STREAMING NOW: Watch Now

Why Uber Eats and GrubHub partnerships are risky for restaurants

Today, you can get just about any kind of food delivered to your door.That's great news when you're hungry. Bu...

Posted: Mar 28, 2018 5:35 PM
Updated: Mar 28, 2018 5:35 PM

Today, you can get just about any kind of food delivered to your door.

That's great news when you're hungry. But delivery can be a risky bet for restaurants.

To reach customers, gain exposure and build a new channel for sales, restaurants that can't deliver food on their own are signing up with third-parties like GrubHub, Seamless, Uber Eats, Postmates and DoorDash.

Americans want their food brought to them at home or the office, and restaurants don't want to miss out. National chains sense an opportunity to grow revenue and are now racing to team up with outside parties, too.

McDonald's partners with Uber Eats. Dunkin' uses DoorDash. Pizza Hut, KFC and Taco Bell parent Yum Brands took an ownership stake in GrubHub last month. Chipotle, Red Robin, Jack in the Box, Cheesecake Factory and Outback Steakhouse also rely on apps.

Related: Supersize your takeout: Seamless and GrubHub merge

But these relationships are in their testing stages and can carry unexpected risks, including shrinking profit margins and shifting customer allegiances.

"It's difficult for a restaurant to just flip on the switch," Stephen Dutton, an analyst at Euromonitor International, said. "Navigating the best way to get involved in delivery is a big challenge."

No booze

Turning a profit in the food business is tough.

Partnering with delivery aggregators squeeze margins even tighter.

Restaurants pay the services 15% to 30% fees for each order customers place through their platform. "It is a very large expense for the restaurant chain to absorb," said Jeffrey Bernstein, an analyst at Barclays.

Customers are also less likely to ask for menu items that carry higher margins -- including soda and alcoholic drinks-- when they order in, cutting deeper into profit from delivery.

Domino's, the industry's in-house delivery leader, has argued the third-party model is "problematic" for restaurants. Domino's charges its franchise owners just 1% for deliveries.

Related: Why Domino's is winning the pizza wars

Olive Garden agrees that the equation doesn't work. "We're not willing to give up 20% to 25% just to get a sale," Darden Restaurants CEO Gene Lee said in January.

Cannibalization

Restaurants risk cannibalizing their more profitable dine-in sales by encouraging customers to stay at home.

Party sizes tend to be larger when customers come in to eat and restaurants don't have to pass off a cut to a third party.

Restaurants say orders that come through aggregators are "incremental" -- sales they wouldn't have gotten otherwise.

McDonald's has reported around 70% of orders on Uber Eats are incremental. Delivery has created new occasions and different times of day, especially late at night, for people to eat McDonald's.

Related: McDonald's to launch ordering app, expand delivery

Sara Senatore, an analyst at Bernstein, said third-party platforms were a cheaper form of marketing and a great way to acquire first-time customers.

But restaurants' returns start to diminish as those new sales become repeat orders through the platform. "It would be much kinder of you to just pick up the phone and call the restaurant" so the operator can avoid paying a commission, Senatore said.

It's even worse if customers decide to replace going out to dinner entirely with ordering in, Stifel analyst Chris O'Cull added. He believes restaurants will start to scale back on third-party relationships if they're cutting into higher-margin dine-in traffic.

Cold food

Integrating third-party delivery into kitchen operations can be a logistical nightmare.

Employees need to be trained how to store, cook, package and handle the food so it arrives at customers' homes hot out of the oven. Delivery services work with several restaurants at a time -- including direct competitors -- and there's no guarantee for the restaurant that their food will be the first stop on the driver's route. The clock is ticking and they can't afford to get it wrong.

If the order takes longer than expected or if the food comes cold and soggy, customers will have a "tarnished image" of the brand, Barclays' Bernstein said. Instead of blaming GrubHub or Uber Eats for the disappointing order, they'll fault the restaurant and may not return.

Related: Grubhub will deliver KFC and Taco Bell. Its stock is soaring

That's why Texas Roadhouse is reluctant to turn to third parties: "We encourage all our competitors to do as much delivery as they can, so they can deliver lukewarm food to the people who order it," CEO Kent Taylor said last year.

Customers also may write a negative review about the wait time or the food, discouraging other people from trying the restaurant, noted Erik Thoresen, a principal at research firm Technomic.

Changing loyalties

Customer loyalty shifts away from the restaurant to the delivery service in third-party partnerships.

"The relationship changes because the restaurant is now one step removed from the customer," Thoresen said. People are "going to a site where they can potentially find something else that's new and interesting."

Analysts also question who controls the customer data on third-party transactions. Restaurants are not able to tailor marketing and roll out new promotions effectively if they don't get those order histories, email addresses or cell numbers.

"You want to know who your best and most loyal customers are," said R.J. Hottovy, an analyst at Morningstar. "You have to make sure you have access to that data."

How to avoid pitfalls

If a restaurant decides third-party delivery is the best way to boost sales, analysts say they can take steps to build a happy marriage.

Restaurants need to negotiate low fees with aggregators to prevent delivery orders from eating into margins and reach data sharing agreements to gain customer insights.

Bernstein explained that restaurants should work with third parties to understand which foods travel well and ensure they are getting priority along drivers' routes.

Full-service operators must "protect occasions they really care about" and "create great experiences around them" to attract diners and defend themselves from the threat of cannibalized sales, said Eli Portnoy, founder of Sense360, an analytics firm that works with companies.

To guard against customers swapping out profitable dine-in meals, restaurants can limit delivery to off-peak hours -- late nights, mid-afternoons and early mornings.

"If you get the munchies at 10:00, and you want to order delivery, there's a good chance that's incremental," O'Cull said.

Huntsville/Madison
Cloudy
43° wxIcon
Hi: 50° Lo: 36°
Feels Like: 38°
Muscle Shoals
Cloudy
48° wxIcon
Hi: 54° Lo: 31°
Feels Like: 44°
Huntsville/Madison
Cloudy
43° wxIcon
Hi: 52° Lo: 31°
Feels Like: 38°
Decatur
Cloudy
43° wxIcon
Hi: 52° Lo: 34°
Feels Like: 40°
Fort Payne
Cloudy
40° wxIcon
Hi: 52° Lo: 35°
Feels Like: 37°
WAAY Radar
WAAY WAAY-TV Cam
WAAY Temperatures

Alabama Coronavirus Cases

Cases: 426543

Reported Deaths: 6126
CountyCasesDeaths
Jefferson62752920
Mobile30551554
Madison27303186
Tuscaloosa20835267
Montgomery19192305
Shelby18693114
Baldwin16513183
Lee12603101
Morgan12321113
Etowah11805168
Calhoun11206200
Marshall10236107
Houston8681148
Cullman8094105
Limestone807474
Elmore7923101
DeKalb771597
Lauderdale763183
St. Clair7599120
Talladega6224108
Walker5930174
Jackson583741
Colbert535473
Blount532083
Autauga522755
Coffee446256
Dale399781
Franklin368148
Chilton337865
Russell335910
Covington330168
Escambia321342
Dallas305196
Chambers288669
Clarke283133
Tallapoosa2630107
Pike251329
Marion247350
Lawrence245247
Winston229035
Bibb217047
Geneva203335
Marengo200829
Pickens196931
Hale177442
Barbour173836
Fayette171226
Butler170758
Cherokee160930
Henry155021
Monroe147317
Randolph141535
Washington138326
Clay127045
Crenshaw120244
Cleburne118423
Lamar118419
Macon116835
Lowndes111535
Wilcox103621
Bullock99728
Perry98219
Conecuh95120
Sumter89526
Greene76223
Coosa60515
Choctaw51524
Out of AL00
Unassigned00

Tennessee Coronavirus Cases

Cases: 690065

Reported Deaths: 8471
CountyCasesDeaths
Shelby767471128
Davidson71148672
Knox38985408
Hamilton34813329
Rutherford33298287
Unassigned22950127
Williamson21507140
Sumner18322232
Out of TN1618380
Wilson14511158
Montgomery14507149
Sullivan12634211
Blount12029126
Washington11949192
Maury11003123
Bradley1083891
Sevier10534108
Putnam9968140
Madison9163179
Robertson766685
Hamblen7018109
Anderson6818104
Greene6615108
Tipton622665
Gibson5656111
Coffee564882
Cumberland542173
Dickson540479
Bedford532889
Roane522979
Carter5115114
Lawrence511469
McMinn510073
Warren500053
Loudon497450
Jefferson480875
Dyer477282
Monroe459462
Hawkins448170
Franklin413062
Obion400580
Fayette399351
Rhea382856
Lincoln379844
Marshall346336
Cocke345656
Weakley341248
Cheatham338130
Henderson333857
Campbell325840
Giles323072
Carroll312759
White311743
Hardeman310452
Hardin298947
Lauderdale294331
Macon289350
Wayne262219
Henry261958
Overton254643
DeKalb242741
McNairy241042
Haywood240645
Smith231727
Marion229231
Trousdale228914
Scott226231
Hickman224934
Claiborne215929
Fentress213231
Grainger209636
Johnson202232
Morgan189815
Crockett180938
Bledsoe174910
Chester174837
Unicoi167944
Cannon158119
Lake156019
Decatur147726
Polk143817
Union139923
Grundy139321
Sequatchie137618
Humphreys133517
Benton132435
Lewis127720
Meigs114916
Stewart105820
Jackson104322
Perry94825
Clay94026
Houston93922
Moore8089
Pickett68020
Van Buren6637
Hancock4056

Community Events