7 Levers to Dispel the Myth Surrounding Delivery Profitability
When dine-in business disappeared, seemingly overnight, all attention was put on the remaining modes of getting meals to guests: takeout, curbside pickup and of course, delivery. Those who had previously invested in these channels doubled-down. Those who hadn’t are looking past many of their previous misgivings about off-premise dining due to economic necessity and a permanent shift in guest dining habits. However, the question of whether third-party delivery is profitable still stands as a key concern even in this environment in which operators are strongly accepting of making big changes to impart survivability and profitability to their brands. We contend that this particular concern doesn’t stand up to scrutiny, now more than ever.
A lot of numbers are being thrown around in the industry right now: the percentage of restaurants that have closed, the devastating toll on jobs, or the sharp increases in curbside pickup, and delivery. Any such statistics we might be tempted to share about the COVID-19 crisis would imminently become outdated, and forecasts vary sharply week to week. However, there is no mistaking the general direction in which guest demand for delivery is heading, so it is essential that operators make a data-based decision on the question of whether or not to offer the service via Delivery Service Providers (DSPs).
In this paper, we will provide a quick look at the delivery landscape and then provide a walkthrough of 7 areas that impact the profitability of your DSP channels in this new environment. Our hope is that, as a result, more operators are able to achieve business success for themselves, employees and communities.
These topics are:
- Calculating Fully Loaded Costs
- Working with Multiple Platforms
- Raised Menu Pricing
- Order Automation
- Restaurant-branded Online Ordering
- Ghost Concepts
- DSP Menu Strategy
Before COVID-19, it was not uncommon for us to hear restaurants claim orders from Delivery Service Partners (DSPs) accounted for 30-40% of revenue. The majority of that revenue is driven by the big 4: Uber Eats, DoorDash, Postmates and Grubhub. These platforms were growing their partnered restaurant counts sharply even before COVID-19; now the rate of new signups is at least 2-3x what it was at the beginning of the year aided somewhat by a variety of promotions to help restaurants cut costs during this season in which financial pressures are heightened.
Across the US, they are joined by over 400 smaller or regional delivery operators, a number of which are also capable of bringing significant order volumes depending on the restaurant’s geographic location and concept.
Generally speaking, fees range from 10% to 30%, with the larger platforms that are able to drive more guest orders commanding the higher rates. We have learned after surveying a large number of restaurants across the US that the blended DSP rate is 24%.
THE SEVEN LEVERS OF DSP PROFITABILITY CONTROL
1. Calculating Fully Loaded Cost
While the thought of “losing” 24% margin off the top could immediately seem daunting to operators who likely calculate their overall profit margin in the single digits, let’s also address additional costs of working with the DSPs as proper measurement is the first step toward improvement. The following costs must be considered:
- Packaging costs - while this one single item can warrant lengthy analysis, 10% isn’t likely too far off. Choice of packaging can determine whether orders arrive to your guest warm and how the brand is perceived.
- Processing fees - some platforms charge a separate processing fee which could be anywhere from 2-4%. This is sometimes not included in the commission rate and only shows up in the accounting statement sent during the payout period.
- Any chargebacks and refunds that come in through the DSPs, often the result of incorrect orders.
- Labor required to prepare the extra orders, manage the DSP tablets and package the food.
- Food costs specifically associated with delivery orders as the food portion sizes may be different.
Of course, there are costs that do not need to be included in the assessment of delivery as well. Under normal circumstances, one could disregard fixed costs that they would incur anyway in providing on-premise dining or takeout, such as rent, certain utilities and insurance. With restaurant restrictions in place, operators will temporarily need to consider those exclusions differently. Similarly, the incremental labor cost for taking delivery orders isn’t quite as high since the majority of the labor cost is typically in the back of house which has additional capacity most of the time with existing staff. While restaurants we talk to most commonly ascribe a labor cost of 10-12% to the fulfillment of DSP orders, be sure to evaluate the specifics of your business. The math regarding labor costs should also change significantly when dine-in business returns.
Most operators who run these numbers for their incremental DSP generated business, arrive at a fully loaded cost of 60-90%, leaving at least 10% profit margin. Some number of the additional factors below contribute to this profitability in most cases.
2. Working with Multiple Platforms
The digital ordering pie just got bigger, and no single platform can capture most of it. Focusing in on delivery platforms, while customer loyalty to specific delivery platforms has been on the decline, it is still a reality that adding the second, third and fourth platforms brings significant incremental revenue each time in most markets for most concepts. Using these platforms well amplifies results further. For reference, Postmates, the 4th largest DSP in the US behind DoorDash, UberEats and GrubHub, commands a noteworthy 10% of DSP volume. Zoom into the delivery landscape in any one market and we will likely find a DSP or two outside of these top 4 contributing meaningful volume.
3. Raised Menu Pricing
The largest DSPs used to disallow restaurants from charging more for delivery than they did for dine-in. That restriction is generally gone and the practice of charging more to recoup fees has been a hot topic over the past year. From our surveyed restaurants, we are seeing that roughly 50% of restaurants are charging a higher price on DSP menus than in-store. That 50% is up dramatically from what we saw from a year and a half ago. The average pricing increase is 10% per menu item. This is something each restaurant should explore directly with their individual DSPs before implementation. We recommend that restaurants that are able to do this, as per the terms of their agreements, experiment with elevated price levels, potentially up to 15% or 20% as customer order volumes do not decrease noticeably for most concepts within that range.
The Point of Sale (POS) system can handle the accurate tracking of the difference in price between the menus, which leads us to the next topic:
4. Order Automation
In calculating the profitability of working with DSPs, restaurant operators are understandably focused on the biggest new line item, the DSP fees. However, other significant costs of delivery are far more controllable. Many of these can be lessened or eliminated by integrating orders originating from the DSPs directly into the POS, eliminating the step of accepting the order via a separate tablet, fax, email, etc, and subsequent data entry. The orders would print or display in the kitchen as they normally would, and operators would find accurate order data, sorted by channel, in their POS or integrated accounting packages.
Through discussion with several hundred restaurants: the top 3 costs addressed through automation are the following:
1. Labor. The average order takes 2 minutes for staff to see, accept and input into the POS. Most restaurants deploying automation receive more than 20 orders a day. Therefore restaurants can anticipate about an hour of labor savings a day. That may not manifest itself as a reduction in payroll expense. It may be that the benefit is felt in not diverting employees from their regular duties to tend to the tablets or avoiding disruption in workflow, especially at peak hours. Calculate the following for your estimated monthly labor benefit.
Monthly Benefit = Average Order Entry Time x Average Daily Orders x 30 x Hourly Labor Rate
2. Chargebacks/Refunds.This cost can vary sharply from restaurant to restaurant. Restaurants ought to examine the number of chargebacks monthly and get a sense of the reasons for them. They can estimate how many of those would be avoided if POS order entry errors were eliminated. Human error is unavoidable, especially during times of peak DSP order volume which likely occur at peak in-restaurant order volumes.
3. Guest Dissatisfaction.In and out of the restaurant guest satisfaction improves when automation is in place. Lines at Quick Service and Fast Casual restaurants move quicker without tablet distraction. Full-Service restaurants are able to provide significantly better service as well without staff attention divided between guests and data entry. DSPs allow guests to rate a restaurant across a number of dimensions including order accuracy and speed, both of which are improved with orders hitting the kitchen quickly just as guests had entered them. Guests make decisions on whether to order again from a restaurant based on their experience, and the large impact ratings have on the decisions of potential guests has been concretely established in the industry. While it is difficult to assign a dollar value to this cost, it can ultimately be the largest in a competitive market.
Data is still coming in on another remarkable benefit of integration which is the ability of management teams to offload the task of updating DSP menus. Fully connected, restaurateurs can make menu changes in the POS and see those changes automatically update on DSP menus. This sub-category of integration is rapidly evolving in exciting ways.
With order integration, operators can conservatively adjust their fully loaded cost downward by 12%. The visual that best illustrates the reduced cost through automation is the iceberg: the more obvious cost “above the surface”, i.e. the fees to the DSPs, doesn’t change, but the significant costs “beneath the surface” get reduced by at least 4x the cost of automation.
5. Restaurant-branded Online Ordering
Restaurants can use any number of partners to accept orders on their websites, facebook page, mobile apps, Google, and other channels. A capable restaurant-branded online ordering platform can now be deemed an essential service. While the benefits go way beyond those that will be discussed here, having one’s “own” online ordering service will reduce the true cost of working with DSPs.
With the addition of a restaurant’s online service to receive orders for takeout or delivery, a portion of the fees paid to DSPs can be viewed as a “one-time” marketing cost to acquire new guests who discover the restaurant through the DSP platforms. If a guest orders from a restaurant via a DSP and then subsequently orders exclusively through the restaurant’s branded solution, the restaurant will have only paid the DSP a commission once for that guest. An operator can reduce their calculated cost of working with DSPs by the lifetime value of the guests they acquire in this manner. With intelligent marketing of the ordering platform, a restaurant can attract a far greater number of first time and regular customers to magnify the profitability of its DSP business. Specific tips include:
- Integrating with a loyalty program
- Offering a specialty item exclusively on restaurant’s ordering platform
- Offering larger family-style meals
For a simple illustration, if a restaurant does 20 orders per day via DSPs, has an average order size of $20, and 10% of those guests go on to order from the restaurant directly in the future just one time, they can see up to 3x returns on their cost of online ordering from the reduced DSP commission alone.
For a more accurate measurement of the ordering platform’s impact on DSP business, one can consider sending a short survey to their online ordering customers or include one at signup. This would include asking “how did you first hear about our restaurant?” with “Delivery Apps” as a response option. Then, by looking at the average number of monthly orders and visits (if those can be tracked through an integrated loyalty program) by guests sourced via DSPs, there is a measurable positive offset against the cost of DSP business:
Monthly DSP Cost offset = % of online ordering customers sourced from DSPs * Average Monthly Orders/Visits * Average Order Value
6. Ghost Concepts
Much has been written about the new virtual kitchen model of foodservice, and indeed, it is going to dramatically change the industry. Large national chains are either involved already or deep in the process of exploring. Independent restaurants might wonder how they can get involved. A great option we see restaurants utilizing is “ghost” or “dark” menus which are simply additional menus on the DSPs that they are already working with. This is a simple way to both experiment with new menu items and concepts and drive higher volumes of orders with the most popular and profitable items.
Let's say a neighborhood pizza joint, in addition to pizza, sees a lot of Buffalo Wings and Mozzarella Sticks being ordered.. They would simply create a new concept on the DSPs, “Wings & Stx”, that offers just these two items and a beverage selection. These could be items that have a higher margin or that require minimal effort from the back of house staff. The same operator has an idea for a new style of Buffalo Wings and tests it out easily on the DSP menus. Guests love it, so they add it to the menu of the pizza restaurant as well.
We’ve seen this result in a 15-20% lift in top line revenue for a number of restaurants that are executing properly. When adjusting the DSP business calculations, one can expect the dark menus to do more than their fair share of the profitability generation.
7. DSP Menu Strategy
Lastly, the difference between success and failure with digital ordering efforts often lies within the menu strategies restaurants use.
Doing it right will drive more sales, smoother operations, higher order sizes and more profit. The results with DSP menus are no exception. This is not an exhaustive list by any means, but here are some primary considerations:
1. Operators must avoid the temptation to put their whole menu up for delivery. We saw numerous restaurants, out of desperation during the first weeks of the COVID-19 outbreak, add more items to their menu when the exact opposite reaction would have been better in most cases. Less is more. Guests will be less overwhelmed and ultimately more likely to complete the order. We recommend checking out the online menus of some of the most successful operations and observing the number of items they offer. We encourage others to follow suit.
2. Related to the above, restaurants should prioritize their highest margin items on their online menus and should usually not include their lower margin items. Prioritizing includes prominent positioning on the menu, including enticing combos, providing upsells and including pictures (if not for all menu items).
3. Part of the premise of attributing a lower cost of labor to DSP orders is that the back of house staff has latent capacity to prep delivery orders. This will be all the more true if the restaurant focuses on items that have a quick prep time. Items with a longer prep time probably don’t belong anywhere near your DPS menus. Similarly, complicated items are also problematic, even if they can be prepared quickly. Complication often means increased stress, packaging and risk of error, especially during a rush.
We truly do believe that with the right thought process, strategy, and implementation restaurants will make working with DSPs very profitable. We often hear delivery referred to as “a necessary evil”, and, frankly, we understand why - until we have deeper, fact-based discussions with our restaurant customers. In 2020, it becomes impossible to ignore the top-line revenue available working with DSPs, and with all the choices operators now have regarding how to work with DSPs, impressive bottom-line results should be equally attainable.
We would love to discuss strategies in improving profitability with DSPs and online ordering providers or how to best implement as a new line of business. Our specialty at ItsaCheckmate is integration, which is often the best place to start on the road to profitability.