The debate over the ultimate impact of home delivery on the eating-out sector continues to rage but, for those who have embraced it, what is the key to maximising profitability in the short-term? Here, John Oakes of RMS gives his view on this ever-changing segment of the market.
There are many advantages for operators when it comes to delivery partners. It can broaden their customer base, particularly with customers they may not have attracted before, together with building additional sales, whilst inducing brand loyalty on days when a customer may not usually come into the restaurant. However, and most importantly, adding a delivery service isn’t necessary for all operators.
When looking to make money with delivery, the variable costs across food, labour and delivery of each order must be covered as a minimum, otherwise an operator will make a loss. It is not a question of what cost percentage these orders are running at, it is a question of how much they can contribute to bridging the gap on fixed costs to full capacity. So in essence, an operator needs to make the strategic decision on how to fill that gap and delivery can be one of the answers to that.
The key to ensuring profitability with delivery partners
Focus should be on the following criteria:
• High margin dishes
• Highly popular items
• Items that are quick and easy to produce
• Items that “travel” well, so don’t get easily damaged or destroyed
• Items that are unique to the brand
The value of each order will vary depending on whether a restaurant is located in a densely or more sparsely populated area. Once the commission percentage has been deducted, which can be anything from 15-30%, operators need to subtract the additional costs of the new service from the net revenue per order, to gauge potential profit margins.
Managing the pricing of the total bill
Managing pricing not only involves the price of each item, operators should be focusing on managing total spend and profitability per delivery order.
If an operator is planning to counterbalance some of the commission they pay to the delivery partner by adding a delivery charge, they should keep in mind that customers will focus on what they pay in total. A £3.99 delivery charge might not sound extortionate, however, an operator needs to consider the customers’ price sensitivity. For example, will a customer decide not to order if the total cost is £15.99 versus £11.99? The key here is for operators to use their EPoS data to analyse price sensitivities before setting delivery prices. A deep dive into the data will identify the key purchase motivations by consumers for choosing a delivery channel, versus sitting in a restaurant. If operators understand the underlying needs, it will help to put a value against it.
Operators should look to create special offers/bundles for the delivery channel. For example, if families are only ordering mains, it would make sense to create a special family meal package which includes highly profitable starters, desserts and say drinks on top of mains, to drive overall sales but more importantly margins.
Monitor costs and ROI
The point here is not about the cost for delivery, it is more about how operator’s ensure sales are incremental without cannibalising trade. If a restaurant is not running at 100% capacity, delivery will add to the profitability as long as variable costs are covered.
To analyse the return on investment, it’s important that delivery data is tracked correctly and integrated with the EPoS data to give an informed understanding of how customers use the various channels - such as eat-in, collection and delivery, together with their purchasing behaviour. These insights will also enable operators to develop channel-specific communication to ensure consumers return time after time.
In summary, delivery partners can be a fantastic addition to operations, they can broaden the customer base, increase sales and induce loyalty. However, it’s important for operators to truly understand pricing metrics to ensure they’re not only sensitive to the price to the customer, but also profiting once commission has been taken from the selected partner. Analysing the EPoS data and defining which meals and products would be profitable should always be the starting point.
John Oakes is chief executive of Revenue Management Solutions (RMS)
