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