Why should restaurants be worried about the Amazon & Deliveroo deal?

Updated: Aug 22, 2019

Today’s news that Amazon is investing heavily in Deliveroo isn't unexpected, but it is

extremely disappointing. In the past year I have written at length about the

challenges regarding Deliveroo as a platform – and it’s well known I'm not a fan.

According to Statista the market for online food delivery stands at $94,385m, having

seen a 14.8% year-on-year increase. The UK is among the most mature markets,

valued at £3,810m with 22.5 million users, increasing 11.6% year-on-year. It’s worth

noting these figures don’t include orders by telephone or for pick-up, which are still

significant.


There’s no doubt in my mind this is a segment that will continue to grow and become

more important to our sector. What’s interesting, however, is how businesses

respond to this ever-increasing consumer movement. While there’s been a clear

increase in the overall market supported by delivery, there’s a lot of evidence to

suggest this is eroding the dining out market at the expense of delivery, with a

degree of cannibalisation for brands that are delivering. This suggests those that

don’t respond at all are at greater risk than those that embrace this change. The

challenge most people recognise is the cost associated with delivery and how we

can change our business models to allow for this. For most small to mid-sized

branded operators, the obvious choice is to partner with a full-service delivery player

such as Deliveroo, which acts as more than just an aggregator by undertaking the

delivery on your behalf. The risk is low but the return is potentially low too by the time

you've shelled out on commissions ranging from 20% to more than 35% depending

on when you joined the platform and the brand’s size. 


The commercial challenges associated with commission are significant, not least

because most restaurant businesses are traditionally structured, with costs hovering

around the 25% to 35% of revenue for both labour and goods. Add in high rents,

taxation and head office costs and suddenly margins are tight enough without

another 20% to 35% on top. When the delivery revenue is incremental and can be

fulfilled by existing staffing levels, it’s a great bonus and can be profitable. When

bringing in extra staff to cope with demand it becomes more of a challenge,

particularly when displacing existing, more profitable revenue. 


At THINK Hospitality we've worked with one of our own investments this year to

analyse this challenge and found delivery was unprofitable on the aforementioned

commission levels, particularly when it distracted operators and had an impact on

the guest experience inside the outlets. Many other brands we work with are making

it work but they have to actively manage order volumes at peak times to avoid that

displacement and have seen delivery orders become too high as a percentage of

overall sales – leading some sites to become unprofitable.


There are other ways to work rather than through a managed provider. One is to

operate your own delivery service, taking orders directly or through aggregators. By

nature, aggregators look to build relationships directly with customers, leveraging

this relationship to drive loyalty and repeat business through their channel to multiple

vendors and outlets. The hotel industry has been battling aggregators in the form of

online travel agents (OTAs) for the past 20 years. Since their introduction in the mid-1990s, OTAs have increasingly gained market share, with some reports suggesting

it’s now as high as 41%. Many of the biggest hotel groups recently invested heavily

in campaigns to encourage direct bookings via their sites such as the “Stop Clicking

Around” campaign by Hilton and “It Pays To Book Direct” campaign by Marriott.

There’s a lesson to be learned here – ensure we don’t blindly walk into giving our

customers away to third parties. Instead, we should look to have a balanced strategy

of working with aggregators but also driving click-and-collect and delivery business

directly – ensuring you own the customer and cut the commission. The key to

successfully driving direct business is convenience and ease of use. I recently sat

through a presentation in which Yum! Brands said its research revealed these are

the key reasons people visit an aggregator rather than buy direct. 


The Statista report I referenced earlier points out something interesting – while the

whole food delivery segment is growing, platform-to-consumer deliveries are

declining in market share, more than 1% in the past two years. The same platform

suggests this could decrease by another 0.5% during the next year. Domino’s Pizza

has long been the brand bastion of good practice in this area but, of course, it’s

important to remember much of this market is made up of direct deliveries by local

and independent takeaway providers in villages and towns across the UK. Nando’s

and KFC are two other brands to have turned to their own delivery services of late,

selling directly and via aggregators.


I have seen a great deal of commentary on social media about the Deliveroo and

Amazon deal, much of it negative from our sector it must be said, with a few pointing

out the opportunities it presents in terms of innovation and moving the sector

forward. I can’t deny part of me looks forward to seeing where this moves things but,

equally, it worries me. This is a truly mammoth powerhouse buying into a business,

Deliveroo, which has already proved its ruthless desire to grow and control the

market at the cost of its partners. Amazon completely changed the global retail

landscape to the detriment of many operators. In the past few years Deliveroo has

moved from being a service provider that delivered food to consumers on behalf of

brands into one that’s created dark kitchens to fulfil consumer demand in areas

missing many of the most sought-after brands – a great and clever move. The

subsequent business decisions are the ones that are questionable and reveal a

distinct change in the way the business views itself, moving from service provider

and tech player into potential industry dominator. Last year was the defining year for

this, when the brand started introducing its own delivery brands in London and, more

recently, created its first consumer-facing outlet, in Singapore. Deliveroo is a

company that’s transformed from partner into competitor. It has the data and

customers and increasingly the know-how, developed on the back of working closely

with operators who trusted them going into dark kitchen partnerships.


Progress is inevitable and obviously important but our sector must adapt and work

harder to innovate for itself to ensure it survives and doesn't see one major player

dominate, as Amazon has done in retailing. There are many examples of how tech

players have dominated and changed sectors, from Uber to Airbnb.


Dark kitchens are far from a proven model – many operators have tried and failed –

but with the backing and technological nous of Amazon, Deliveroo has deep pockets so it can afford to keep failing until it gets it right. I predict we’ll see more use of the technology platform and customer database, from creating an in-house payment and pre-order mechanism to more customer-facing units. They will be aggressive, and move quickly.


As operators we need to respond by putting innovation and technology at the centre

of what we do, thinking differently so we can capture and retain our own customers.

Great operators will unite these skills with great hospitality and create brands that

are authentic and mean something – something Deliveroo Editions brands frankly

can’t deliver. Let’s make sure the hospitality sector doesn't become completely

commoditised. We are more than that – we connect people and provide emotional

experiences.


Originally published in Propel Premium Opinion

© 2019 by THINK HOSPITALITY LIMITED

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