Food delivery has experienced massive growth recently. Sarah Rush Wirth writes in Restaurant Business Magazine that this service has skyrocketed and is expected to grow 12 percent year over year through 2022.
Thomas Franck at CNBC puts hard numbers on that growth. He reports the market was worth $43 million in 2017, but it will be worth $76 billion in 2022.
As a deli owner, growth is often a top priority, and so offering food delivery is something that you may have been considering. The opportunity is certainly there. However, many deli owners still remain unsure whether delivery is the right move for them.
This post will take an in-depth look at the business of delivery services, what implications adding such a service can have for your deli, and how to know whether adding delivery to your own deli makes business sense.
Food Delivery Flourishes While Dining In Languishes
Charisse Jones at USA Today writes about how food delivery has disrupted the restaurant business in general. She says there’s been a recent phenomenon where traditional dining has taken a significant hit because of food delivery.
And this is largely due to the ease and convenience that online ordering provides.
“Convenience is among the chief reasons why consumers visit restaurants and delivery brings a heightened level of it,” says Warren Solochek, senior vice president of market research firm NPD Group. “Restaurants need delivery in today’s environment in order to gain and maintain share. It has become a consumer expectation.”
Andria Cheng also points out in Forbes that food delivery is especially popular among millennials. But don’t mistake this as a desire for simple convenience. Porter Plant at NUVI says the younger generation is generally less inclined to spend an evening at a fancy restaurant, stand in line waiting for a table and potentially encounter a poor dining experience. Many opt for having their food brought to them instead. It’s a question of value for time spent.
Elizabeth Dunn at The New Yorker even goes so far as to say that delivery apps may end up putting many restaurants out of business. That just goes to show how modern dining is evolving — and that deli owners should take notice.
The Potential for Increased Revenue
The first thing restaurateurs ask is whether adding delivery can improve sales, and if so by how much.
Melissa Wilson, a principal at Technomic who discussed how food delivery impacts sales at the recent Restaurant Leadership Conference in Phoenix, says companies have had some very favorable results with 60 percent generating incremental sales. She also notes that 25 percent of customers spend more on off-premise orders.
A good example is LA-based sandwich company Mendocino Farms. Tracey Lien mentions in The Los Angeles Times that they were able to increase sales by 2 to 3 percent shortly after offering delivery.
Delivery Doesn’t Always Equal Profits, Though
Food delivery isn’t a driver of sales for everyone. Dunn at The New Yorker highlights one restaurant, Mulberry & Vine, which started to deliver their food in 2013. Although they were successful in increasing their number of orders, CEO and founder Michelle Gauthier tells another side of the story.
She says that increased deliveries actually resulted in decreased profits for the simple fact that between 20–40 percent of the revenue gets gobbled up by third-party platforms and couriers. By her estimations, Mulberry & Vine’s profit margins dropped by a third in the past three years. “I think it’s a far bigger problem than a lot of operators realize,” Gauthier says. “I think we are losing money on delivery orders, or, best-case scenario, breaking even.”
Plant offers another, more extreme example. One restaurant, he notes, tried to ditch the traditional dine-in model altogether and switch to delivery-only. But it was a disaster, and the restaurant quickly discovered that the cost of delivery completely ate away at their profits. This combined with growing courier costs due to increased minimum wages and a tight labor market eventually put the restaurant out of business.
That’s why food delivery isn’t something you want to rush into. Do your due diligence first. Below are three questions to help guide your research.
1. Is Delivery Service Even Feasible for Your Business?
One of the first things to take into account is the increased resources you’ll likely need to implement a delivery service. While taking more orders is usually a good thing when it comes to growing your business, you may not necessarily have the capacity to accommodate this growth.
For example, if you’re working in a small kitchen with limited cooking power, growth on this scale simply may not be in the cards.
But if you feel you can keep up with extra demand, then the potential for increased revenue could be worth it. To ensure a smooth transition, the VSAG team recommends having a designated area for delivery prep and orders only, along with staff members who are solely devoted to delivery orders.
Another issue to consider is the initial cost, which Fora Financial explains can add up in a food delivery model. Some of the costs they mention include buying delivery vehicles, hiring drivers and purchasing containers to keep the food warm. They suggest you may even need to apply for a small business loan if you don’t have adequate cash flow upfront.
There’s also the issue of scaling-up. Lior Sion writes at Bringg that making this type of operation successful requires a steady, step-by-step approach. You need to take the time to train staff members, work with your drivers as well as explain the process to customers. Trying to move too quickly can work against you, so it’s critical to scale gradually and smoothly.
2. Are Third-Party Service Providers a Good Fit?
One way delis can overcome the problem of upfront costs is by partnering with a third-party company such as UberEats, GrubHub or Postmates. These platforms allow you to receive orders, and one of their drivers will deliver the order to your customer for you.
An added plus: These platforms provide you with access to a built-in database of customers. If someone nearby were searching for delis on GrubHub, for example, there’s a good chance they would find you.
The GrubHub team even cites research in Business Insider that found restaurants were able to increase their takeout revenue by an average of 30 percent by using online ordering platforms. One in five restaurants actually doubled their takeout revenue.
Of course, this comes at a cost. As we mentioned before, going through a service provider can eat up as much as 40 percent of total revenue — something you’ll want to be aware of. But by carefully calculating the associated fees and having a plan in place to absorb them (as well as operational strain), you can certainly make this arrangement work for you.
3. Is it Smarter to Simply Hire a Delivery Person?
Perhaps going through a service provider doesn’t sound appealing to you. In that case, you could always hire your own delivery person. Just be aware of the costs involved with adding in-house delivery.
Dylan Chadwick at QSR Automations says that to start you need drivers and vehicles. Vehicles (unless they’re bikes) require fuel, and drivers require paychecks.
According to PayScale, the average hourly rate for a delivery driver as of 2018 was $13.71. However, it can be as much as $20.57 depending on the location.
Marketer Emily Royster adds in TriMark RW Smith that you’ll also need vehicle insurance to make it work. Small business specialist Kent Thune explains that you can expect to pay anywhere between $750 and $1,200 annually for commercial vehicle insurance. If you’re using multiple vehicles, this can quickly add up.
Beyond that, there will be costs involved with hiring and training deliver drivers, which is something else you’ll need to factor in.
The bottom line is that there are some considerable startup costs that you’ll encounter with in-house delivery. In the long run, however, it might be the more profitable option.
Making the Right Call
There’s no denying that food delivery is insanely popular.
With this market increasing and traditional dining decreasing among some groups of consumers, delivery is an attractive service offering for deli owners. Under the right circumstances, it can be quite lucrative and help grow your business. On the other hand, it could create more costs than revenue.
Therefore, it’s crucial to look at the big picture and objectively consider all of the implications. Doing so should help you determine if this is something that is likely to work for you or if you’re better off leaving it alone for the time being.