Cost Reduction

Restaurants Finding Alternatives to High Third-Party Delivery Fees

When the pandemic struck, and lockdowns pursued, creative restauranteurs turned to any viable means of sustaining themselves until in-house dining returned and, with it, their customers. Dining rooms became grocery stores, kitchens prepared ready-bake meals, and those that had no delivery procedures in place turned to third-party delivery apps.

Food-delivery apps are exploding, with businesses more than doubling their revenue since COVID-19 took hold. DoorDash, Uber Eats, Grubhub, and Postmates raked in about $5.5 billion in combined revenue from April through September, over twice what they did during the same period in 2019.

Now, as cities and states ease dining restrictions, the industry is left to see if the delivery apps will sustain their growth or if the high delivery fees have left restaurants searching for alternatives.

Restaurants Respond to High Delivery Fees

These third-party delivery apps typically charge between 20% to 30% of a restaurant’s sale in fees and commission. For restaurants to make a profit, many have had to start charging customers for these types of deliveries.

Noodles & Company reported a 128% increase in digital orders in the fourth quarter of 2020, when compared to the same quarter in 2019. Dave Boennighausen, the CEO, told Nation’s Restaurant News that, even though 90% of their 450 restaurants are open for in-house dining, 65% of their sales are still coming from their digital sector.

Noodles & Company’s CFO, Carl Lukach, reported that their third-party delivery fees added up to 5.7% of their sales in the fourth quarter and that their margins went from 17.2% in 2019 to 13.6% in 2020.

To compensate, the fast-casual chain charges customers that use these apps a 15% premium delivery fee. Those that place their orders through the restaurant receive no delivery charge.

Because of the disruption brought on by the pandemic, many cities passed regulations reducing the commissions that delivery apps can charge. Some of these include Santa Cruz, Chicago, Seattle, Los Angeles, Washington DC, Santa Clara, San Francisco, Berkeley, Tucson, and New York City.  Many in the restaurant industry would like to see these commission caps permanently expanded across the nation.

Third-party apps argue that, despite the high commission rates, they are still not profitable. Whether the third-party delivery app business model can produce a profit is still in question.

The Search for Alternative Delivery Options

Several alternative delivery models have emerged due to the increased demand for reduced delivery fees.

Relay: The Handpulled Noodle in Harlem, searching for lower fees, switched over to a delivery-only service called Relay. This service operates through third-party delivery apps. Owner Andrew Ding pays Grubhub a 5% marketing fee and Relay gets 10% plus a $3 fee, which he passes on to the customer.

Gothamist reported that the number of New York City eateries using Relay increased by 70% in 2020.

This delivery service is available in New York City, Philadelphia, and Washington D.C.

Third-party delivery apps are responding to the push-back from restaurant operators. DoorDash offers a delivery-only service and Uber Eats lets restaurants use their staff as delivery drivers.

Tock To Go: Nick Kokonas is the owner of Chicago’s award-winning Alinea and Roister as well as Tock, a restaurant reservation platform. When the social distancing measures and in-house dining restrictions began, he saw a need for a restaurant delivery platform with reduced fees. Tock To Go was created.

Tock To Go charges a flat 3% fee and works by accepting the order and sending it to the restaurant via the Tock To Go app. Restaurants handle the actual delivery using their staff as drivers.

Ordrslip: Agave Uptown, home to authentic Oaxacan cuisine in Oakland, realized third-party delivery apps were eating away at profits. Owner, Octavio Diaz, started working with Ordrslip, a company that creates a restaurant’s delivery app that works with their POS system.

BentoBox: Buddha Bruddah, a Seattle-based Thai restaurant, went with BentoBox. This company creates a restaurant’s website that takes online orders from customers. Owner Mark Mizer told CNET that “the restaurant saw more than $50,000 in online orders in April.”

Supporting Local Restaurants

As reports about delivery apps’ high fees and their effect on a restaurant’s bottom line spread, more customers began ordering directly from restaurants. As dining establishments continue to develop their own delivery apps and online ordering capabilities, that trend should continue.

Another way to support local restaurants that do not have their own drivers is by checking into local delivery services before going national. This keeps the money in the local economy and usually comes with lower fees and commissions.

Datassential’s survey revealed what those in the industry already knew, people miss going out to restaurants—for both the comradery and the food. The market research firm reported that eating at restaurants will help 70% of respondents feel normal again and that dining in will feel more special post-COVID-19.

Until that time occurs, let’s do what we can to help our neighborhood diner make it through the pandemic of 2020.

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