Food delivery apps are taking over restaurant take-out and delivery, transforming a business that was once dominated by pizza and fast food into one that can deliver nearly any kind of local cuisine.
The rapidly-growing industry now revolves around the third-party platforms which offer ordering and delivery services through their apps, such as DoorDash, Grubhub, and UberEats.
These companies have attracted both investors and restaurant partners, and understanding the role they play is important to anyone trying to understand the modern restaurant industry.
Third-party restaurant delivery platforms are aggregators that list many restaurants on their app and use location-based technology to recommend nearby restaurants to their customers.
Generally, restaurants sign up to be listed on the app, providing their storefront location and uploading their menu. Once listed, customers can find the restaurant by name and location on the app and make their order using the menu.
Some restaurants are able to sign up for multiple platforms since it costs them nothing and allows them to be accessed by more customers.
The ability to expose restaurants to a massive pool of new customers is one of the primary selling points of online delivery platforms.
Aggregators are able to promise independent restaurants an increase in business of 20% or more due to the convenience of being promoted online.
Connecting with Delivery Workers
One of the main services provided by delivery aggregator apps is access to their network of drivers and couriers who can make deliveries on restaurants’ behalf. Restaurants who can’t support their own delivery personnel can still offer home delivery services to their customers.
However, delivery drivers who work through the apps are contractors who are frequently under heavy pressure to make as many deliveries as they can. Their pay comes partially from delivery fees, but they are also dependent on customer tips which are based on a suggested rate from the app, but they can vary widely.
Food delivery aggregators earn money by taking a commission on each delivery, which is often between 20% and 30% of the restaurant’s earnings.
This commission goes to paying delivery drivers as well as logistics and support costs. Restaurants, which may make only 10% profit on sales, dislike the large cut taken by aggregators and have called for the companies to reduce their fees or proposed that local governments create a maximum commission rate.
Combined with additional fees, customers may end up paying much more for the convenience of getting food delivered.
Even as these third-party platforms seem to prosper, the industry remains unstable. Grubhub’s CEO defended their commission structure, saying that in effect they only make 1.5% on restaurant orders, and in general they have been resistant to calls for lowering prices.
They also reported to shareholders that their partnerships with quick-service restaurants actually cost them $2.50 on each delivery due to lower prices per order. Many companies that have entered the market have been absorbed by the major platforms, and even the most visibly successful companies are not making a profit.
Grubhub is looking to sell to Uber or one of its other competitors despite having 23% of the U.S. market in April 2020.
While their business is in higher demand than ever, food delivery aggregators are not necessarily able to turn their growth into a stable and profitable business. As dominant as they are, there is no need to assume that third-party platforms will remain a fixture of the restaurant industry.
They are dependent on individual restaurants and delivery drivers who they bring together, but as restaurants grow more accustomed to the value of online orders, they may be ready to set up their own delivery apps and take control of their brand.