We’ve all been there this past year: You don’t want to cook. You want to “save” your local restaurant. And so you take the path of least resistance: you use a third-party delivery service like DoorDash, GrubHub, Bite Squad, or others. But I don’t use third-party delivery because I know too much. If you knew what I knew, you wouldn’t use them anymore, either. I don’t think the average consumer knows what a mess these delivery platforms are creating for local food establishments.
These tech companies (that’s what they are; not restaurant companies) have found a way to convince consumers to overpay for food, at the same time gouging restaurants masked as relief, all for the benefit of creating a tech company that has struggled to turn a profit because others are racing to control this lose-lose space. It’s a racket with no winners except for a few financial players who turn quick deals to their own advantage.
Restaurants pay between 22%-32% of the menu price of items in order to use a third-party delivery service. If a restaurant sells a cheeseburger for $12 on their menu, under these contracts and arrangements, the restaurant receives only $8 of that. If you ordered the same cheeseburger and picked it up yourself, you’d pay $12 and the restaurant would get $12.
How or why could a restaurant actually view a third party taking up to 32% of each transaction as a positive thing? As a restaurant owner, it never made sense to me and I was a skeptic from day one. It leaves nothing for the restaurant but hopefully a small amount of exposure, and as we’ve all learned pretty quickly in this climate, restaurants don’t need exposure. They need revenue in the form of actual dollars, and all of those dollars.
Restaurant owners, know this: they need you more than you need them. If you have a robust delivery business, subtract the third-party fees and add them up. It’s simple math. The fees you pay to them will add up to more than hiring your own employee to do the same job and controlling the entire process. By using them, you are leaving important work – and your reputation – in the hands of a company that is actively trying to recruit your neighbor to be your competition.
In 2019, as far as I can see, only one of the third-party delivery platforms (Grubhub) showed a profit. Now, they are all busy and they are all (somehow) growing, but they can’t seem to find a way to make any money. They will likely sell to another bigger company someday, which is their actual goal, not to actually provide value to the restaurant company.
Allow me to elaborate with an example: A profitable, independent, one-unit restaurant with year-on-year growth every year making $200,000 in annual profit will be lucky to achieve 2.5x to 3x cash flow or profit as a valuation. It’s deemed risky, and this is the industry standard. I use this example because I had a company that achieved these performance metrics for nine consecutive years. Now, a recurring revenue model (third-party app platform), growing year-on-year achieving millions of dollars in LOSSES year-on-year is able to achieve 7x REVENUE as a valuation.
If these two companies in the example did EXACTLY the same amount in annual revenue, let’s round up and say each company did $2 million in revenue (assuming the restaurant made 10% profit). The profitable restaurant company might sell for $500,000 and the not-profitable third-party delivery company could be acquired for $14 million.
Yes, I realize I’m in the wrong business. Same annual revenue, very different model.
CAN THIS EVEN BE CALLED HOSPITALITY?
I once had a third-party driver show up at one of my restaurants and ask how long it would be until the order was ready. I had not opted into this platform, so I had no idea what this person was talking about. I can’t make this up. To be clear, and by design, we had not done ANY takeout orders at this restaurant in its three-year history. The driver said he had called and talked to “Joe,” which was actually impossible, because we didn’t even have a phone. I know it’s a little odd, but we never had a phone or needed one for anything.
Dumbfounded by this blatant dishonesty by the driver, I then looked at the order. The third-party delivery company had added an outdated menu from my restaurant to their platform without my consent. The customer, who was able to order a menu item we no longer served, was mad and took it out on us online. They couldn’t get their food, so now I was the bad guy. Then, I realized the next day that the third-party platform RAISED the menu price of the menu item that wasn’t even on my menu, in order to increase the percentage fees they charged. Isn’t this maddening?
The unavoidable topic that nobody, including myself, has had time to discuss or deliberate upon, is if an online ordering app connects to a third-party delivery platform through a restaurant website, can we even call this hospitality anymore? The restaurant didn’t have a chance to interact with the customer (until they complain, likely online), the third-party keeps all the data, the restaurant gets gouged, and the consumer will only ever call the restaurant to complain about their awful experience.
In the two-way marketplace, the restaurant has now become nothing but a prepared food factory. I’m almost certain we can’t call it hospitality anymore.
Matty O’Reilly has earned his BA in Business Management from St. John’s University and MBA from the University of St. Thomas. As an owner, operations manager and/or consultant he has contributed to 30+ food and beverage industry start-up models.
Editor’s Note: After sustaining ongoing losses and closures during the pandemic, Matty O’Reilly recently declared bankruptcy. He blogged about the experience recently and told us: “I completely took for granted that I’d always be able to simply be open to the public. That notion is not far-fetched, based on history, but without revenue on a daily basis my company couldn’t absorb the economics in which they were structured. I don’t blame the government, but without revenue or full capacity, I’m not sure what else I could have done.”