Are Delivery Services Good For Hospitality Businesses?

As I was sitting in a semi-empty Sushi restaurant in Fulham the other day a black-suited astronaut galumphed his way to the service station to pick up an order for delivery. This prompted me to ask the question, 'are delivery services good news, either commercially or branding-wise for restaurants and bars?'

According to a recent article at the Harvard Business Review, in the USA, VC's have invested circa $5 billion in food delivery technology businesses in the past 12 months, an increase of circa 400% over the year prior. This is based on a market that is worth circa $25 billion today (in the USA) and expected to grow to around $60 billion. But, the caveat is that right now, pretty much all the delivery tech businesses are losing money. The reason being that there really isn't much money to be made on a per delivery basis and in order to drive demand and lead the pack, the delivery companies effectively subsidise each order. So, for the sector to become profitable then prices need to go up, but if they do so then there is likely to be a corresponding drop in demand. Key to the success of the delivery business model is the notion of 'economics of density', which basically means that the more customers and better mix of restaurants you connect within a local area then the greater the cost savings and hence the higher the profit. This is similar conceptually to the business models of Uber and Lyft.

But, from a restaurant perspective, do the delivery services add value or are they effectively cannibalising an existing customer base with subsidised food, no upsell and no chance of a tip?

CGA Peach, in their recent business leaders survey, found that 52% of businesses in the UK now offer a third party delivery service, with 73% saying that it has had a positive impact on sales. However, only 33% believe the services benefit loyalty with 8% believing it is harming their business. From a brand perspective, only 19% of leaders felt that the delivery services positively impact their brand, whilst the vast majority at 61% believe there is a neutral impact.

One of the biggest impacts that the delivery services have had is on the ability for new entrants to enter the market via the introduction of ghost kitchens. Historically, potential new entrants would need deep pockets to launch a new venture; leasing suitable premises, hiring staff, marketing and covering costs till breakeven. With the advent of ghost kitchens, this barrier to entry has been dramatically reduced, meaning new businesses can easily test the water to see if their venture has commercial potential.

Hospitality businesses that work with delivery companies basically fall into two camps. First, there is the long tail of low margin chicken shops, burger and pizza joints. These are easy to set-up, have little or no brand loyalty and are easy to exchange. This segment is likely to have a higher churn on the delivery apps. The second segment is those venues that offer a brand attraction, with a unique experience that is more than the food and drink on offer. It is this segment that the delivery companies want to attract as they elevate the offering and drive higher spending customers. This means that operators in this segment are better able to negotiate on the terms and importantly, get access to the data so that they can help build relationships with the customers.

So, in answer to my original question, in an increasingly mobile-driven world, customers are able to pick and choose the experiences that are best suited to their immediate needs, and delivery services are best able to accommodate this with their technology. Whilst commercially the services offer distinct benefits, from a brand perspective the jury is out, as if the experience is below what the customer would experience in venue then customer loyalty and in-venue visits are likely to suffer. For operators to make a success of the delivery services they need to negotiate better commissions, gain access to the customer data and most importantly, ensure that the experience of the delivery supports their brand.

All views expressed are my own.