A New Order for Restaurants
Consumer comfort with delivery platforms threatens to disrupt the fabric of restaurants - who must adopt to a new, tech-driven landscape.
This is a regular newsletter examining the disruptive trends across the consumer & leisure industries. To receive this straight to your inbox, subscribe here:
There's a long list of examples when it comes to traditional consumer & leisure businesses actively being disrupted by startups – DTC brands disrupting consumer goods, the reinvention of bricks-and-mortar retail or hotels pushed aside in favour of Airbnbs. But, perhaps one of the clearest examples today is that of restaurants – whose existence is being threatened by the rise of delivery platforms.
1️⃣ Delivery, Convenience and Experience
Not so long ago, delivery options were confined to what we would term 'junk' food. Put simply, to get restaurant-quality food, you would need to go to an actual restaurant and ‘dine in’. However, a plethora of restaurant delivery platforms such as Deliveroo, Uber Eats, Doordash and Delivery Hero have upended this dynamic. Instead, consumers can choose from any number of cuisines - no longer limited to junk food alone.
As delivery platforms have consolidated – both in number and in traffic - they have become increasingly powerful in their appeal to consumers. The next significant evolution is the rise of 'ghost' or 'dark' kitchens (restaurants that are delivery-only) which will further deepen the appeal of these platforms. Uber Eats already works with over 2,000 of these kitchens in EMEA alone.
Unlike traditional restaurants, ghost kitchens can operate on cheaper real estate with lower associated restaurant costs - for example, they do not need to be located in high footfall areas or pay for serving staff. In turn, these cost advantages can be passed onto consumers - UBS has reported that the magnitude of this cost advantage could lead to home cooking evaporating as restaurant deliveries become so cheap. This will further entrench delivery platforms in consumer consumption habits and provide a strengthened competitive threat to traditional restaurant chains.
2️⃣ How Delivery Threatens Restaurants
Whilst delivery platforms theoretically provide another sales channel for restaurants, they also come with steep commissions, which erode the already razor-thin margins of many restaurants. However, the broader implications are becoming more pronounced.
As consumers, we are torn between factors of convenience and experience. The rise of delivery platforms has now commoditised restaurant meals - as restaurant-quality meals have become more ubiquitous on delivery platforms, consumers have increasingly opted into the convenience of delivery against the experience of dining in. The pandemic has further crystallised this trend, with restrictions forcing consumer's hands when it comes to the adoption of meal deliveries.
Of course, this is a sliding scale. Fine dining, for instance, inherently entails an experience greater than the meal itself and is hard to replicate through meal delivery alone. Quick-service restaurants (QSRs) are also naturally insulated from this shift as their concepts tend to align them to the delivery economy where they can potentially benefit from this evolution in consumer choices. However, 'casual dining', which offers little in the form of 'experience', sits precariously in the middle ground of these two formats and is most exposed to the ensuing sector commoditisation.
Whilst casual dining restaurants can, of course, list on delivery platforms themselves, they have not been optimised for delivery. Instead, their business model relies on a seat occupancy rate, reflected in their high lease costs (owing to the cost of strategic real estate and space for diners) together with other associated costs such as serving staff. While delivery does provides an additional sales channel, it is hard for these restaurants to generate the necessary ROI against their existing cost base.
An added complexity is the competition on these platforms. Whilst some traditional restaurants may have some brand recognition, many cuisines are becoming so competitive that consumers will simply go for the cheapest option, or those that ‘look’ the best through their meal photography and virtual presence. As ghost kitchens continue to rise in number, this threat will further deepen as they pass on cost savings to consumers.
Incumbents have reacted to this shift by re-assessing their restaurant footprints. Where the economics are challenging to make work, leases are abandoned. In other cases, restaurant chains have quickly transitioned to a diversified strategy, adding delivery-only additions (their version of ghost kitchens) to their portfolios - such as Chilli's (Just Wings), Applebee's (Cosmic Wings) or Wagamama's.
3️⃣ Arming the Restaurants
In recent years, restaurants have increasingly adopted technology in their search for operational efficiencies. A crowded restaurant-tech landscape exemplifies the options available to restaurants – including PoS, restaurant management, procurement and reservations.
However, in a crowded and competitive restaurant landscape, several chains and restaurants have started to position themselves more as tech companies than bricks-and-mortar. Through this strategy, they hope to generate customer loyalty and operational efficiencies to differentiate themselves.
Chains, both old and new, have recognised both that cuisines are becoming increasingly homogenous, and that orders will continue to edge towards digital channels going forward. In turn, they have taken steps to 'own' their own technology and logistics stacks, avoiding the 30% effective tax delivery platforms charge. An added and potentially more valuable benefit of this ownership is their ability to build a proprietary data flywheel, which further helps to retain and sell to customers.
Sweetgreen, for instance, has been a leading purveyor of this strategy, now seeing most of its orders coming through its smartphone app. It has further built out its own delivery network and leverages digital products to forecast sales, deploy labour and order food. As a result, it has been rewarded with hefty VC funding at a $1.6bn valuation (at last count) and is moving towards IPO, having recently filed its S-1. On the public side, Domino's and Chipotle have built out a similar strategy, and their success has been reflected in a steep relative share price appreciation over recent years.
A valid argument is that this strategy may work for larger restaurant chains but is not feasible for smaller chains who do not have the necessary capital to deploy, nor the brand presence with consumers, to make such a strategy work. As a result, they are left most exposed by this deepening shift to meal delivery.
However, tech platforms have started to shift the balance of power away from delivery platforms and champion the small restaurant through lower commission rates or by enabling them to 'own’ the customer relationship. For example, platforms in the 'order enablement' vertical of restaurant tech such as ChowNow, Slice, OrderSwift, Flipdish and Foodhub provide a real alternative to delivery platforms, enabling them to sacrifice less margin and offer customers options such as click-and-collect.
Final Thoughts
Only 29% of Americans have ever used a delivery platform, meaning that we are still relatively early in understanding the true magnitude that delivery platforms will have on restaurants. Taking a step back, the restaurant market is set to continue to transform as delivery platforms become more ingrained in consumer habits.
Whilst some may succeed in 'owning' their tech stack or managing to reduce their exposure to these platforms, the rise of delivery platforms and ghost kitchens will lead to a more saturated restaurant sector, equating to more commoditisation. In turn, this threatens to erode their pricing power – leading many to seek ways to differentiate themselves against this backdrop.
Elsewhere, restaurant chains, both old and new, are responding to this shift by gravitating their portfolios towards QSR formats or diner-lite options. Some are capitalising on evolving consumer trends, such as in health & wellness (e.g. Sweetgreen, Dig Inn and Farmer J's) or around the 'experience economy' (e.g. Flight Club, Bounce and Vagabond) in order to seek differentiation.
Sources & Additional Reading
Spoon Market Map: Ghost Kitchens in 2019 | Jennifer Marston
The Future of On-Demand Food Delivery | Sifted
Food Delivery and The Future of Restaurants | Nikhil Basu Trivedi
Delivery Only: The Rise Of Restaurants With No Diners As Apps Take Orders | Shannon Bond
Salad Chain Sweetgreen’s Tech Focus Helps Push Valuation to $1.6 Billion | Katie Roof
Is the Kitchen Dead? | Jo at Cookpad
The Kitchen Multiverse | ACV
Delivery-Only Restaurant Brands See Pandemic-Fueled Growth | Dee-Ann Durbin
A Bigger Truth About Restaurant Food Delivery | Mark Suster