Fine dining once meant dressing up for a long-awaited reservation at your favorite restaurant. Now it often involves dressing down in sweatpants to order takeout in the comfort of your own home.
Food-delivery apps help restaurateurs entice new eaters and cull sophisticated data to enhance their businesses. But the lure of those benefits draws some restaurants into unprofitable sales even if it encourages more orders from at-home diners.
Major online food-delivery players are flying high with 84% of U.S. adults ordering delivery or takeout at least once a month, according to a Gallup poll last July. Privately held DoorDash is now worth more than Domino’s Pizza . Meanwhile, publicly traded Grubhub GRUB -0.17% grew revenue 39% year over year in the first quarter, even though its competitors grabbed market share.
But many restaurants are struggling even as their takeout orders grow, hindered by soaring rents in high-demand cities and new minimum-wage laws for employees. Dwindling foot traffic doesn’t help. The first quarter marked the 12th consecutive quarter of shrinking year-over-year traffic for the broader restaurant industry, according to U.S. restaurant tracker MillerPulse.
Many independent restaurants say they work with multiple online-delivery apps because they have become so pervasive; without them, they fear missing out on business. But that doesn’t mean they come cheap. Last year, Modern Restaurant Management reported that Uber Eats was charging restaurants a service fee of 30% of the bill. Similarly, a 2018 analysis by Business.com found select New York restaurants that opted for sponsored listings, in addition to delivery services, ended up paying a minimum of 30% to Grubhub.
For some restaurants, those fees are too high. A recent survey of members by Restaurants Canada found that 55% of restaurants that used delivery apps said the apps were “slightly profitable” for their business, while 21% said they were “not at all profitable.”
Larger chain restaurants such as Applebee’s owner Dine Brands are thriving this year and some have the luxury of opting out of delivery. After partnering with DoorDash just last September, Applebee’s largest franchisee Flynn Restaurant Group recently axed delivery in three markets as a test, according to Restaurant Business. Chief Executive Greg Flynn told the publication that restaurant dining and in-person takeout increased in those markets after delivery was cut.
Regulation could be coming in select areas. Later this month, the New York City Council of Small Business will investigate how delivery companies like Grubhub, DoorDash and Uber Eats charge for their services. Chairman Mark Gjonaj told the New York Post earlier this week the council would consider setting a limit on how much these companies could charge in an effort to help mom-and-pop restaurants “keep their doors open.”
Costs aside, delivery apps can be effective traffic drivers and work better for some chains. Chipotle Mexican Grill partnered with DoorDash to offer delivery for the first time last August. Same-store sales grew nearly 10% in the first quarter for the restaurant chain, the strongest period in two years. Chipotle’s stock is up a whopping 71% in the year to date. Management credited DoorDash with helping to raise its operating margin in the first quarter.
In a Grubhub survey commissioned in 2015, 1 in 5 restaurants reportedly doubled their takeout revenue after working with them. Grubhub noted, though, that the study was conducted when the company delivered a very small percentage of its orders versus the approximately 30% it delivers today. Although delivery can expand a restaurant’s reach, added service means added costs.
The economics of delivery apps may not add up for all restaurants—particularly smaller ones. But as their customers increasingly prefer to eat at home, they may have no choice but to keep paying the tab.
Write to Laura Forman at laura.forman@wsj.com
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