivery sales, which might be a net loss for the restaurant. Some are reducing or eliminating their employee delivery drivers and increasingly relying on third-party delivery companies. A few innovative restaurant companies are testing the hybrid “last-mile” delivery model mentioned above.

The market is also seeing an increase of “centralized delivery,” especially in densely populated areas. Under this model, a driver will deliver multiple orders to a centralized location, then send a notification to the customers that their orders are ready to be picked up. The customers then walk to the delivery location, which is much closer to their office or residence than the restaurant, and collect their orders. Or, perhaps a delivery vehicle with multiple heating/cooling lockers carrying multiple orders will park in a centralized location and the customers can pick up their orders directly from the vehicle, which spares the delivery driver the time and effort of having to navigate lobbies, elevators and stairs for every single delivery.

KEY ISSUE – Labor Costs in Food Delivery

Labor costs are, by far, the most expensive variable in the food delivery equation. They will continue to rise as more cities and states increase their mandatory minimum wage. It will become increasingly difficult for restaurants to deliver their products at prices acceptable to customers. The consensus among restaurant operators seems to be that food delivery costs must come down in order to both (a) satisfy the cost expectations of customers and (b) increase profitability of the restaurants. Certain experts at this year’s Food On Demand Conference proposed that the most obvious way to reduce delivery costs is to reduce our reliance on human beings to make deliveries. Human beings are expensive and have a number of limitations when it comes to delivering food. We may see a paradigm shift to robots, drones and self-driving automobiles, which we’ll examine in a future article.

Long-Term Food Delivery Outlook Remains Hazy

Ultimately, in order for food delivery to be successful, it must be a win-win-win scenario. The restaurant needs to make money. The third-party delivery company needs to make money. The customer needs to be satisfied. So far, it appears consumers are willing to pay a premium for food delivery. We don’t know how long this will last. Although customers are generally willing to pay extra for convenience, we don’t know how much they’ll be willing to pay over the long term, especially when the novelty of “food on demand” has worn off. Interestingly, we’ve read that no third-party food delivery companies are yet profitable, which is pretty surprising given the popularity of food delivery across the country and the amount of investment still being made in the space. To date, third-party food delivery companies have been forced to raise massive amounts of equity financing in order to cover their losses and remain viable. We’re on the front lines with our clients helping them navigate this fluid, rapidly changing market.

About The Author

Chris MummChris has broad experience with complex corporate and business law issues. He has represented clients in a wide range of transactional matters, from single-location acquisitions to large, multi-unit, multi-jurisdictional acquisitions. He counsels restaurant owners and companies in navigating the complex and sensitive hospitality world.