Now-a-days, how a person eats is very different from how their friends or family eat. This was not entirely possible decades ago but it is now. Today a person’s family may eat red-meat/fish/dairy but they themselves might be on a vegan/keto/gluten-free diet. This has provided space and opportunities for restaurants to cater to such niche markets - in cities big and small.
The opportunity was so enticing that in 2017 NYT reported that restaurants in the U.S were growing at twice the rate of population! The signs were there to be noticed even earlier, in 2014 restaurant revenues had surpassed grocery revenues.
And in 2019, it reached its peak - the most number of restaurants per U.S resident. Then Covid and lifestyle changes (WFH) decimated and put hundreds of restaurants out-of-business.
Historically, Restaurants started out mostly as dine-in only but incorporated some new ideas as the economy progressed. When the interstate highways were laid down interconnecting the country - it also spawned off a boom in drive-thru restaurants. The idea was for people to make a pit-stop along their journey to grab a bite and eat it in their car and carry on with their drive. The concept appealed to both restaurants and travelers and it took off. Some restaurants were exclusively drive-thru and some were both dine-in and drive-thru.
In the US an interesting side-effect of immigration is that the rate of immigration has a direct impact on the culinary options available in that place. As people arrive from diverse backgrounds, they also bring along with them their culture, food habits and recipes. It is such an obvious fact when you think about it but often overlooked and under-appreciated.
Worth noting that building a drive-thru requires obtaining required permits, adhering to municipal guidelines and a bunch of investments like adding another kitchen line so as to not disrupt the regular dine-in service and also get more staff to command the drive-thru line.
Now post-Covid - delivery has become the new raging idea “drive-thru” once was not just in the U.S but globally.
Yes, Covid forced every type of restaurant to adopt delivery but one food that had already kick-started the delivery concept way before all this was Pizza. It has its own unique advantages - quick prep time, easily transportable - the pizza box protects the integrity of pizza, keeps it warm while allowing the steam to get out.
Nature of Food Delivery Business
For restaurants’ delivery makes sense economically. Dine-in seating is expensive - requires more space and labor to serve the tables, has operating expenses and there is a ceiling to how many customers you can serve at a time and there is a somewhat limit to the area your customers will come from. But with the delivery model - you immediately remove many of the operating expenses like space, electricity costs and can serve more customers in an hour and from even far flung parts of the city. Yes, it requires labor (more cooks) and a bigger kitchen.
Before the internet - the main factor which determined a restaurant’s success was location, location, location and food. Now, to be successful in delivery its food and packaging.
Make no mistake lots can go wrong with food-delivery.
Economics of Food Delivery
Normally, a P&L statement for a traditional dine-in restaurant would look like this below -
P&L statement of a traditional restaurant with contract with third-party delivery app
Now, of course with incremental orders this negative profit margin improves as it doesn’t incur any incremental labor, occupancy costs. However, this is overlooking possible requirements for more cooks. If 3 cooks produce 60 plates an hour, then a restaurant can cater to 40 plates for dine-in customers and can still serve 20 plates of delivery orders without any additional cost. But with any more increase in delivery orders - costs increase.
Working with this premise -
One may think Profit Margin as % of revenue drops but on a $$ basis it has increased.
Assuming each plate is $10
Challenges with the delivery model
Third Party delivery fee - It is the biggest bone of contention. During the pandemic in March 2020 - this receipt from a pizza shop running out of a van went viral highlighting how third party apps are eating all their profit.
- One may think that the restaurant can mark-up their prices by 10-15% to offset this cost but customers know that cheaper options are just a few clicks away on the app and usually have low-medium loyalty towards a restaurant.
Also, it is especially hard for independent restaurants to start their own delivery channel (website/app) like Dominos for example. Yes that would help them avoid a cut to delivery apps but they need to figure out how to incentivize customers to move away from delivery apps and order through their own channel? And how to reward loyalty amongst customers who go out of their way to order through the restaurant’s unique channel.
Contrary to other industries - scale doesn’t help with the delivery business model. More orders do not lower the cost. You still need to pay someone enough money to drive to the restaurant, pick up the food and deliver it. That takes time and needs to be appropriately compensated. For the driver to make money off deliveries the delivery fee - needs to offset his time, fuel and vehicle’s wear-and-tear costs at the minimum. Is the delivery driver an employee of the third party app? Does he get employee related perks? This is very hard to figure out.
There are multiple operations challenges as well. The restaurant wants to give its customers the best experience with the food - hot and fresh.
Ideally, whenever a customer orders food - they want it in ~30mins on average. This includes ~10mins prep time. And keep aside ~20 mins for parking at restaurant + driver pick-up+parking at customer and finding the house/building. (This doesn’t take into account if the driver has multiple orders to drop-off on the way)
Should the restaurant start preparing the food after the driver has arrived to pick it up? Or keep it ready?
It is tricky if a restaurant gets notorious for making drivers wait, drivers will stop going there i.e cancel orders. But for a driver if you cancel too often you will be removed from the delivery platform.
Is the solution to have the customer pay extra to get hot food? I.e Restaurant preps the food after the driver has arrived. And the driver waits and is just going to deal with that one order.
Authors bring up a good point that restaurants should not have the same exact delivery menu as the dine-in menu as some dishes just don’t travel well. Also, restaurant owners should test their own food - how it tests after 20 mins of sitting in a car. In fact, these may be an example of paying attention to details.
Restaurants will also have to fix the bottlenecks in the kitchen and make it smoothly function just like an assembly line. They will have to apply the “pull the rope” method in the kitchen so that the next person waiting pulls the dish and works on it. Kitchen shouldn’t work on the “push the rope” model. Also, the slowest station will have to take first place in the process.
One of the major food delivery companies in the U.S, DoorDash in its IPO filing revealed that they spent more money on Sales & Marketing than they actually spent on delivering food - underlining how competitive that field is.
Upcoming Models
Ghost Kitchens - A restaurant owner can switch to exclusively “delivery only” mode and rent a proper industrial kitchen just to make food and ship it out without the customer knowing where it came from - restaurant or a ghost kitchen.
Ideally, a Ghost Kitchen will take care of providing the equipment, refrigeration, permits, utilities and city fees. The restaurant owner doesn’t need to invest in real estate.
The only downside is - Ghost Kitchens require a lot of upfront costs. A restaurant can rent a ghost kitchen space for $30k/month. Ghost Kitchen provider will possibly give him a sign-on bonus like 3-6months rent free.
Conclusion
Restaurant business in today’s world is incredibly hard. This book does an excellent job explaining the different aspects of running a restaurant and possible solutions being tried out in the industry. One thing I didn’t like was, somewhere in the book, the authors seemed to be lamenting the rising minimum wage to pay to chef, servers. Like if the business model’s success relies on underpaying the workers then it’s not foolproof.
Overall, reading the book helped me understand the whole process of what it takes to get food from a restaurant to a customer’s home via delivery. It made me realize this business model is quite fragile. How much is a reasonable price for a $15 (plus local taxes) cheese burger to be delivered in 30 mins such that every party in the process is reasonably well-off?
Assuming 10% local tax on average takes it to $16.5
A fee on top of that would include delivery fee + driver cuts + app’s fee. Is 25% reasonable? 30%? 40%? Do tips count extra?
You get the idea, thus the title!
2 comments:
Very good.
Verygood review. For a changing lifestyle and preferences this trend is very helpful.
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