Order Up! Are delivery apps a friend or foe to restaurants?

Last week before my Tuesday class I stopped for dinner at Shake Shack over in Chestnut Hill (ya I basically made the whole week a cheat meal) and found myself a little bit aggravated that it took almost a half an hour to get a ShackBurger and some crinkle cuts. Now Shake Shack is not Mickey D’s, but it’s not really a sit-down restaurant either. It shouldn’t take a half hour to get a burger and fries at a fast casual chain. Now I understand times are challenging with labor shortages and COVID-19 impacts to the supply chain, but Shake Shack has an open kitchen so I could see all the employees. They were moving like crazy in the kitchen so I’m thinking to myself what the heck is going on here. But as I was waiting and heard person after person come into the restaurant and say “hey I’m with UberEats or I’m with Grubhub” I got to thinking about how these online ordering apps might be impacting restaurants.

The COVID-19 pandemic has had a profound impact on restaurants. In the early stages of the pandemic throughout 2020, restaurants lost $130 billion in sales between March and October. Over 2.1 million jobs were lost and an estimated 110,000 restaurants were closed permanently or long term. We have seen the impact here in Massachusetts with some locally well known restaurants shutting down for good.

The pandemic forced restaurants to respond to customers in different ways. With in person dining closed due to COVID-19 restrictions, many restaurants resorted to takeout orders and using digital apps like DoorDash and UberEats. While forecasts for digital apps were expected to grow over the coming years, COVID-19 made their use explode. The four major players in U.S. food delivery apps industry (Doordash, Uber Eats, Grubhub, and Postmates) saw their revenue in Q2 through Q3 expand by $3 billion year over year ($2.5B in 2019 and $5.5B in 2020).

So while it’s a fair argument that online ordering helped keep restaurants afloat at the onset of the pandemic, it’s important to take a look at how they will impact restaurants going forward. According to research done by Morgan Stanley the delivery market was $45B in 2020 which was even higher than the $41M it had forecasted for 2021. The addressable market for delivery may have shifted forward 2 to 3 years due to the pandemic. The market cap for delivery could hit 2025 projections in 2021 or 2022. While that might sound like a benefit to restaurants, the challenge is that restaurants need to prepare for how to handle this change in consumer behavior much quicker than had these trends continued on a slower trend into 2025. Digital technologies were quickly adapted by consumers throughout the pandemic and restaurants have been playing ketchup (sorry had to throw that pun in there).

Beyond not being able to react quickly to the changing trends, restaurants also have to deal with other components of using digital apps. Number one is the commissions many of the services charge for services. Service fees can be as high as 30% on some orders which can hurt an industry that is low margins as it is. If that charge isn’t passed on to the consumer for using the app, the restaurant has to eat the fee through its own margin. While many restaurants dealt with this to survive at the onset of the pandemic a great deal more are fed up with it. Legislation may change this over time as restrictions get imposed on how high companies can charge in fees which has already created tension in the forms of lawsuits. The argument that many legislatures make is that these companies tend to have monopolistic tendencies in terms of market share by geographic area. For example, Grubhub dominates the New York market and Doordash dominates the San Francisco market etc.

What will be interesting is to see where we go from here. Consumers aren’t slowing down and restaurants are struggling to keep up. Sadly there are stories of employees quitting because the just can’t keep up. Some restaurants are scaling back with online ordering at peek times to focus on other aspects of the restaurant. I would argue this makes a lot of sense. Shake Shack the other night should have prioritized my in person dining order over an online order, or at least have the a system in place to better streamline online vs in person because if there is no differentiation what then is the point of in person dining?

11 comments

  1. Nice post. I agree that restaurants will need to adjust to take advantage of the new environment brought on by post-pandemic habit changes. We saw a lot of that at the cape this summer, restaurants limiting takeout to focus on the in-person experience.

  2. One thing that has been really interesting to me is that food delivery apps very not profitable pre covid. I think that is very telling in a huge shift in consumer behavior, but from an investors stand point, I wouldn’t feel comfortable knowing that my business is only doing well because of a disruptor. I see food delivery never reaching a higher peak than it has in the last year.

  3. Christina S · ·

    Great post! I heard grumblings last year about how the delivery apps eat into restaurants’ margins, which caused me to pay closer attention to the fees that the apps charge and I vowed to only order directly from the restaurants (…..that didn’t last long when winter rolled around, Uber and DoorDash started sending me “irresistible” promos and I knew I could easily have a delicious cheese pizza just for me delivered from somewhere across town).

    In Operations Management class we did a case study on breakfast at The Paramount in Beacon Hill, where allowing takeout orders became so disruptive to the flow of the restaurant and the in-person customer satisfaction that they eventually limited it to only specific days and times. I think we’ll begin to see more restaurants adopting this approach – I’ve observed it with both major chains and local diners, but at the same time I’ve also noticed a shift in my own behavior to relying more heavily on ordering ahead. I really do hope that there is more transparency and eventual regulation around the fees. They seem completely astronomical, especially when they don’t even include tip and presumably only minimally cover the drivers’ wages.

  4. Great post! I totally related to your experience with Shake Shack as I was a frequent customer during the pandemic and was left waiting there each time as I watched online orders getting filled. I am hoping restaurants adjust to this change quickly. This makes me think back to the discussion we had on Starbucks and their online ordering system. I wonder if restaurants such as Shake Shack, which are not meant for dining in (or not the ideal dine in restaurant at least) are doing this on purpose to eliminate customers from coming in all together eliminating cashiers and allowing the extra employees to be in the kitchen preparing orders.

  5. Shannon Reardon · ·

    I posted a blog a couple weeks ago regarding the rise of tech-enabled food delivery, so I enjoyed the new perspective on harmful effects of the rise. Your point though about prioritizing online versus in-person orders raises an interesting debate. My first thought immediately ran to prioritizing in-person, but then I considered the benefit of prioritizing online, with regards to customer retention and gaining traction on restaurant loyalty. Worth discussing in class!

  6. DownEastDigital · ·

    I think food delivery apps are a friend to restaurants overall, and like any technology…it’s ultimately up to the user to leverage its capabilities to what works for them. If it’s taking away from the experience, fine…make some adjustments as to when apps can be used etc. In the end, I think the food delivery apps just give restaurants another opportunity to do business when they wouldn’t have ordinarily. People understand the difference between eating in a restaurant and getting takeout…the food is never as good as takeout. This is why I think restaurants will always have a demand for in-person dining. One option for restaurants could maybe be to come up with some sort of abbreviated menu that’s easier on them for takeout and to encourage people to come in.

  7. DropItLikeItHox · ·

    It doesn’t seem like there are many ways that delivery apps act like foe’s to restaurants. By leveraging them, restaurants open up delivery options for thousands more people that may order, likely resulting in thousands of dollars in revenue over the course of the week. While the 30% margins seem high, I’ve also seen many restaurants sign up with 2-3 delivery apps and give consumers the choice to use any app they’d like for delivery; it feels like the idea of the monopoly may be a big overplayed out. I personally use doordash, which doesn’t appear to have a massive presence in Boston.

  8. greenmonsterbc · ·

    Love this post, but definitely don’t love shake shack and their $20 meals!! Id be curious to know if this idea was triggered by the recent Dominos advertising campaign against delivery applications? It seems even industry giants are impacted by the delivery apps who take a considerable percentage and make it difficult to meet basic margins. They even went to far as to purchase gift cards for other local restaurants to push delivery apps out of the picture.

    https://adage.com/article/marketing-news-strategy/dominos-targets-delivery-apps-giveaway-program/2380521

  9. lexgetdigital · ·

    Great post! I echo your frustrations with Shake Shack. I think it mostly comes down to BAD management – because they were slow even before the height of delivery apps. However, it’s an interesting proposition and one that I think so obviously needs to be solved on the back-end. I find that a lot of these restaurants have the same issues when it comes to online ordering: they’re late. And there’s nothing worse than getting to a place on time to sit and wait (these are billable hours, people!!!!!!). My suggestion: actively monitor your app and start limiting intake. For example, Sweetgreen in Wellesley does the DUMBEST and most frustrating thing: when they have too many app orders, they put up a sign and say no in-person orders, just app. Backwards. And a great way to frustrate customers. While I’m throwing companies under the bus, let’s add Starbucks to the mix: why should I wait for 5 mobile orders to be delivered to wait on the tray while I’m standing there for a simple black iced coffee?? Get it together, mobile app using companies.

  10. totombc2021 · ·

    Great topic! I always call and pickup my orders when ordering from restaurants. 1 the restaurant gets a bigger cut, and 2 i avoid paying those ridiculous fees and charges! I would however consider an Amazon prime type approach. I pay $100 or x amount a year, and get free delivery!

  11. bengreen123 · ·

    I heard a while back that no restaurants are taking a gain on the deliveries. The best that they can hope for is that these delivery services stem the bleeding until the labor shortage is solved and then they can run strong again (in part thanks to services like Open Table). It’s already tough and low margin business. I’m doing my part to keep my favorite places alive.

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