Despite the disruption delivery can be on operations, not to mention its margin-hurting fees, the model remains a juggernaut and is gaining wider adoption by the day. For all its faults, delivery is now widely accepted as an antidote to lackluster traffic, and restaurant brands large and small are working to figure out how to do it on their own terms.
In recent months the nation’s largest restaurant brands have sealed partnerships with major third-party delivery players. Subway, Chipotle Mexican Grill, Chick-fil-A, Wendy’s, Starbucks and McDonald’s have all added or expanded delivery options. The last big holdout, Taco Bell, came on board in February. The Irvine, Calif-based chain’s scale and brand cachet mark a significant milestone for the delivery marketplace.
Except for a few naysayers, most major operators and industry analysts agree that growth by digital sales is no longer a novelty.
It’s reality.
Restaurant digital orders have grown at an average annual rate of 23% since 2013 and are projected to triple in volume by the end of 2020, according to research firm The NPD Group.
And the trend shows no sign of stopping. In fact, the $13 billion third-party food delivery market is projected to grow to $24.5 billion by 2022, according to a 2018 report by food strategy firm Pentallect Inc.
Delivery has emerged as a way to jump-start stalled traffic trends, which have been stuck between a 1% gain and flat for the past few years, according to NPD.
“Digital orders will remain an outsized source of growth for the restaurant industry over the next few years,” NPD Group food and beverage analyst David Portalatin said in an NPD report. “Operators who desire to grow need to embrace a digital strategy.”
Getting in the game
For the largest restaurant chains, delivery adoption has become a frenzied race as consumers — especially the Letter Generations — redefine convenience in today’s stay-at-home economy.
In 2018 Gen Z consumers made 552 million restaurant delivery orders, up 13% from a year earlier. They’re not far behind Millennials, with 553 million orders last year, a 3% increase from the year before, according to NPD.
“Gen Zs can FaceTime their friends, text their moms, and order a pizza all at the same time,” NPD’s Portalatin said.
Generations raised on technology have set the bar high for access, convenience and integration. And that’s forced restaurant companies to step up their digital strategies.
In mid-February, Starbucks Delivers grew to seven major metropolitan cities — Miami, Washington D.C., New York, San Francisco, Chicago, Boston and Los Angeles.
McDonald’s recently said delivery is now available at half, or 19,000, of its U.S. and international stores. Delivery is a $3 billion business for the Chicago-based chain. And despite pushback from franchisees, McDonald’s CEO Steve Easterbrook said it will heavily promote delivery through Uber Eats this year.
“We’re confident delivery offers additional growth potential for our business,” Easterbrook said in January. “We know we have an opportunity to let more customers know that McDonald’s will bring meals to their homes, offices and college dorm rooms.”
In November, Atlanta-based Chick-fil-A made delivery available at roughly half of its more than 2,230 locations. The chain is also testing two stores dedicated primarily to fulfilling catering and delivery orders.
In a February earnings call, Wendy’s said it expects to grow third-party delivery from 60% of its North American stores to 80% by the end of 2019.
Fast-casual chain Blaze Pizza, known for its custom 11-inch pizzas, is currently testing new 14-inch large pizzas, which the Pasadena, Calif.-based company developed to bolster its carryout and delivery business. Orders can be made through the company’s app, website or through Postmates.
CEO Jim Mizes said Blaze doesn’t need to do delivery, but it just makes sense.
“It is wise to do so,” he said. “We built our brand from the inside out and now it is time to capture some of the pizza consumed away from the restaurant too.”
Investing in integration
Early adopters of delivery know it can often crush operations. First-generation delivery, for example, requires employees to re-enter orders from third-party tablets, which can slow delivery times and distract employees.
So while many of the nation’s largest chains have launched some form of delivery over the past 18 months, Taco Bell and Chipotle didn’t move as quickly.
Julie Felss Masino, North American president of Taco Bell, said fans of the Irvine, Calif.-based chain have been asking for doorstep delivery of chalupas for years. But instead of jumping on the delivery bandwagon a few years back, the nation’s fourth largest restaurant company, in terms of sales tracked by NRN, paused.
When you’re 7,000 restaurants strong, maintaining speed of service is crucial, she said.
“Our goal is to be the best at Taco Bell. We waited until we figured out the integration,” Masino said.
When Taco Bell parent Yum Brands made a $200 million investment last year in Grubhub, the companies leveraged the partnership to create a frictionless system.
The Grubhub/Taco Bell integration sends orders directly to the kitchen resulting in fewer errors and faster service, Masino said.
And, while she declined to provide the percentage cut Grubhub is making from Taco Bell deliveries, she did say, the “world class deal” is working to the benefit of franchisees.
“All of this wouldn’t be possible without the scale of Yum,” she said.
Chipotle made a similar move last year with its partnership with DoorDash.
The Newport Beach, Calif.-based fast-casual chain now offers delivery through its own app, making it one of the only limited-service chains to offer doorstep delivery without sending customers to a third-party app.
DoorDash orders are directly integrated with Chipotle’s POS system. Chipotle’s delivery footprint has grown from 1,500 stores in late April to more than 2,200 of its 2,500 restaurants in early 2019.
Jersey Mike’s Subs recently went live with a POS-integrated system at more than 1,300 restaurants through Uber Eats. The integration ensures accurate sales and inventory reporting. It also allows the company to be more nimble with its menu.
“If Jersey Mike’s introduces a limited-time-only offer, this can be added to the POS and it will automatically show up on Uber Eats’ menus nationwide,” the company said.
But does frictionless ordering lead to more sales?
In its latest quarterly earnings, Chipotle said digital sales grew 65.6%. In 2018, digital sales accounted for 10.9% of sales or $0.5 billion.
At Taco Bell, it’s too early to tell. Delivery at about 4,500 restaurants, or 65% of its U.S. system, started in early February.
However, stores that have tested delivery since September are seeing check averages nearly double to $15. Masino said 46% of orders made in test stores are also reaching customers within 30 minutes.
“We are incredibly excited about what results we see,” she said.
Taking advantage of the boom
An estimated $250 billion in off-premise sales are up-for-grabs in the delivery marketplace, according to equity research firm William Blair. And there’s no shortage of players, both startups and household names, looking to get a piece of the action.
Third-party delivery partners Grubhub, DoorDash and Uber Eats dominate the market, with Grubhub taking the biggest slice of the pie, according to Second Measure, a firm that analyzes U.S. consumer spending.
In the six-month period from July 2018 to January 2019, consumer spending among the top three third-party delivery companies grew 29% nationwide, according to Second Measure.
But there are also newer players looking to get in on the action, including Pasadena-based Kitchen United, which launched in mid-2018 to support restaurants overwhelmed by off-premise orders.
“Delivery is breaking their existing systems and locations,” CEO Jim Collins said.
Kitchen United’s virtual restaurant facilities are designed with kitchens and prep stations to help partner restaurants fulfill off-premise orders for delivery or catering. The kitchen centers also give restaurants the ability to enter new markets without having to open a new location.
Collins said Canter’s Deli, an iconic independent restaurant in Los Angeles, uses its kitchen to accommodate large-scale catering and delivery in the Pasadena area, which is 20 miles away.
Seeing demand for its services, Kitchen United recently added a second facility in Chicago. Depending on the concept, Collins said some Chicago restaurants are projected to fulfill 40 to several hundred orders per day.
Other facilities are opening in the next few months in Atlanta, Columbus, Ohio, and Scottsdale, Ariz.
“It’s a race to keep up with market demand,” Collins said.
Proceeding with caution
Despite the growing number of chains forging partnerships with third-party delivery operators, some are treading carefully.
“What we are seeing today is largely incremental sales, so it makes sense for us to march down this road,” Lenny Comma, CEO of Jack in the Box, said during a recent conference call with investors. “We’re just cautious not to run down this road.”
For Jimmy John’s, that means going it alone, at least for now.
In early February, the Champaign, Ill.-based sandwich chain went rogue when it boldly said it would never work with Uber Eats, DoorDash and Grubhub.
CEO James North said it doesn't make financial sense for the chain to hire another company to perform a service the brand has been doing since it was founded in 1983.
“We just don’t trust anybody else,” he said.
About 2,800 restaurants employ 45,000 drivers who deliver sandwiches within 15-20 minutes, about twice as fast as a typical third-party order, North said. But there’s a caveat to Jimmy John’s speed: Orders, which account for one-third of sales, are only accepted for sites within five minutes of a store.
North said he’s not blindly looking away from third-party partnerships, which if used, would greatly expand the store’s delivery radius. But after researching last-mile delivery options, he said he found the 20% to 30% fees prohibitive and delivery times too long.
“This is not a high-margin industry,” North said. “Quite frankly, the math doesn’t work.”
Balancing in-house and third-party operations
Like Jimmy John’s, traditional pizza operators that have been offering delivery for decades are looking to strike the right balance between in-house delivery infrastructure and third-party partnerships.
Pizza Hut, which has said it’s fighting a misconception among consumers that it doesn’t deliver, recently began offering delivery through Grubhub at a small number of locations.
The company, a division of Yum Brands, told NRN that the pilot is a way “to attract new customers and grow our franchisee margins.”
The test does not involve third-party drivers. Orders come in through Grubhub, but Pizza Hut makes the delivery.
“Pizza Hut delivery through our driver network remains our strategic focus and core competency. We’ll continue to assess the pilot in order to inform our path forward,” the Plano, Texas-based company said.
Newport Beach, Calif.-based pizza brand Mountain Mike’s Pizza recently added third-party drivers as a complement to its in-house delivery fleet.
About half of its 205 franchised restaurants now offer delivery through Grubhub, DoorDash and Uber Eats. Jim Metevier, chief operating officer, said the company made the move after tests showed that third-party delivery was introducing the brand to new consumers.
“We weren’t in the consideration and now we are,” he said.
By the end of the year, Metevier said most restaurants will be in partnership with at least one third-party delivery operator. He said franchisees are seeing incremental sales and no “cannibalization” of the in-house fleet, which delivers for an average fee of $3.
Would Mountain Mike’s consider a future where third-party delivery replaces its employee drivers?
Metevier said that’s not on the table — for now. “Never say never, he said.”
Contact Nancy Luna at [email protected]
Follow her on Twitter: @fastfoodmaven
