Pondering third-party

Dozens of third-party delivery services have been cropping up in the last few years – Uber Eats, SkipTheDishes, DoorDash and Foodora, to name just a few.

These services, which give customers in larger towns and cities a one-stop online platform to mull over their meal options, have shown impressive growth over the last few years.

Restaurant operators may be wondering whether or not to work with these services as they grow in popularity with customers. Should they ignore these services, handle delivery themselves (or not offer delivery), keep control of delivery quality and customer service and risk being invisible to diners who place orders through them? Or should they sign on with one or more services, pay the commission fees and give up some control of their delivery quality in the hopes of picking up new customers?

Restaurants Canada’s Foodservice Facts 2019 reports that digital foodservice delivery made online and through apps and traditional phone orders totalled more than $4.3 billion in 2018, a 44 per cent increase over 2017. Delivery represents just six per cent of all foodservice spending. Yet it’s a hot-button topic these days for pizzeria operators, many of whom pride themselves on offering good, fast delivery. Why should restaurant operators pay attention to this delivery trend?

“Third-party delivery is too big to ignore and certainly it’s here to stay,” says Chris Elliott, senior economist for Restaurants Canada, who spoke with Canadian Pizza in July. “With more people working at home and less time to go grocery shopping and prepare meals, the idea of third-party is fulfilling a need for convenience and speed. In particular for younger generations, it’s all about that instant indulgence.”

Elliott is not surprised there is great interest in third-party delivery among restaurants. “We’ve seen some spectacular growth in third-party sales, and in an industry where growth is so hard to come by, you can see where operators would want to grow their sales 30 to 40 per cent in this category as well. We did a survey of our members to get a sense of why they like third-party delivery or don’t like it and what they rate highly.”

Operators who like using delivery services appreciate the ease of use for guests and the way it has expanded their customer reach, Elliott says. “A customer that’s on SkipTheDishes or on Uber Eats is not necessarily one of their normal customers, so by being on Skip and Uber, it’s actually opened up another window of opportunity for them to reach an audience that they may not have been able to reach before.”

“The flip side is that a lot of operators feel they are almost forced to be on it now,” he notes. “If you’re not on one of those apps, you’re basically invisible to a lot of customers, especially if you’re a new restaurant.”

Delivery has changed over the years, Elliott says. “Before it used to be the domain of Chinese food and pizza, whereas now it’s every type of international cuisine you can think of and every major chain and a lot of independents. It has really been a challenge for some operators to try and compete with that because there is more selection now than ever.”

Operators have to figure out if third-party delivery services are right for their business and find the right way to use them, he says.

WHAT TO CONSIDER
What factors should you consider when thinking about working with third-party? “It comes down, overwhelmingly, to the cost,” Elliott says. “It’s those commission fees that can run anywhere from 30 to sometimes 35 per cent of the sales.” For restaurants who are charged rent or franchisee fees based on sales, he also cautions that increased delivery sales can give a misleading impression: “It looks like you’re making a lot in terms of incremental sales but at the same time there are all these incremental costs now that you’re getting. So it’s trying to find that right balance between providing that increase in sales and controlling the costs enough so that you’re not eroding your profit margins.”

Is it profitable? Among quick-service restaurants, only 50 per cent said third-party delivery was slightly profitable and 21 per cent said it was not at all profitable, Elliott says, sharing data from a survey conducted by Restaurants Canada in April 2019 and appearing in its Q1 2019 Restaurant Outlook Survey. For table-service restaurants, 56 per cent said it was slightly profitable and 16 per cent said it was not at all profitable, he adds. Those remaining said third-party was either very profitable or moderately profitable, but some of those restaurants were early adopters and weren’t paying those 30 to 35 per cent commission fees, he points out.

One of the other challenges for operators is that delivery may end up cannibalizing their on-premise business, Elliott says. “People are ordering the main dish and that’s it: they aren’t ordering the appetizers and alcohol that go with it.”

PRICING AND MENU STRATEGIES
Elliott says that, based on conversations he has had with operators, it seems to be fairly common practice for restaurants to mark up the price of a menu item when placing it on a third-party platform. “What we are seeing is, operators are increasing the price of the menu item on the third-party app versus what a customer would pay at the restaurant, in some cases charging at least $2 more,” he says. “Customers are either unaware or agreeing to that as part of the convenience factor.”

“Those are some of the ways operators are trying to manage some of those higher expenses – to raise the price of an item by $1 or 2 to try and defray some of that cost. . . . Sometimes the only way to deal with those costs and higher commission fees is to try and pass some of those costs on to customers.”

Some services seem to be allowing that flexibility. “Restaurants aren’t penalized for listing an item’s price higher on Uber Eats than in store, a spokesperson for the company told Canadian Pizza.

SkipTheDishes offers some flexibility to restaurants it works with: “We work alongside our restaurant partners to develop menu offerings specifically for delivery,” says a spokesperson for the service. “Restaurant partners can include special menu pricing options, which may differ from in-store prices, up to a maximum of 10 per cent. If we become aware of any menu pricing that falls outside of those guidelines, our team will immediately reach out to that restaurant partner and work with them to correct the discrepancy.”

Another strategy for operators is to limit their delivery menu, Elliott says. “They may choose to include only high-margin or very popular items on a delivery service app,” he says. “The concern is that you’re going to turn a profitable regular visiting customer into a non-profitable regular delivery customer. And that’s just going to be a downward spiral in the end – not sustainable over the long term.”

QUALITY CONTROL QUESTIONS
Elliott brings up a challenge with third-party delivery that is especially relevant to pizzerias: quality control. “There’s still a learning opportunity for third-party delivery to step up the game in terms of providing that food quality. A four-by-four bag that would normally hold a hamburger and fries is not going to work here.

“For delivery services, it’s about speed and convenience. For the operator, it’s more about the quality of the food, along with the speed and the convenience. That’s something both sides have to find a solution to.”

WHO OWNS THE CUSTOMER?
Another question is who owns the customer in the end? “If there is an issue with an order, how do you address it?” Elliott asks.

A spokesperson for SkipTheDishes says: “Restaurant owners can contact customers until the order has left the restaurant. Restaurants can view insights specific to their restaurant, such as how often a customer has ordered from their location. Skip also shares insights with restaurant partners that can support their growth in the food delivery industry, like how to optimize their menu for delivery, how to build an online presence to create more visibility and how to utilize marketing strategies rooted in industry data. . . . Restaurants can also request that we connect with a customer on their behalf at any point.”

A spokesperson for Uber Eats says: “Many of our restaurant partners use Restaurant Manager, our online portal that helps them to see their business results, customer comments, and payment statements. . . . Restaurants are able to contact customers directly about an order that was placed through the Uber Eats platform to ask follow-up questions, offer substitutions if something is out of stock or any other need to speak with the customer in regards to the order.”

Issues may arise when a review is posted on an outside website. “The customer may be unhappy with a meal and decide to go on Yelp and give the restaurant a bad rating, whereas the restaurant may not have had a chance to find a solution,” Elliott says. “All the issues and complaints will go directly to the third-party service and then they choose to either give a refund, re-issue the order or find a way to fix the problem.”

SkipTheDishes has a customer support team available to help customers with orders before or after they are delivered. “Customers can use the Skip app or website to provide direct feedback to the restaurant on every order. External reviews of restaurants on third-party services don’t come to Skip, but if a restaurant brings an external review to our attention we’ll work together to address it.”

Uber Eats says, “We will only inform restaurants about negative reviews, comments or ratings on the Uber Eats platform itself, not others.”

There are a lot of growing pains, Elliott says. Getting information from third-party services about who your customers are is a way to maintain a connection with customers, he adds. “I think over time it will work itself out. But certainly right now quality control is still an issue.”

AN ALTERNATIVE TO IN-HOUSE DELIVERY
Rob Federici, owner of Ciao Roma in Woodbridge, Ont., hedges his bets by using two third-party apps. “We use Uber Eats as well as SkipTheDishes,” Federici says, adding that Ciao Roma charges the same price on the apps as they do in store and their entire menu is available on both apps. “I think using only one service cuts out a demographic as there are people who prefer using one app over the other,” he says.

Third-party delivery sales make up five to six per cent of the pizzeria’s total sales. “When we started out, the sales through the apps were low,” Federici says, “but in 2018 they quadrupled, so it’s a matter of people just realizing that you are on them as well as people coming around to the idea of ordering through a platform.”

Federici believes in-house delivery would not be practical. “Even though we are happy with the growth of our delivery sales I don’t think the orders for delivery could justify having our own in-house delivery person. The cost for that would far surpass what we pay to Uber and Skip. So, I think that for a small business trying to build its delivery revenues, platforms such as these – which not only handle all the logistics for delivery and payment but also have the reach that they do to drive traffic and delivery orders to your store – are essential and an invaluable asset.”

Raveenthan Thambirajah, owner of Za Café in Mississauga, signed up with Uber Eats, SkipTheDishes and DoorDash soon after opening his pizzeria last April.

As a new operator, Thambirajah also sees the benefits of using third-party services as a replacement for direct delivery. “We don’t have the resources to do our own delivery,” he says. “All items on the store’s menu except gelato are available through the services and Za Café charges the same price as on its menu,” he adds.

The two services he uses together bring in about 20 per cent of Za Café’s sales. And although he feels the commission rate of 30 per cent is too high, he likes that the services add to his sales, draw more customers and provide exposure for the restaurant.

‘A MATTER OF CONTROL’
Not every operator is a fan of using third-party services. Commenting on Facebook, Richard Ames, owner of Daddio’s Pizzeria in Grande Prairie, Alta., said he will not use third-party services due to the costs involved. Ames decided to stick with his own delivery service. One of those added costs is labour. “What they are not telling you is that, if you have to hire more staff, that is an extra cost. If some of your regular customers decide to use their service, you are losing 30 per cent on their order.”

Angie Risi will not sign up with a third-party delivery service. Risi, the owner of Maria’s West Pizza Pasta Pastry in Brantford, Ont., has turned down third-party services who have approached her. For her it’s a matter of control. “I’m not giving up any control in my business,” Risi says. “Third-party delivery services take away a little bit of the control. I want to be the one responsible for my customers.”

That includes knowing the drivers. “How can I fulfil my customers’ order when I don’t know the employees making the delivery?” she asks. “And if the delivery is late, it reflects on me. I will give up some of that net profit to satisfy my customers. I can afford that luxury.”

Risi describes Maria’s West as a “mid-range” pizzeria that competes with quick-service and gourmet pizzerias and has healthy profit margins.

“I feel bad for places that are just starting out and feel they can’t say no to the services,” she says. To pizzerias who have decided to join a third-party delivery platform, she suggests negotiating the initial sign-up fee, demanding food-handling certificates and not handing over your customer data. To those afraid of missing out on new customers, she suggests an alternative to third-party. “Get creative. Offer [new customers] a 10 per cent discount. Give them incentive to come to you.”

“I’ve been doing this a long time. Maybe I’m a control freak,” she says with a laugh. “Stay in control. Do your best and the customers will come to you.”

‘WATCH YOUR MARGINS’
Is third-party delivery for you? “It really comes down to this: you have to watch your margins,” Restaurant Canada’s Elliott says. You may see the incremental sales but you have to offset those with all the additional costs – not only the obvious ones, like the commission fees, but also how much that is cannibalizing your on-premise business.”

Elliott recommends not jumping into a service but being very cautious. “Know your numbers inside out and backwards so that, when you do take that leap of faith, you know what you’re going to be making off of this. …You do have a choice, but it has to be well thought out and cautious.

“Manage it so you don’t impact the people who are coming to pick up your food, manage it so that it doesn’t affect your on-premise sales and manage your costs so that your high-margin items are the ones you’re doing the delivery for versus the low-margin items.”

Elliott’s final piece of advice to those using outside services: “Talk with third-party delivery and work with them. They are partners in this. Ultimately everybody wants the same thing: to make sure the consumer has a positive experience.”

TRYING THIRD-PARTY?

Pros

• Gain new customers
• Increase incremental sales
• Save money and time spent organizing in-house delivery
• Extend your geographical reach

Cons

• Give up some control of customer service and quality of food at delivery
• Give up some of the personal connection with customers
• Risk taking away from your
• in-house business
• Incur incremental costs such as labour

FURTHER READING

For a broader overview of Canadian foodservice, read Chris Elliott’s “Delivering the Goods?”