Third-party delivery has grown exponentially to become a vital sales channel for many operators. In this article, AlixPartners’ Steve Braude assesses the current state of play on both sides of the Atlantic

With people leading increasingly time-poor and hectic lives, the convenience of getting food delivered to your home, workplace or wherever you might be staying has simply become the norm. In our 2019 AlixPartners North American Restaurant Study, the top three reasons that consumers ordered for delivery was overall convenience (80%), eating in the comfort of their home (75%) and not having enough time to eat at a restaurant (63%).

There are several key trends driving the growth of third-party delivery (TPD):

● Increased consumer acceptance of mobile transactions, driven by Amazon, being secure and convenient

● Frictionless ordering on mobile devices through improved UX (user experience) and UI (user implementation)

● Gig economy emergence with a scalable pool of people willing to drive or cycle part-time

● Era of hyper-convenience with consumer expectations of convenience being redefined – “What I want, When I want, Where I want”

● Highly competitive environment for

restaurants now willing to pay higher

commission rates for delivery

● Low barriers for restaurants to start online delivery – tablet provided, no hardware spend required, only minimal training.

Looking at what is going on in the US restaurant market, casual and dine-in restaurants have been growing delivery at 14% per year, according to Technomic figures, compared to in-store sales, which have been growing at 4% per year. The growth is most apparent in casual dine-in and fast-casual restaurants, albeit from a lower base. But no segments are being left out of this growth.

Flooding the market

TPD providers have flooded the US market over the past few years to go after this rapidly emerging market. The TPD market was pioneered by GrubHub in the US, which started in 2004 in Chicago. In the UK and Europe, Just Eat and Deliveroo have been the pioneers, with Uber Eats the third of the large players.

The simplicity of the online ordering process, coupled with the high penetration of e-commerce in the UK has resulted in a rapid surge in popularity of TPD providers, with over half of all takeaway orders now being placed online. In fact, fast food delivery is the second most popular product or service purchased via mobile in the UK.

Despite Just Eat and Deliveroo being the first of the large TPD players in the UK market, the ubiquity of the Uber brand, its deep pockets and vast pool of drivers and consumers, made Uber Eats the biggest threat to the early dominance of Just Eat and Deliveroo. In the US, Uber Eats went from 0% to 20% market share in just 12 months, while in the UK, Uber Eats has 51k daily app users against Deliveroo’s 45k.

The game changed again on 17th May when Deliveroo confirmed that Amazon had led a $575m funding round. Given Amazon’s brand, customer penetration, and logistics expertise, the battle for dominance has just gone to the next level.

Maintaining control

For the well-established chains, it’s a matter of technological investment, brand and digital penetration, location and focus. For local operators, the increasing costs of labour, the complexity of managing the growing demands of delivery, and the marketing power of the TPD brands, means that more and more smaller operators are likely to move to TPD in the short- to medium-term. For those operators, it will be perceived as the equivalent of outsourcing marketing and delivery on a ‘pay-as-you-go’ basis.

All of the TPD players are faced with the fact that delivery is a local business and the economics to serve local are very challenging. While the UK is geographically much smaller than North America, this is not an easily scalable business and the big challenges are similar to those Stateside:

● Acquiring and managing a fleet of contract drivers

● Acquiring and supporting accounts. Most restaurants are independent and TPD needs scale, so working with just a handful of chains isn’t sufficient – they need to knock on a lot of doors

● Attracting local customers to their platform and not directly to the restaurant or to a competitor’s platform.

A Wild West scenario

There is a ‘land grab’ going on by the TPD providers to grow across Europe and globally. Whichever TPD is first to gain the local network will attract and retain the most restaurants, drivers and customers. The hope is that, eventually, profits will follow those final few TPD winners.

This land grab has created scenes akin to the Wild West in markets, with local managers free to be entrepreneurial and, at times, act aggressively (or even unethically) to add restaurant chains to their platform in order to build scale. In the end, only those TPD providers with deep enough pockets can survive and win, leaving just a handful controlling the market.

This scenario has left restaurant operators trying to understand the right path for them in this highly dynamic environment where there is no correct or standard way of working. Operators need to carefully consider their business model, menu, clientele, competitive pressure and economics.

TPD is an opportunity that most restaurants cannot avoid, but does require careful review of objectives and expectations, partnership building with TPDs and financial modelling and analysis to determine that the economics stack up and provide ROI. The situation is fast-moving and there will be a shakeout and consolidation – eventually these businesses will need to stand on their own feet and prove they can be profitable without the deep funding of Venture Capital. Which TPD vendors restaurants choose, and in which areas, could have a significant impact on their business in the future.

■ Steve Braude is a Director at AlixPartners

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