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  • Writer's pictureGwyneth Borden

Is Delivery the Future of Restaurants?

Updated: Aug 3, 2019

DoorDash bought Caviar for $410 million, and for those watching the food delivery space, this was likely no surprise. Not long ago Square, Caviar’s former parent company, struck a deal with Postmates for integration. And while that deal wasn’t focused on food delivery, it was a notable integration since Postmates was one of Caviar’s closest competitors in terms of market share.

DoorDash eclipsed GrubHub this year, taking the biggest food delivery market share and with the acquisition of Caviar, is poised to take a bigger lead in dominating the delivery marketplace. Caviar represents a new market opportunity as it was a curated marketplace, targeting independent restaurant operators with a reputation for delicious food, most often places that have a strong on-site customer base. Caviar sought out its restaurant partners, often denying or putting off restaurants they didn’t deem to meet their curation standards. A representative of Caviar who spoke on a panel at the Golden Gate Restaurant Association Industry Conference in 2018 boasted that their marketplace was “curated” and that they knew their clients “didn’t want to be on a platform next to Burger King” (it may have been another fast food restaurant, I cannot quite remember, but it was a fast-food operator name). Today that sounds ironic, as I wonder how DoorDash will manage this -- will Caviar continue to appear as a separate platform or be fully integrated into DoorDash? Will this impact attracting new restaurants, who too favored Caviar’s “exclusivity” and often looked down upon the bigger players? I muse because when I heard the Caviar spokesman’s comment, all I could think about is how impossible it is to scale a curated marketplace in the food delivery space and turn a profit. Volume is the name of the game and even with all the scale that UberEats has with its existing customer base from Uber, it’s not profitable (nor is Uber for that matter). Apparently, DoorDash isn’t profitable either.

Predictably, there’s been much consolidation in the food delivery space -- Eat24 folded into GrubHub, and Seamless is also part of GrubHub although it retains its own brand. GrubHub has bought many smaller players over the years. DoorDash has a crazy valuation despite not turning a profit because the sector continues to grow as consumers increasingly turn to delivery platforms to bring them their food. But is delivery really the future for restaurant food?

While data suggests that delivery is the only sector that will show continued growth for restaurants, this needs to be balanced in contrast to a decline in onsite traffic. For a restaurant, onsite traffic is key, because you retain all the revenue and can upsell customers on everything from appetizers to beverages to desserts. There’s no true upsell in online delivery platforms -- while platforms suggest pairings, it doesn’t really compete with the onsite upsell.

Delivery services take a large cut out of restaurant profitability -- fees paid to the delivery services range from 15 - 30 percent. When you consider that an average restaurant profit margin is 4 - 6 percent, it’s clear that you need to really to do volume in delivery for it to pencil out.

The delivery companies are using independent contractors to deliver food, which allows them to avoid paying benefits afforded to employees -- everything from minimum wage, access to unemployment insurance, employment taxes, etc. -- benefits that restaurants have to pay -- and these services are largely not profitable. And while GrubHub has turned a profit, they have many current challenges including a website controversy and phone fees dispute, which threatens their future in continuing to attract an increasing restaurant customer base not to mention potential new regulatory impacts.

Right now the California State Legislature is considering Assembly Bill 5, which would implement a test for determining whether an independent contractor is considered an employee based upon a standard as defined by a California Supreme Court case. There are three components known as the ABC test, but the most challenging portion of the test is whether “the worker performs work that is outside the usual course of the hiring entity’s business.” This is a hard test for food delivery services to argue, which is why a compromise is being sought to prevent the bill’s passage.

One of the most confounding things is that these companies can basically function like they have tip credit -- not paying a minimum wage and instead of applying tips to worker payments -- while restaurants in states like California cannot. Because of backlash, all these companies have dialed back their policy on tips and contractor wages, but it’s questionable if that was ever legal based upon California Labor Code 351, which says that “gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.”

But in my mind, this issue -- the inability of these companies to profit under the current favorable conditions -- calls into question the overall future viability of delivery platforms. Whether its AB5 or some other regulatory or even voluntary reforms take place, how do these companies become profitable or maintain profitability as their costs increase? And with restaurants increasingly beginning question fees for these services and whether delivery cannibalizes their onsite traffic, the future viability of the size and scope of the marketplace is in question.

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