Everyone's Ordering Delivery, but Apps Aren't Making Money

When Luke Edwards opened OH Pizza & Brew in 2014, the Columbus, Ohio, restaurateur thought delivery apps could help his business. His chicken wings and specialty pizzas—the most popular an appropriately named “Bypass,” topped with pepperoni, sausage, ham, salami, bacon, and extra cheese—needed an audience. And he says working with apps such as DoorDash, Grubhub, Postmates, and Canada’s SkipTheDishes helped him build a loyal following, allowing him to open two more OH Pizza & Brews, with another location on the way.

But by January 2019, Edwards had had enough. For one, he didn’t think the services were helping his bottom line. “Even though we were bringing in more money, after paying out the commission rates, we were seeing a decrease in net profits,” he says. The drivers were inconsistent, he reports, and sometimes lacked equipment like insulated food bags to keep deliveries warm. Edwards also found it harder to get in touch with customer service reps for the apps, who would sometimes refund customers at the eatery’s expense for deliveries he believed had gone well.

“Quickly, I realized [the apps] were good at the search and optimization thing,” he adds. “They were terrible at delivery.” Today, OH Pizza & Brew pays its own contracted drivers to deliver, which Edwards believes saves him money.

To be sure, Edwards is swimming upstream. The Covid-19 pandemic forced many restaurants to close their dining rooms and accelerate online ordering, takeout, and delivery services. Popular services such as Uber Eats, DoorDash, Postmates, and Grubhub each added hundreds of venues to their offerings. Through the end of April, collective sales at the delivery services nearly doubled compared with the same time last year, according to credit-card analytics firm Second Measure.

The apps are appealing for a reason: Without much overhead, restaurants can quickly gain access to a labor force of insured and background-checked drivers, a customer base of people who reach for their phones when they want a meal, and a suite of marketing and promotional add-ons. Taw Vigsittaboot owns Thai X-ing in Washington, DC, a restaurant known for its intimate, prix fixe service of traditional Thai food. Since the end of March, the restaurant has been serving takeout through delivery apps. “It’s a lot of confusion sometimes, but we’re learning,” he says. He credits takeout, plus a loan from the government, with keeping the business running. At the end of April, Second Measure says 29 percent of Americans had ordered from an online delivery service, up from 23 percent the year previous.

But the experience of Edwards and others points to the enormous challenge for these services: maintaining both sides of their customer base. They must compete to keep eaters, who are, according to a 2019 Grubhub letter to investors, “becoming more promiscuous”—looking through multiple platforms for deals and promotions before settling on a meal. And they must compete for restaurants, whose slimmer-than-usual margins have run up against commission fees ranging from 15 to 30 percent per order. Some owners are reportedly slipping menus and cards into each app-ordered meal, to prod buyers into skipping the middleman and ordering directly from the restaurant next time.

As it is, the delivery companies are hardly minting money. Grubhub reported a 12 percent increase in revenue in the first quarter, to $363 million, but posted a loss. CEO Matt Maloney told shareholders this month that the company is about breaking even on orders during the pandemic. Uber said gross bookings at Eats rose 52 percent in the first quarter, but the division also showed a loss.

Smaller, independent restaurants and chains like OH Pizza & Brew and Thai X-ing may be the key to winning the delivery app race. In the past few years, the apps have engaged in a high-profile turf war to win partnerships with big restaurant brands like Taco Bell (Grubhub), Chipotle (DoorDash), and Starbucks (Uber Eats). But Grubhub executives told shareholders in February that “national enterprise brands” had negotiated fees for their orders, leaving less for Grubhub.

An independent restaurant, by contrast, “values our demand generation capabilities,” according to the execs, and so pays more in commission. (Independent restaurants may also use the app’s less-popular delivery service, which means it gets to collect some of the delivery fee too.)

Independent restaurants may influence the apps’ political future as well. In recent weeks, policymakers in Los Angeles, New York, San Francisco, and Seattle, as well as Jersey City, New Jersey, and Washington, DC, have passed emergency bills capping the apps’ commissions. They aim to keep restaurants afloat and restaurant workers employed while dining is down. But the delivery services may respond to the regulations by raising prices to consumers, which could hurt sales. After Jersey City earlier this month imposed a 10 percent cap on commissions, Uber raised local ordering fees by $3.

“Regulating the commissions that fund our marketplace—particularly during these unprecedented times—would force us to radically alter the way we do business, set a far-reaching precedent in a highly competitive market, and could ultimately hurt those that we’re trying to help the most: customers, small businesses and delivery people,” an Uber spokesperson said in a statement.

Some services have lowered or eliminated commissions for smaller restaurants during the pandemic. DoorDash cut commissions for smaller restaurants by 50 percent and waived them for pickup orders, and Grubhub has deferred up to $100 million in commissions. Uber also waived fees for pickup orders.

Next month, DoorDash plans to launch a new service, called Storefront, to allow restaurants to control orders through their own websites but use the company’s contract workers to deliver them. A spokesperson said the service is built for restaurants that want more direct access to customers.

In a statement, a spokesperson for Grubhub said: “The vast majority of our orders are completed without delays or complaints, but when things don’t go as planned, we appreciate hearing feedback and work hard to make it right.” The spokesperson also said delivery times are sometimes longer for reasons outside drivers’ control, like longer restaurant preparation time and traffic.

The fierce competition is prompting a wave of consolidation, which ultimately could lower the costs of resource-sucking promotions and competition for drivers. The Dutch company Takeaway.com closed its $7.8 billion purchase of Britain’s Just Eat in January; Uber Eats is selling its Indian business to Zomato; and Germany’s Delivery Hero late last year spent $4 billion to buy South Korean service Woowa. Earlier this month, The Wall Street Journal reported that Uber was in talks to acquire Grubhub; together, the companies would control roughly 45 percent of the US market—about even with reigning US champ DoorDash.

In a statement, a Grubhub spokesperson said” “Consolidation could make sense in our industry, and like any responsible company, we are always looking at value-enhancing opportunities. That said, we remain confident in our current strategy and our recent initiatives to support restaurants in this challenging environment.” An Uber spokesperson declined to comment.

But the fate of these companies may come down to the decisions of people like Edwards, who has kept all his workers on the payroll despite the sharp downtown in business caused by the pandemic. He has even handed out some raises, he says, in part because some employees realized they would be making more if they had been let go and been able to access pandemic relief assistance. He credits the apps for “getting the word out for us. But sometimes, we had to fight to keep customers in spite of them.”

Everyone’s Ordering Delivery, but Apps Aren’t Making Money

Author: sgadmin

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