Posted: Mar 29, 2019
I rarely had ‘takeaway’ meals as a child.
For us, it was a luxury. My stereotypical Asian mother drilled into us that ‘eating out’ was a waste of money.
“Why spend money on expensive junk food when home cooking is cheaper and tastier?” was her automatic response.
Fast-forward to 2019, and it’s not uncommon for my young household to indulge in takeaway dinners. Typically, it’s a Friday night, after my wife and I have exhausted the batch-cooked meals for the week.
On average, I’d say we eat out, or order takeaway, about once or twice a month.
I thought that was a lot, until I learnt some of my peers eat out two or three times a week!
Aussies, we do love our takeaway. In fact, we spend more on restaurant meals and takeaway then we do on electricity, gas and even secondary education.
Figures released by the Australian Bureau of Statistics in 2018 revealed Australian households spend on average $95.05 each week on both restaurant meals and takeaway. That’s about triple the amount of their electricity bills ($35.05) or what they spend on secondary education ($27.99).
In 2015-16, Sydney topped that list, spending $112.80, compared to a weekly bill of $74 for Darwin.
Australians now spend more money on restaurants per person than Americans do!
Can’t, too tired, or too lazy to cook
Meal delivery platforms such as UberEats, Deliveroo and Foodora have exploded in popularity over the last few years.
Too busy to cook the mid-week meal? Too hungover to drive to Maccas? CBF putting on pants?
Yeah, let’s order in.
The explosion of food-delivery platforms is an example of how consumer demands and wants are shifting with technology. We’re moving towards a society who value convenience over price, any time of the day.
Fast food and meal delivery is not a new concept. Franchises such as Domino’s pizza have delivered food to your doorstep for decades (since the 1980s). What has changed, however, is the variety of food available.
In a time not so long ago, restaurants were handicapped to serve their patrons who would prefer to ‘order in’. The cost infrastructure and logistics of setting up a delivery service were too expensive (and the food handling requirements too onerous). You needed to have drivers on payroll, you needed to buy a few scooters or cars with logos, you needed a website that users can find and an APP they could download.
It’s a big investment with questionable ROI.
This is precisely the problem that delivery platforms were invented to solve: helping restaurants serve their lazy, instant-gratification-demanding customers who value planting said butts on the couch watching Netflix while devouring a chicken-tikka masala and garlic naan combo.
Now, that’s a problem worth solving.
The benefits of offering food via delivery platforms
There is undoubtedly a myriad of benefits of partnering with food-delivery platforms for your restaurant.
Firstly, the ability to deliver food directly to your customer’s door, with established infrastructure and no capital investment, is an appealing one. Rather than being limited to the ‘number of seats’ in your dine-in restaurant, your market is expanded to patrons at home.
Secondly, the ability to be discovered by hungry ‘new patrons’ browsing on the app provides a new form of distribution compared to the standard marketing channels. This means you are potentially reaching a new audience.
Both of these, in theory, should result in more sales for your restaurant, which is the main benefit that delivery platforms sell generally. Or in other words, the better utilisation of assets.
Maximising financial leverage in your business
Think of your kitchen as a manufacturing operation.
The products that they produce are made to order, but have a very short shelf life.
The equipment that is required costs many hundreds of thousands of dollars, but only provides a very limited return, as peak times in a restaurant can be as few as 12 hours a week (primarily Friday night and Saturday).
The kitchen equipment costs the same whether you serve 100 customers or 1000 customers, and you are paying for it 24 hours a day, seven days a week.
As a profit-driven business owner, the question you should be asking yourself is: how can we get a better return on all that money just sitting in our kitchen?
Cue delivery platforms
Delivery platforms seek to help restaurants generate a higher ROI on their investment with better utilisation of their fixed costs and assets. Practically speaking, because your restaurant is exposed to a new customer base via deliveries, you are able to sell more food without having to invest in all the costs and headaches with delivery infrastructure.
In other words, you are better utilising your kitchen assets without any additional investment.
And better utilisation via higher sales should mean more profit, right?
The cost of delivery platforms
Delivery platforms need to make money too. They do this by charging you a commission for the sales they bring to you via their platform.
The commission rate varies between 20-35% of sales sold through the platform.
Most restaurants barely scrape net profit margins of 2-10% on a good day, so the question is, do the financial benefits of using a delivery platform outweigh this cost?
And hence the crux of this blog.
Now before we continue, I’m going to use UberEats as an example to explain my calculations. But this logic applies to all delivery platforms, including Deliveroo, Foodora, Just Eat, and so on.
So, should my restaurant offer UberEats?
As a rational, profit-driven business owner, the question you need to ask yourself is this: does the 20-35% commission paid to UberEats outweigh the additional sales generated from delivery customers?
Well, it depends on three factors:
Below is a simple financial model of a restaurant. As you can see, there is a base case and an adjusted case, which is driven by the above assumptions.
In this example, we have assumed that at a base case level, the business currently does $21,000 of net profit (3%), assuming a gross profit margin, excluding labour of 63%.
Now, what if the business decided to adopt UberEats?
Under the adjusted model, we have assumed that new customers via UberEats generate an additional 15% of sales for the restaurant. We also assume 10% of total sales are made via UberEats.
These impact the direct costs of the business, because the 15% of new sales generated attract the UberEats commission of 35%.
Factoring the 15% of new sales growth and UberEats commission, the business generates an additional $38k of new annual profit.
Under this example, it’s a no-brainer: you should offer UberEats.
What this example assumes is that all of the new sales generated is from new customers to the restaurant.
The ultimate factor for restaurateurs to consider in this equation is the cannibalisation of existing sales. That is, what happens if your current loyal customers decide to order via UberEats, rather than just stopping by in person, or even eating at your premises?
The problem here is that the overall mix of sales made via UberEats is higher, which can actually cost you more money if you’re not attracting any ‘new customers’ as a result of the platform.
To model this, let’s play with the assumption that no new sales are generated from the base case, and the overall mix of sales generated by UberEats stays at 10%.
As you can see, it’s a very different result. The business is actually worse off. Why? Because there are no new sales being generated from UberEats. Furthermore, the sales from your loyal customers who would ordinarily buy from you anyway are now ordering via UberEats which attracts a 35% commission. The result is that the overall costs of the business increase, with no actual benefit.
Economically speaking, UberEats is useful for your business only if you can attract new customers (or have the ability to serve more customers that are coming through the doors without spending more money on things like labour).
The ultimate risk is that you cannibalise existing customers which may end up eroding your profitability.
I mean, customers still tend to follow the same buying behaviour across the week, whether they dine out or in via delivery, so it’s not a far-fetched assertion.
How to protect your profit margins with UberEats
So the question is: how can you ensure you are protecting your margins when you partner with a delivery platform?
1. Charge a premium for delivery platform sales
After asking restaurant owners and business advisors about how they factor UberEats commissions into their business, I was surprised to learn there is the widespread practice of ‘two-tiered pricing’.
In other words, restaurants are charging a higher price for menu items sold via the delivery platforms, compared to the identical items sold in-store.
I had to check this out for myself.
On Friday night, I decided to indulge in some Guzman y Gomez.
I first checked the prices of the menu items via the UberEats app.
I then went to the local store, which is only a five-minute drive from my house.
Comparing the two menu items, I learntGuzman y Gomez charges a 20% price premium paid for the use of Uber Eats (excluding the fixed delivery fee).
This is an example of restaurants having a two-tiered pricing model to factor the UberEats commission (which I assume in this case is 20%).
I had no idea this was happening!
As an accountant and business advisor, I 100% recommend every restaurant charge a premium price to cover the commission paid to these platforms.
But as a consumer, I felt a bit misled. However, I understand restaurants need to charge a higher price to cover the commission. I guess I never thought to ask the question in the first place.
2. Design a specialised menu
I spoke with restaurant profitability expert, Ivan Brewer about this exact issue.
When asked how restaurants should think about two-tiered pricing, Ivan’s suggestion was to have a different menu altogether.
“Restaurants should design a specialised ‘delivery’ menu that is built for speed, and durability during transport. The outcome is that this lessens the price sensitivity as the menu items aren’t the same,” he says.
Practically, this makes a lot of sense. It’s hard to replicate the ‘food experience’ of certain meals. Can you imagine trying to delivery a soufflé?
Designing a high-margin, high-durability and high-speed menu built for delivery is a great way of ensuring your restaurant is making the right margin and delivering the right dining experience for your customers.
Interestingly, there are semi-automated, ‘ghost kitchens’ that are popping up in the USA, designed solely for delivery platforms. They don’t serve customers over the counter as they don’t have any front of house staff. They are solely production houses.
3. Build direct brand loyalty
The thing about delivery platforms is they don’t just want to bring new customers to your restaurant. They want to attract (some may say steal) your existing customers as well. I mean, how many of your new customers would have come to you without the platform?
Ivan’s recommendation is to “target every customer, whether coming via a platform or in-house, into your own loyalty program. An example might be a thank you note in the packaging, an offer if they order through your website or ring direct.”
Delivery platforms do not provide you with customer data, so you have to get it yourself.
As an accountant and business advisor, I can objectively say that it is likely that partnering with a delivery platform can be good for your restaurant business.
Assuming you can leverage the brand awareness, new distribution channels all while protecting and improving your margins, then it’s definitely a win for you.
But like every business decision, it’s important to understand the risks and rewards. Ensure you keep track of the total percentage of sales made via UberEats so you can understand the direct impact of it on your business’s profitability, and ensure that you are pricing accordingly.
As a user of UberEats, I’ll be honest and say that I feel a bit misled from a consumer perspective.
The price disclosed by UberEats only mentions the fixed delivery fee of $5. They don’t openly disclose that identical menu items can be more expensive via their platform.
Accordingly, I’ll be thinking twice about ordering takeaway via these platforms in the future.
Perhaps I just need to be reminded of my mother’s advice all those years ago: “Why spend money on expensive junk food when home cooking is cheaper and tastier?”
Sound advice as always, mum.
By Jason Andrew
March 29, 2019
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