The Winds of Change

Posted by estiator at 11 December, at 15 : 28 PM Print

■ By CONSTANTINE N. KOLITSAS, Consultant

 

CHANGE is a constant in nature and in life. And the question is never whether change is good or bad, but how effective we are in adapting to change. This is as true in business as it is in any other discipline or field. And the restaurant business is no different. Currently there is a Category Four Hurricane forming in the industry, and it’s time to take notice and to put systems in place to adapt. The wind of change that I’m referring to? Delivery.

I know, I know. Just the mention of the word stirs your blood. But remember, there’s nothing you can do about the change. You can complain that it’s not a good change until you’re blue in the face, but the fact of the matter is that more and more food consumers are opting to have their meals delivered in.

Let’s dial back a few decades to understand what kind of impact the delivery phenomenon can have on your business. I remember as a high school student working in diners during the summer… The phone would start ringing around 7:30 and it would continue until 9:00 am. Pick up orders for egg sandwiches and lots of coffees. We’d have flat boxes that could hold 12 cups. “Give me six dark no sugar, two light and sweet, three black and five regular.” And the register would ring like a piano and fill up with cash.

Where is that business today? It started with gas stations selling self-serve coffee and then came Starbucks and Dunkin Donuts… Of course, they didn’t just take the coffee business, but a big part of the breakfast sandwich business as well. Ask yourself if you’d like that revenue stream back!

Delivery, as we know, is not a new thing. But with the maturation of the internet over the last ten years, delivery has taken on a new meaning. Few are the businesses that employ full-time drivers to service the delivery needs of their clientele. With the exception of high-volume pizza places and caterers, most delivery is done by third party companies, with nearly all of them featuring online ordering through mobile apps and websites. Known as Food Delivery Services (FDS), these companies are now beginning to expand beyond the large cities to which companies like Seamless Web, Grub Hub and Eat24 were once limited. Now, regional players have emerged, offering personalized service to the businesses in their market, as well as to the end users, creating relationships and loyalties just as restaurants have been doing with dine-in guests since the first Greek grill man walked off a merchant vessel.

The big players are going suburban too, competing with the taxi-app service Uber.

The model is for most of these services to charge regular menu prices, with an additional delivery fee paid by the customer. In addition to delivering the food, the FDSs market the restaurants they serve by posting their menus on their site and building relationships within the business and corporate communities. For their part, they also receive the orders (usually through a mobile or website platform), process them to the proper restaurant (usually via email, fax or phone), deliver the food and process the payments. The FDSs pay the sales taxes and credit card fees. And they pay the drivers and (not insignificantly) the insurance for the vehicles and drivers. For their part in the process, they typically receive between 25% and 30% of the transaction.

At first blush, this is a prohibitive amount to pay. Most restaurants, the argument goes, only make between 10% and 20% profit on each transaction. As such, delivery is done at a loss. But there is a flaw in the math here. To understand the cost of delivery you should ask yourself a few questions: How many more people do I need to put on a shift to handle a 10% increase in business from delivery orders? If your answer is none (and it should be), then you are not adding any labor cost to the cost of delivery. Next, ask yourself how much more it costs in utilities to process third party delivery orders… rent, insurance, etc. Again, your answer should be zero. The only additional costs that you will incur are related to food and packaging. If your delivery business gets especially busy, then you may have to add a person to process and package the orders and make sure there are no mistakes. And if that becomes the case, it’s a good problem to have! So, if you’re running 30% food cost and the packaging costs you another 3%, then your incremental profit on the delivery business is between 37% and 42%, depending on which FDS you choose.

If you are still not convinced, consider the following statistics: In 2016, 44% of consumers used Food Delivery Services at least once per month. In addition, 43% of consumers ordered their food online with an additional 13% using a mobile app. Today, people (young and old alike) are opting to eat in rather than go out. Whether it’s because it suits their hectic lifestyle or just because they don’t want to be out and about, the trend is increasing. The question becomes, then, whether your business will adapt and exploit the trend to its benefit, or be caught in the devastation from its wake.

 

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Constantine N. Kolitsas is a restaurant consultant living in the New York tri-state area. His company, CNK Consulting, has helped numerous businesses improve their operations, develop their concepts, and increase profitability. For more information visit cnk-consulting.com or call 1-888-869-6068.

 

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