Some of the most successful direct to consumer brands share a common theme of ‘the founder identified a problem in their life and sought out a solution for that problem’. New approaches to buying mattresses, watches, luxury goods, travel, and more all came as result of the founder asking herself, “why does it have to be this way?”. So, while Apple may have become known for creating products that people never knew they needed, DTC brands have generally solved problems that we knew we had, but never took time to figure out. So, where exactly does that leave third-party delivery services? Let’s find out.
The new products and technology that have come to market courtesy of these diverse forms of inspiration fall under the umbrella of “disruption”. That’s an intimidating word that can be interpreted two ways: negative for the party being disrupted and positive for the party creating what we call “aspirational change”. The word can be defined situationally and in the restaurant and convenience retail business, third party delivery services (3PD) such as Doordash, Grubhub, Postmates, and Uber Eats cast a mixed bag of positive and negative for the retail partners they serve.
Let’s take one step back. I think of third-party delivery companies as predominately consumer focused in appeal and value proposition. The entire concept was inspired by consumer’s desire for speed and convenience more than to solve a specific problem. In a way, Amazon may have made 3PD possible. Its Prime program tapped into a consumer nerve influenced by our “lazy gene”. People want products and services delivered to them as quickly as possible and Amazon trained the world to become accustomed to shopping in the world’s largest store and receiving everything purchased within 2 days as a member of Amazon Prime. Why not extend that concept to restaurants, convenience stores, and more? Enter 3PD.
Convenience and speed bring big valuations
It should be no surprise that Netflix consuming people who applaud speed and convenience immediately jumped on the Order and Delivery train. Each of the third party delivery companies has grown rapidly, with some going public and all sporting gigantic valuations; witness Grubhub at $2.7 billion and Doordash at $13 billion.
Now let’s talk about the other constituent in this triad of value — the retailer. Restaurants have been delivering food for decades. But home delivery comes with cost, risk, and logistical problems. Wasserstrom clearly documents the top 5 risks associated with food delivery being Customer privacy, Food safety, Tampering, Food quality, and Driver issues.
Some firms like Jimmy John’s continuing to maintain a proprietary fleet of delivery drivers. Having control over this aspect of service is a key driver of the “Freaky Fast” (LINK) brand identity. Panera Bread is another well-known restaurant chain that stuck with proprietary delivery until just recently. Panera’s decision was influenced by a desire to have its delivery capabilities keep pace with store growth while keeping control of food quality and customer data. For that reason, the Panera Bread agreement with 3PD is a hybrid in the market, where Panera drivers continue to fulfill deliveries whether customers order through a third-party delivery app or not.
Customer data is the golden baton in third-party delivery
For most restaurants and certainly convenience store chains, a big motivator for participating with third-party delivery services is lead generation. People at home or in the office are looking first at the aggregator 3PD sites to search for options, then selecting from within the app. That is a scenario which benefits restaurants through additional order generation and complete outsourcing of delivery operations. Everyone should be happy except for one thing, well maybe a few things:
- Every order that originates in a 3PD app means lower margins for the retailer. Fees are negotiable but can run as high as 30% of total purchase amount.
- The customers that order through the 3PD app are customers of the third-party delivery company, not the restaurant. The data play is clearly weighted in favor of the 3PD company.
- Customer satisfaction with each delivery is dependent on the 3PD, though the negatives will almost always fall back to the retailer. Restaurants and convenience stores are trusting a big portion of brand equity to the performance of individual drivers working for 3PD companies.
This scenario has led to a rising group of voices in the industry calling for more careful evaluation of 3PD usage by retailers of all types. The most comprehensive assessment of the risks and rewards of 3PD use by restaurants was penned by Zach Goldstein, CEO and Founder, Thanx. His article describes 3PD’s as “The Four Horsemen of the Restaurant Apocalypse“. It’s a long read but worth it if you want to understand the issue in more depth.
COVID-19 has put a [unwanted] spotlight on third-party delivery
The developing story of the future of third-party delivery is coming into intense focus during the COVID-19 crisis. For consumers living in quarantine and seeking any thread of normalcy available, being able to open up a single app on a mobile phone and order food from a familiar set of restaurants is, in a word, awesome. For restaurants who fulfill the orders during a time when they are fighting for their business futures, each order through a 3PD comes from a customer who they don’t always know and at greatly reduced margins.
The way third party delivery companies have responded with support for the industry they thrive upon during the COVID-19 crisis has been inconsistent at best and in some cases their actions may cause restaurant clients to accelerate their scrutiny of how they manage delivery.
One article we read stated that “App-based delivery services such as UberEATS, Grubhub and Doordash haven’t given restaurants a break. While offering free delivery to customers during the crisis, the services haven’t lowered the customary 30 percent commission restaurants are charged to be listed on the apps and have food delivered by third-party drivers”. We dug deeper and found that Grubhub’s publicized “economic relief effort” was not a reduction or waiver of fees, but a deferral program which came with several conditions favoring Grubhub.
Each 3PD company responded in its own way. Uber Eats and Doordash each responded in a slightly more positive way than Grubhub. And Postmates did not make a public statement in early March when others were issuing press releases. To be fair, Grubhub may have improved its offer to its restaurant clients but at the time of this writing, we haven’t been able to find evidence of such an offer.
Restaurants will [and should] take note of third-party delivery when the dust settles
There are several important points
to be made:
- Everyone in the restaurant industry is fighting for survival now. When the dust settles, they will remember who helped them and who did not. Just like no frequent flyer program could exist without an airline, the 3PD industry would not exist without the restaurants they serve. Balance needs to be maintained in the economic relationship.
- Even before COVID-19, restaurant owners had taken note of a lesson that DTC brands learned over the past few years; using an aggregator service can generate leads and profits in the short term, but the long term business impact needs to be thoroughly understood and evaluated. Example: using Amazon for product marketing could accelerate sales, but every customer that results through that channel is an Amazon customer that must be remarketed at cost by the DTC brand to convert to first party purchase.
- Customer data is the lifeblood of business today, but don’t think of it as a “new oil” or commodity that can be traded on open market. Instead realize that customer data is a resource that is not guaranteed to your brand. It must be protected with respect, care, and privacy.
Third party delivery companies are disruptors that bring specific benefits to the clients they serve — especially during an unprecedented situation such as the COVID-19 pandemic. When those benefits are compromised or become unbalanced, the value of the disruption is called into question. Even more important, when the core value proposition (e.g. aggregating customer data for eventual leverage) of 3PD’s is seen to be in competition with the clients they serve, there’s trouble.
There is history at work here. The impact of intermediary aggregator sites in hospitality and travel can be seen clearly. The Walled Gardens of Facebook, Google, Amazon are a growing threat to retail advertisers. Third party delivery companies have the opportunity to correct their course during the COVID-19 crisis, but they’ve got to move quickly.
Maybe the company most willing to
align the interests of economic value and data collection practices with the
restaurant industry will become the winner in a crowded competitive space. Who
do you think that might be?