Food-delivery apps have become big business across Asia – and globally – but questions remain about their real benefit to restaurant partners.
More and more delivery apps are launching – to the point that some Southeast Asian markets like Ho Chi Minh City in Vietnam are becoming saturated, with at least five operators competing to attract orders and restaurant partners.
There are four key concerns about the impact of delivery apps on restaurants:
● Cannibalisation of in-house sales
● Profitability after the app service takes its cut
● Data ownership and protection
● The diffusion of brand identity
Taken together, that’s enough to scare many of those restaurateurs who are not already signed up to such services into dismissing them out of hand. But managed properly, food-delivery apps can bring about incremental business – and profits.
Firstly, for a restaurant, the worth of signing up to a delivery app is really dependent on whether or not the product lends itself to delivery.
“Obviously certain types of food don’t travel well – such as Michelin Star restaurant food or hot pot. And tempura is never going to travel well,” explains Brian Lo, GM of Deliveroo Hong Kong.
“We want to get food from A to B into our customers hands at the right quality which we define by temperature and taste.”
Restaurant partners are usually worried food delivery will cannibalise their dine-in sales. But Lo claims this does not happen and more and more of its restaurant partners are seeing an increase in overall sales.
“Ninety to ninety-five per cent of our delivery partners say they make incremental sales by working with us.”
That promise is in contrast with independent research undertaken in markets where the delivery-app industry is more mature and entrenched in the market. According to a survey in North American undertaken by Morgan Stanley, “43 per cent of delivery patrons said that a meal they ordered in was replacing one they would have otherwise eaten at a restaurant”.
A salesperson in Canada who worked with multiple chains told Canadian-based journalist Corey Mintz that the average customer doesn’t use delivery platforms to discover new restaurants: they order repeatedly from the same half dozen.
But this is most likely a symptom of a mature market. Doordash was founded in 2013 in California, Deliveroo in England the same year and Foodora in 2014 in Europe. In Asia large-scale use of delivery apps is a little more recent, and some lessons have been learned by operators abroad before they expanded into Asian markets. In general, they appear more keen to develop partner restaurants’ businesses than overseas anecdotes suggest.
One of the best examples of such partnerships is the development of virtual brands: food concepts which have no physical restaurant presence, existing only on a delivery app.
Deliveroo now boasts 200 virtual brands, many of which do not even have their own kitchens.
“Every one of them adds 80 to 90 per cent revenue on top of the main brand,” Lo, pictured below outside a virtual brand’s ‘dark kitchen’, tells Saladplate.
Using existing infrastructure, many of the brands were created by analysing sales data. For example, analysis of Deliveroo data showed PizzaExpress there was a demand gap for pastas and salads. The company’s kitchens had capacity to deliver more food during lunchtime and in the afternoon. So it introduced a new dining concept under a new brand The Pasta Project, at first in the island suburb of Wan Chai, selling only on Deliveroo.
“It received tremendous feedback from consumers and has since expanded to five locations,” explains Lo. “With The Pasta Project, PizzaExpress has successfully tripled its lunch turnover without having to invest in additional staffing, overhead costs or kitchen space.
“In addition, the brand has acquired new customers from The Pasta Project and is now working to develop other virtual brands to delight diners with more variety and choices during different parts of the day and locations where Deliveroo’s data and analysis show cuisine and price gaps.”
The Data Dilemma
Data is the biggest issue with delivery apps for Ricky Lai, CEO of FWM Group, which operates restaurant chains including Morton’s Steakhouse, The Butchers Club and Red Lobster, across Greater China.
“These third-party aggregators or the delivery partner are getting all your data which is most valuable. What would happen if Amazon made a deal with a major delivery operator and that data?,” he asks.
Used properly, data from delivery apps can be a boon for a restaurant, but some people in the restaurant industry are concerned about what the app-owners are doing with the data and whether it can offer rival restaurants an advantage.
Deliveroo has developed strict internal policies on how it collects and uses data, which are published online for customers and restaurant partners alike to review. Lo says the company does not sell data to external parties and only shares order-specific information with restaurant partners, such as popularity of products, delivery volumes by time and customer spending patterns.
On a broader basis, Deliveroo will share aggregate data on trends relative to the suburb, but not financial data or information specific to one restaurant.
Lo cites an example of Deliveroo noticing that a lot of people in a certain district are looking for sushi for lunch and then not ordering, suggesting that there is an opportunity for restaurants to offer sushi at lunch time in that neighbourhood.
While some industry observers around the world question the role of delivery services and their impact on restaurants, there is clearly a view that data collection and analysis can benefit the industry.
“By aggregating supply and demand you can do a better job of matching,” explains Larry Illg, CEO of the online food delivery and ventures arm of South African-based Naspers. “These companies are increasingly using data and machine learning to understand what people want to eat and when they want to eat it. Restaurants will have to rethink their model.”
Naspers has invested more than US$2 billion in food-delivery companies around the world, including India’s market-leading Swiggy and Delivery Hero, which has just acquired South Korea’s Woowa. Woowa owns Baedal Minjok, which it says generated approximately 100 million orders during the third quarter of 2019 and Baemin in Vietnam, which took 1.3 million orders during the same quarter.
Illg said in a recent interview that the opportunities for food-delivery services are greatest in fast-developing countries due to rising middle-class populations and inefficient market structures. In less developed countries, people spend about 20 per cent of their time and money buying and preparing food – that’s about double the figure for western markets.
If a restaurant uses the data supplied by delivery apps efficiently, it can help make ordering more efficient and reduce wastage, thus improving profits. US dine-in pizza chain Little Caesars, the world’s third-largest pizza chain, claims one of the reasons for its price competitiveness is due to how it has used data from customer transactions to predict order volumes, meaning it can serve freshly made, hot pizza to walk-in customers with no waiting time or advance ordering. That’s the sort of approach the apps are now adopting.
Whose Brand Is It?
A common claim of restaurants who have been using delivery services for a long time is the feeling that the app has become a sort of middleman. It gets between successful restaurant businesses and their diners, then charges the restaurant to access their former customers.
There is also the diffusion of branding. When a restaurant operates its own in-house delivery service, the entire process carries the restaurant’s brand. But when you partner with an app, that brand can sometimes take the forefront. The delivery companies kit out their driver in uniforms for easy customer recognition, and their vehicles and delivery packaging usually contain the same branding.
Some delivery companies supply restaurants with food containers designed to maintain temperature or vent steam to preserve the quality of the meal. Bought in bulk, the companies can pass on the packaging to partner restaurants, saving cost – but again the down side is the containers usually come in the colours of the app not the eatery. That said, they are not compulsory.
Some customers might become so accustomed to the ordering experience they fall into the habit of thinking their food comes from the app rather than their favourite restaurant, creating a distance between customer and supplier.
This leads to an even greater concern: that less-professional delivery apps can actually damage the restaurant, because the whole delivery experience is only as good as its weakest link.
“If the consumer experience suffers it impacts the restaurant’s brand, not just ours,” says Lo.
As an example of how it can all go wrong, in Ho Chi Minh City Grab Food has experienced issues with drivers cancelling orders mid-delivery. The customer books the meal on the app, the app lodges the order with the restaurant and assigns a driver. That works well until the driver becomes frustrated with the length of time an overly busy restaurant is taking to fulfill the order – time he or she is not being paid for – and cancels the order. The end customer then has to start over, the restaurant is left with a half-cooked meal and Grab Food loses a commission. Does the customer blame the restaurant or the app? Worse, when they lodge another order the business will invariably go to another restaurant – or through another app.
While there is obviously a complaints-resolution service for such incidents, it does not help the customer sitting at home hungry…
This example also reflects that for services like Grab or Uber Eats, food ordering is an add-on to an existing ride-hailing service for which the company has adapted an app and driver-management system, whereas for ventures like Baemin or Deliveroo, food delivery is the core focus of the business and systems have been built from the ground up.
The Profit Conundrum
The most important question for any restaurateur considering partnering with a food-delivery app is: will it increase my profit?
Signing up to a delivery app was like “a death by a thousand cuts” one New York restaurant chain owner told the New York Times recently. “We saw a direct correlation between the delivery services and the reduction of our income.” He blamed the app for the closure of two locations.
In Asia, the commission delivery app services charge restaurants varies market by market. From our research the range is typically from 15 per cent to 25 per cent, depending on the development of the market and the number of competitors. In Hong Kong it generally starts at 25 per cent “with a narrow bandwidth on either side” according to one restaurateur. But Deliveroo’s Lo says his company, the territory’s market leader, charges between 15 per cent and 25. In Mainland China fees usually peak at 20 per cent. Customers are usually charged a delivery fee on top, although that is often built into the price.
Lai describes delivery apps as “marginally sustainable” in restaurants.
“A lot of it comes down to capacity management. If I have excess capacity then why not. But if I am opening a new restaurant and people are queuing for a table or I am booked out, then I cannot turn it on.”
Clearly the case of PizzaExpress launching a virtual brand has boosted its bottom line, but that requires a degree of creative thinking and a delivery partner employing sophisticated data analytics. That level of sophistication is not yet in place across the majority of delivery businesses operating throughout Southeast Asia.
Some restaurants use delivery services as a means of brand building – but that can be a double-edged sword. While an app may boost awareness of your brand among prospective customers, so too it may alert your existing customers to rival restaurants.
In conclusion, if your restaurant business is successful, you have queues out the door, or your staff and kitchen resources are being used at close to maximum capacity, there is most likely little point in partnering with a third-party delivery service.
But if you have excess capacity or are starting out, a delivery service may boost brand awareness, leading to inhouse sales which is where the real profit lies.