A new wave of delivery is rapidly transforming the dynamics of the restaurant industry, with everyone from fledgling operators to listed hospitality groups entering the fray - whether they want to or not. But has the impact been wholly positive, and is the current model sustainable for operators already battling a series of cost pressures? Finn Scott-Delany reports.
The arrival of Deliveroo and other third-party platforms has been a game changer for the eating-out market. Some 85,000 new restaurants and pubs that have not historically delivered food have entered the space, and MCA expects the number of restaurants to continue to grow.
In many respects the future looks bright, with MCA’s UK Foodservice Delivery Market Report 2017 finding 18-34s are the most valuable customers, making up for 47% of delivery revenue, and ordering most often.
And technological innovation is helping revolutionise delivery, with the arrival of non-traditional operators making the market more dynamic and innovative.
But while a popular narrative has been that delivery provides operators with an incremental revenue stream, the reality has been less clear-cut, with key questions over the profitability of the current model, and the risk of cannibalising trade.
Commission has emerged as the big bugbear, with third-party platforms charging anything from 10% to 35%, inevitably putting pressure on slender margins.
Meanwhile restaurant operators are losing control of delivery quality and in-person interactions with customers and many branded operators MCA spoke to told of their frustration with third parties taking a large cut of their already under-pressure profits.
“It’s fundamentally changed the dynamics of our industry, and not necessarily in a superpositive way.
For HOP Vietnamese, delivery works well for the predominantly grab-and-go offer – but the experience has still been “a rollercoaster”. Founder Paul Hopper, who said delivery accounted for 15% to 30% of total sales, expressed a familiar frustration with the way platforms are shifting the dynamics of the industry.
“I’ve always been a bit annoyed about the fact that they are here,” he said. “It’s fundamentally changed the dynamics of our industry, and not necessarily in a superpositive way.
“Me and my competitors would prefer that revenue was coming from fully paying walk-in customers. We’re annoyed we’re having to pay a fee for revenue that was there for us anyway.”
But the former City analyst is pragmatic about the situation. “You can’t ignore it”, he adds. “It’s here and not going anywhere. It’s become an important part of our business. We have to work out how to make money from it. There’s no question Deliveroo is running away with it.”
While complaints over commission are common, these have become even more pronounced after Deliveroo told operators it would be rais-ing its commission for those that are not exclusive to an eye-watering 35%.
One London pizzeria operator, who takes around £1,000 a week through Deliveroo, told MCA he would “rather incinerate myself in my own pizza oven” than go exclusive with the platform.
He said Deliveroo had also refused to increase the restaurant’s prices when requested because they did not match prices quoted on the website.
Despite their misgivings about delivery providers, it is often hard for operators to stay away.
Bodean’s BBQ quit Deliveroo earlier this year, only to re-join “until another competitor becomes more affordable”. Founder Andres Blais said despite Deliveroo’s “punitive” commission of 30%, smaller delivery platforms were not able to offer the same level of service.
“Their rates are excessive”, Blais said. “But we all know it’s going down that way until someone can come in and undercut the market. “There’s a few game players coming through, but until then Deliveroo are capitalising on their fees.”
Others such as rotisserie chicken concept Clockjack are embracing delivery – but at the expense of traditional dine-in rest-aurants. Founder Jerry Goldberg told MCA he had closed his bricks and mortar site because running a delivery only production kitchen, serving a wider catchment area, was, in theory, a much more profit-able proposition.
He said: “The question we’re asking is how profitable can we make a big kitchen, and what is the optimum catchment area? “We don’t know the answer yet, but the theory is the percentage margins are very attractive because of the relatively low property costs compared to the revenue capacity and the market it’s serving.
“The natural feeling in restaurants and multisite leisure is, to grow you need to roll out, but it’s not quite the same here. The business model is profitable because of its cost to revenue economics.”
Pubs lagging behind
When it comes to pubs, MCA’s research reveals this side of the sector is lagging behind on delivery – but there are belated efforts to bridge this gap.
After noticing the rising popularity of food orders being delivered to wet-led pubs, Deliveroo has trailed a scheme in 20 pubs and will look to expand the service in 2018.
Punch began working with Just Eat last year after establishing a consumer demand for delivery from its pubs – though development director David Wigham has said the case for its profitability remained to be seen.
And Mitchells &Butlers has widened its delivery experiment to include 61 sites, with chief executive Phil Urban telling MCA it did not appear to be cannibalising M&B’s core business – though going on to describe the current model as “unsustainable”, and saying a squeeze on commissions and minimum orders was “inevitable”.
One of the first pub operators to offer delivery was Ben Stackhouse of PubLove, who used it as a way to maximise revenue from sites, with it even becoming a deciding factor on 50/50 kitchens. Despite early success, though, he said the arrival of competitors on Deliveroo had stunted growth.
“Delivery has definitely added to the business,” Stackhouse said. “Some kitchens we’ve opened because we knew delivery would be strong after looking at data and insight.
“We had a great start at The Great Eastern in Docklands, because we had the Canary Wharf catchment, and there were few burger operators on there. But over the years, more operators have come in, and the market share gets spread a bit – especially when a business like Bleecker Burger shows up.”
Approach suited to delivery
Unlike some causal-dining operators, who are ambivalent about delivery drivers streaming through the restaurant, PubLove’s open theatre kitchens and fast-casual food approach are well suited to delivery.
And he sees brunch and breakfast as a prime opportunity to stretch his pub sites into new delivery dayparts. “Extending it to brunch would be good way to add a new revenue stream”, he adds. “When you start breakfast and brunch, it is always a bit of a battle, so it’s helpful if delivery companies are extending hours to include mornings.
“The more people that know brunch is deliverable, the more people will start thinking about getting brunch delivered.”
After delivery focused chains such as Domino’s and Papa John’s, which make up 70% of the market, MCA’s research finds independent fast food, takeaways and restaurants have the second biggest share of delivery (18.5%), compared to branded restaurants at 7.4%.
“The question is can anyone make any money from satisfying that demand?
The allure of delivery is belatedly appealing to giants such as McDonald’s, Greggs and Subway, following on from the earlier adoption of the service by casual-dining brands. McDonald’s launched delivery in June with UberEats, which as of October had been rolled out to a fifth of the estate, and accounted for 10% of sales.
The success of McDonald’s was apparently enough to persuade Greggs of the consumer demand for value-led home delivery, and the bakery group is running a trial in areas of Newcastle, Manchester and London.
The U-turn came after chief executive Roger Whiteside had repeatedly doubted demand for Greggs delivery, and he admitted McDonalds’ converting its average in store spend from be-low £5 to above £10 for delivery had been a convincing factor. “The question is can anyone make any money from satisfying that demand?” he asked. “I don’t know. We are watching it and will see.”
Meanwhile Subway has been offering delivery at a number of regional franchise sites via JustEat, which has been sufficiently successful to lead to a trial in London.
The Restaurant Group (TRG) has also continued its tentative steps in 2017, with Frankie & Benny’s now on Deliveroo, alongside Coast to Coast and Chiquito delivering through UberEats. Chief executive Andy McCue told MCA delivery was something TRG should be doing, with the trial aimed at seeing how it affects the group’s core restaurant offer.
The likes of YO! Sushi have an industry average delivery sales share of 3% – but could be exploring new avenues with the launch of a Deliveroo Editions site in Reading.
Meanwhile some household brands have tried and failed to get a foothold in delivery. For example, PizzaExpress’ acquisition of upscale pizza delivery concept Firezza in early 2016 was hailed as the business’s entry into the London delivery market, though after testing a hybrid concept store in Soho, it was ultimately offloaded last month under new management.
Focus on the independents
While JustEat remains the largest delivery provider, with 28,000 restaurant partners in the UK, and 85% of those in the regions, it is primarily focused on independent take-away and fast-food outlets, providing a platform for restaurants, but leaving the delivery up to them.
Meanwhile Deliveroo works with 10,000 restaurants in the UK, with the majority London-based (49%), and a focus on branded restaurants – though the company told MCA the majority of customers were independent small businesses.
Analysts have tipped Deliveroo and UberEats, which is now live in 40 cities, to gain market share due to their ability to co-ordinate between restaurants, drivers and consumers – complex logistics that few rivals have the technological capability or will to try to replicate.
Both companies have expressed a goal to disincentivise home cooking by making on-demand food more and more efficient and better value. And one avenue to reduce the price point for consumers is Deliveroo Editions, the so-called dark kitchens operating out of industrial estates and carparks.
Credited with changing the game by offering a vertically integrated service, the Editions model aims to tackle conflicts between takeaway demands and eat-in diner experience, and thus speed up the delivery times.
The kitchens operate in a number of London locations as well as one in Hove, with Deliveroo shouldering the capital and underwriting the risk. While Deliveroo founder Will Shu described Editions as the “the future of food delivery”, others says the development also raises questions.#
Deliveroo is meant to be a delivery partner and marketing system for restaurants. But as they’ve evolved it, they are almost becoming restaurant operator.”
Adam Walford, a partner at Howard Kennedy, and an expert in commercial property for hospitality, said Editions represented another shift in the dynamics of Deliveroo and its transition into an operator.
“Editions is an interesting move”, he said. “The way I see it is Deliveroo is meant to be a delivery partner and marketing system for restaurants. But as they’ve evolved it, they are almost becoming restaurant operator.”
Walford said Editions kitchens require the same work as a full site acquisition – without the guarantee an operator is going to trade there, or do the numbers. “To me that shifts their business model massively compared to what I understood it to be”, Walford says. “And their need for capital greatly shifts compared to JustEat.”
With operators signed up on loose licences, without certainty of trade, they risk damaging their brand, Walford said. “What is the impact brand-wise and so on, if Deliveroo get their lease taken away? What happens to the operator?
“There have been some fairly well publicised difficulties with them taking sites and residents not being that happy about it, with planning enforcement notices being served. People don’t just see Deliveroo, they see the operator as well.”
“With Deliveroo, the interaction is a name on a website, the point of sale, and the product arriving on your doorstep. I would have material concerns about what that does for your brand in terms of telling a story with the consumer.”
Deliveroo said it was helping to “revolutionise the UK restaurant sector” by bringing restaurants to new customers, and enabling them to scale their operations. A spokesman said: “In recent times the high street has faced challenges from technological changes and the emergence of online retailing, as well as out-of-town shopping offers.
“However, in contrast to this trend, Deliveroo has helped restaurants secure new customers via our app, who not only order food at home via Deliveroo but who will subsequently also eat-in at the restaurant venue at a later date.”
The company said some restaurants on the platform have seen their revenues boosted by up to 30%.
Testing various initiatives
Despite Deliveroo’s insistence that Editions is the way forward, the company is known for testing various initiatives, such as subscription service Deliveroo Plus, and a £6 Lunchbox offer trialled at Canary Wharf.
And a key to the future could lie in Canary Wharf, where Restaurant Brands Management, trading as Vessel, operates a star-studded Editions site, and has the licence for brands such as Miami-based Buns & Buns. MCA understands concepts such as HOP, Le Bab, Tommi’s Burger Joint and Yoobi have also licensed Vessel to serve their food from a carpark near Blackwall DLR Station.
Vessel owns the site, with the operation led by Ari Ojalvo Oner, a director of the Sushisamba Group, and Deliveroo providing the online platform and delivery. While the Vessel model is in its formative phase, MCA understands the volumes are positive so far, with Vessel hoping to secure more sites to operate in partnership with Deliveroo.
Trying to make it work
Wherever delivery goes, many operators believe they have no choice but to stay on the platform and try and make it work.
For Paul Hopper, the technology is also already leading the lunchtime industry in another direction – the subscription model of MealPal, which recently secured $20m to expand in the UK.
“MealPal have come storming in”, added Hopper, who already sees 10% of sales through the platform. “They’ve done for that market what Deliveroo have done for delivery. You ask yourself can I afford to not be on it? The market capture, and money spent on customer acquisitions is phenomenal.
“A lot are on it, and you wonder whether they going to their usual places for lunch if they can get it for less than £5 on MealPal.You ask yourself, if I’m not there, how many existing customers do I not have anymore. Is that why like for likes are down? They are changing the dynamic of grab and go.”