How big is a third-party restaurant delivery business? In 2018, the total number of sales through third-party food delivery companies was $5 billion, about 55% more than what it was recorded in 2017. And these numbers are only continuing to grow with GrubHub having 52% of market share, followed by Uber Eats with 18% and DoorDash at 12%. All other smaller online food delivery providers or companies share the remaining 18%.

As a result, restaurants, on average, are teaming up with two to three delivery services at a time to capture a wider customer base. On the other hand, customers love the idea of choosing from an array of restaurants through a single online portal.

Given the current scenario, it won’t be wrong to say the demand for third-party food delivery and aggregators is equal at both ends of the market.

The problem is that these services come at a price - to be borne by the restaurants alone. On average, a food delivery service charges about 12-18% per order from restaurants, depending upon the level of services they provide. When it comes to calculating the total revenue of a restaurant at the end of the financial year, for most, the “math doesn't work" They work more, get less and this negatively impacts their bottom line - the case is especially true for smaller brands running on low margins. But then, most restaurants use these services to grow their consumer base rather than profits.

The Debate

The rise of digital technology is reshaping the restaurant industry. Consumers are accustomed to placing food orders online through third-party aggregators as they offer numerous benefits such as ease of access, attractive discounts, doorstep delivery, various payment options, flexibility, and transparency.

Source: emarketer.com

Even after offering such conspicuous benefits to restaurants and their customers, these companies often become victims of the unremitting debate - whether a restaurant should consider third-party ordering services or invest in an in-house online ordering. Should restaurants see this burgeoning trend as a threat or an opportunity?

Let’s first discuss opportunities

There are a number of factors to be considered before we shun out the idea of availing the services being offered by third party delivery companies just because they are expensive and lack control. Restaurants today are operating at slim profit margins, barely managing a net profit margin of 5-6%. Given the math, it's true that the high per order fee puts a dent to a restaurant's revenue, especially for QSRs and standalone restaurants. But then these are also the kind of establishments that can benefit from the reach of food aggregators. In the last five years, on an average, most restaurants have seen a 20 percent jump in the revenue from food aggregators, with a 10 percent increase in food deliveries. Thus, being listed on these platforms is essential.

The same is true for big restaurant chains. It's impossible for them to match the reach of these platforms. Not to mention, the amount of money they burn on marketing and customer acquisition is something that no business in the food industry can afford to spend. Besides, as long as these aggregators are being funded, they’ll continue to scale rapidly.

Then there's a lesson from big restaurant chains like Chipotle, KFC, McDonalds bolstering their tie-ups with food aggregators and setting up new units to manage digital orders from these platforms. In short, restaurants of all kinds and sizes are leveraging technology in ways we’ve never seen.

The Threat: Growth versus profitability is a tightrope

While the proliferation of food delivery market is a strong call, collaborating with these services comes with certain challenges for restaurants. At the ground level, profitability has become elusive, but third-party services have the logistics and the data, making it easy for restaurants to grow their footprints in the US. More and more consumers are making the instinctual choice to order from third-party food aggregators, costing restaurants a big chunk of market share.

Experts have pointed out that this is exactly what happened with the hotel industry when booking sites like Trivago and Travelocity became popular amongst consumers for booking rooms. In the coming years, such a shift in the food industry can become one of the greatest threats for restaurants if they don't take the necessary measures to make their own websites and apps more appealing, convenient and transparent to match those of delivery companies.

Apart from this, there’s always a risk when you trust your brand’s reputation with someone else, even if it’s just about delivering the food. Yet, they are the ones to reap the benefit of having full access to consumer data. A recent study found that 76 percent of consumers blame the restaurant for errors that may occur, which could put a restaurant’s reputation at risk.

Having said that, many small and new restaurant businesses are slowly opting out and gearing toward in-house online ordering and delivery model due to these concerns.

Turning threats into opportunities

Customers drawn to third-party food delivery services have a certain set of expectations that need to be met. They expect to be able to easily browse the menu, make a reservation, order pick-up or delivery. They want to be able to do all this as quickly and seamlessly as possible and they want instant help from a human in case they don't find what they were looking for. If your restaurant website is not able to provide an exceptional service; your customers will switch to third-party food delivery apps. A practical move here would be to figure these issues out and develop a more sophisticated channel to handle online ordering and delivery.

As far as mobile ordering is concerned, a recent survey from TrendSource clearly states that US diners are more inclined to using restaurant's own app for online ordering vs. third-party app, provided they get the best customer experience.

But a restaurant may or may not have to pick one or the other if leveraging the benefits of both the platforms is an option. Having a presence on multiple platforms, including in-house online delivery could mean tapping on the market that may not be possible with limited resources and reach. Restaurant chains like Taco Bell, McDonald's, Dominos, and Chipotle are good examples in this space. Their strategy to integrate in-house online ordering and third-party services helped them drive long-term growth.

However, convincing the customers to order from you is key to success. Mentioning price guarantees, loyalty perks and other incentives on your website that aren't available on third-party apps will encourage customers to order directly from you. Another success-guaranteeing strategy is providing additional dishes and customization options only on your site.

Industry watchers are optimistic about the synergy between the restaurants' in-house online ordering and aggregators. They believe this can lead to faster scaling of the entire food technology market, especially when the market is at the cusp of exploding significantly.

Now, it is up to your business to decide which option is best suitable and how you can leverage the new technology to optimize operations and build a strong customer base.

So What Do You Pick?

Restolabs was created to help restaurants take back control and make a smooth transition into a digital world. We pride ourselves in helping restaurants around the world to be the beneficiaries of this digital shift so they can retain their customers as well as profits through direct sales channels.

With Restolabs Online Ordering System, customers get all the benefits of ordering online - accuracy, multiple payment options, customized menu, fast delivery and ease of access. On the other hand, restaurants with its own online ordering can enjoy the benefits such as the ability to offer customized solutions, real-time engagement with customers, access to data and analytics, and of course, elimination of commission fee to the third party service.

Speak to our restaurant software advisors today!