Third-party marketplaces' inefficiencies have led to higher prices for both restaurants and customers. However, first-party orders still rely on the same inefficient delivery network without the extra charges to cover it.
The last few years have seen a love-hate relationship between restaurants and third-party delivery marketplaces. On the one hand, third-party marketplaces bring incremental orders, introduce diners to new restaurants, and make it incredibly easy for restaurants to be online and deliver. On the other hand, marketplace orders are expensive for both restaurant and consumer, rife with guest experience challenges, and hard for restaurant operations to deal with.
Yes, marketplaces drive orders…
DoorDash had 37 million monthly active users worldwide at the end of 2023, most of them in the United States. Some 18 million of them were DashPass members in 2023. UberEats had over 80 million worldwide, with 15 million of them UberOne members. Although it is unclear how many program members will remain after the free one-year subscriptions through the Chase and Capital One credit cards ends, that is a huge number of restaurant consumers with high purchase intent concentrated in one place.
…but marketplaces also charge big fees
The marketplaces take a hefty fee, particularly for independent restaurants that don’t have the volume to negotiate. Marketplace fees range from 15-30%, depending on the features offered by the third-party platform to the restaurant and on the strength of the restaurant's brand. Fees are the obvious costs restaurants incur to receive a third-party order. These fees are somewhat understandable — the marketplace is bringing consumers to the restaurant (marketing costs), transacting with the customer (credit card processing and technology maintenance costs), and delivering the food (fulfillment costs).
Restaurants have largely increased prices to stay profitable
Understandable commissions are not the same as palatable commissions. As marketplace orders have grown — reaching 30 or 40 percent of sales for some concepts — restaurants have come to see third-party orders (and therefore third-party fees) as part of the business, not incremental to it. Over the last two years, most restaurants have stopped thinking of orders from the marketplaces as “incremental.” Instead, they now consider marketplace sales a regular and important part of their overall business income. As a result, many restaurant brands have increased marketplace prices over and above the general inflationary environment.
Emboldened, perhaps, by large chains increasing their prices on third-party marketplaces, everyone increased their prices. This approach may not seem like a good idea for a lesser-known independent restaurant being discovered for the first time on a marketplace. If customers have no in-store context for a restaurant’s price, they would seem expensive — but when everyone is doing it, even unknown restaurants with no in-store reference, they don't seem relatively expensive. Instead, delivery as a whole appears more expensive than ever before.
Price hikes were initially small, but as third-party guests demonstrated minor price sensitivity, restaurants increased prices further. Now, most restaurants price the marketplaces high enough to pay for the platform fees. A study by Gordon Haskett Research Advisors found that the average price premium versus dine-in for 30 major national brands is 19%, and that premium has nearly doubled since 2020.
Consumers like free delivery
Following the trend in eCommerce, where free shipping has become the standard, restaurant consumers have also demonstrated a preference for free delivery. The main benefit of DashPass and UberOne is free delivery. The marketplaces are full of free or reduced-price delivery offers from the restaurants themselves. Even if the underlying prices are higher and the additional service fees essentially offset free delivery claims, consumers respond to the free delivery claims.
This leaves first-party direct ordering in a conundrum: If direct online ordering prices are the same as in-restaurant prices, and if consumers prefer free delivery, how will a restaurant effectively compete with third-parties, who can give away free delivery and pay for the costs through service fees, advertising revenue and higher product prices? If restaurants try to offer free delivery, how do they then pay for the cost of delivering first-party orders?
Is third-party revenue actually more profitable than first-party?
On-marketplace price hikes have brought us to an unusual state of affairs: Third-party marketplace revenue may actually be more profitable than direct ordering.
The issue is that outsourced logistics are costly. There are a lot of entities involved who all must get paid — the marketplace, the driver, the restaurant, the technology, and the credit card processing - and the disjointed nature of it all means there is a lot of expensive inefficiency in the system. In the third-party marketplace model, the guest and the restaurant cover these costs through various fees and commissions. When the restaurant increases prices on the marketplace to offset its portion of the fees, the guest covers these costs exclusively.
With direct (or first-party) ordering, unless the restaurant uses its own delivery fleet, it must still pay someone to deliver the order. This someone is outsourced logistics. It includes products like DoorDash Drive, Uber Direct, Olo Dispatch, Toast Delivery Services, Relay, Nash, First Delivery, or some local delivery company.
What is a restaurant to do? The most tempting answer is to increase menu prices or delivery fees for direct ordering. If consumers value delivery, let them pay the full costs of it, no matter which channel they place the order on. But as inflation has worn on, and consumers have increasingly voted against price increases with reduced visits, increasing direct-ordering prices is risky. Certainly having different prices online versus in-store is risky. Worse, with the marketplaces’ ability to offer free delivery, higher direct-ordering prices could actually push consumers from the restaurant’s own website to a marketplace.
Decreasing the costs of delivery to make first party more profitable
Delivery costs may eventually come down in time through autonomous vehicles, drones, and similar innovations. However, for most restaurants, those solutions are unavailable (physically, practically, or lawfully) and are still in development and trial. One option to decrease delivery costs is through taking delivery in-house, thus eliminating the middleman who gets paid in the third-party logistics scenario and improving the delivery's efficiency (and therefore cost).
This approach sounds complex, and for this reason, most restaurants avoid doing it. But the pizza and Chinese segments have been delivering their own products for years. It is not as difficult as it sounds, particularly with new software solutions in place to manage drivers efficiently.
What the third-party marketplaces have taught the restaurant industry is that the gig-working model for delivery is just a superior economic model. Delivery drivers prefer the flexibility of driving when they want, need or are able to. The “gig ATM” is appealing, and to date only the marketplaces have figured out how to give drivers what they want. But if drivers want to work this way, shouldn’t restaurants be able to offer this model as well?
First-party ordering is the best guest experience
If restaurants can figure out efficient and effective first-party delivery, they can unleash the power of first-party ordering. After years of investing in online ordering and loyalty systems, the volume of direct, first-party ordering remains lower than restaurants would like. First-party ordering comes with more control over chargebacks and winback, more data for remarketing, and less “pay for play” sponsored listing results. First-party ordering is better for the restaurant, and figuring out how to make it profitable without increasing prices will create the winners in the delivery world.
For those restaurants who intuitively know that an in-house delivery fleet will create a better guest experience, but who are concerned about forecasting sales, scheduling drivers, dealing with callouts and no-shows, handling unexpectedly low or high volumes — it can feel like they are stuck between a rock and a hard place. They want in-house delivery, but they don’t want to deal with the headaches of employee drivers. What if a third way is possible? What if restaurants can offer a dedicated, on-demand delivery fleet that enables drivers to work how and when they want — gig-style — and also lets restaurants press the “easy button” to get their goods delivered?
Dedicated, on-demand delivery is possible. It’s in-house. And it’s also automatic. Sound too good to be true? Restaurants with high delivery volumes can offer a high-quality delivery guest experience, at a reasonable cost, by pressing the “easy button” of dedicated, on-demand delivery.
Value and convenience — what every customer wants
Delivery has come a long way since the pandemic made it necessary for every restaurant. Today, customers have more choices on how they wish to order from restaurants. As frictionless digital interactions become table stakes, execution and value become the differentiators. Restaurant executives who invest in the right technology to make delivery seamless and optimize the value of each order will undoubtedly be best situated to win in the years ahead.
The love-hate relationship between restaurants and marketplaces will no doubt continue, but the economics of delivery must improve for all parties. As more technology comes to market that makes delivery more efficient and valuable, it will have every chance of benefiting everyone.
AUTHOR BIO
Meredith Sandland and Carl Orsbourn are co-authors of “Delivering the Digital Restaurant: Your Roadmap to the Future of Food” and “Delivering the Digital Restaurant: The Path to Digital Maturity.” After each spent 20-plus years in corporate strategy and retail food, Meredith and Carl concluded that food in America was changing. They left their corporate jobs in search of innovation that would transform the restaurant industry. Ghost kitchens, virtual brands, digital marketing, the gig economy and lean operations are at the heart of the future they envision. Meredith is the CEO of Empower Delivery, software that enables high-delivery-volume restaurants to take back control of their guest experience. Carl is the co-founder of Juicer and an advisor to restaurant groups and technology solutions. Subscribe to their newsletter and podcast at deliveringthedigitalrestaurant.com.
