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Restaurants Must Embrace Online Delivery, and Fast

BloombergOpinion

(Bloomberg Opinion) -- Restaurant megachains already have a lot on their plate: The industry is too crowded and their menus and supply chains need an overhaul as consumers opt for trendy or healthy ingredients. But they must be careful that dealing with those ongoing challenges doesn’t cause them to miss out on their best hope for long-term growth. 

Over the next five to 10 years, nothing will be more decisive than online food delivery in sorting winners and losers in the dining sector. In fact, restaurant chains are at much the same moment that mall-based and big-box chains were in the first decade of the 2000s, when e-commerce had just started to show itself as a massive threat to the traditional retail model.

Restaurants Must Embrace Online Delivery, and Fast

Just 1.6 percent of all restaurant industry transactions in 2017 were conducted online for delivery, according to a report by Cowen Inc. restaurant industry analyst Andrew Charles. The same analysis estimates that online delivery accounted for $19.7 billion in gross merchandise volume, or 3.7 percent, of U.S. restaurant sales in 2017. That’s roughly in line with the proportion of retail sales that had moved online by 2008. And we all know how different the mall landscape is now compared to 10 years ago. 

Restaurants Must Embrace Online Delivery, and Fast

Online food delivery is likely to similarly transform the restaurant business, as GrubHub Inc., Uber Eats, Postmates and others make it easy to place orders and effectively train consumers to think differently about the occasions for which delivery is a logical option.

Restaurants Must Embrace Online Delivery, and Fast

Some of the major players in the dining business have gotten the hint. Domino’s Pizza Inc. has been consistently delivering robust comparable sales growth, in no small part because it was an early leader on digital-enabled ordering. Yum! Brands Inc., corporate parent of KFC, Taco Bell and Pizza Hut, took a $200 million stake in GrubHub earlier this year, and Panera Bread has built an in-house delivery operation that served 43 states as of May. On Tuesday, IHOP, owned by Dine Brands Global Inc., announced it is partnering with DoorDash to offer delivery from more than 300 of its restaurants, with plans to expand to close to 1,000 locations by the end of the year. 

But others appear to be approaching delivery only cautiously or at a small scale, likely because they’re worried each sale made in this format could be less profitable. But restaurants can’t afford to think that way. In the last year or so, consumers appear to be giving in to the routine of swiping and tapping a dinner order.

Restaurants Must Embrace Online Delivery, and Fast

Plus, chains such as McDonald’s Corp., which offers delivery from more than 11,500 of its restaurants thanks to a partnership with Uber Eats, are finding that the average order value is actually larger for delivery orders and that the offering is attracting incremental business, such as during late-night hours. That should offset some of the profitability concerns.

Restaurants Must Embrace Online Delivery, and Fast

Restaurants need to move quickly, because it’s hard to overstate just how many changes this format necessitates. For instance, they have to rethink how they use space in their kitchens and dining rooms. Consider Chipotle Mexican Grill Inc., which got 8.8 percent of its sales from digital transactions — including mobile orders for pickup — in the latest quarter. So the burrito chain has been outfitting its kitchens with second “make lines” to handle additional demand from online.

Sit-down chains also need to think about ways to make their food travel well. IHOP, for example, has introduced patented to-go packaging designed to suit the shape and texture of pancakes.

And restaurants may even find themselves wanting to change their menus. Uber Eats has been using its data to help local restaurants launch delivery-only menus. In Chicago, it found people were searching for suddenly popular Hawaiian poke, but there weren’t many options. So Uber Eats reached out to neighborhood sushi spots, which would already have some of the same ingredients, and asked them to try making the dish for the app. Imagine how transformative those kinds of insights could be if applied at the scale of a chain restaurant.

There are, of course, risks in embracing digital-powered delivery. It’s possible some third-party providers flame out, leaving them in the lurch. There could also be consolidation in this arena, which would make for a less competitive landscape and leave restaurants paying frustratingly high commissions.

Restaurants Must Embrace Online Delivery, and Fast

And while outsourcing delivery means restaurants don’t have to develop a new competency, it also means they are relinquishing control over how consumers engage with their brand. When diners buy Popeyes fried chicken through Uber Eats, they won’t be interacting with customer service workers that Popeyes trained. They’ll be interacting with some contractor driver. Still, these risks shouldn’t obscure the bigger picture.

On a recent conference call, Nigel Travis, who was announcing his retirement as CEO of Dunkin’ Brands Group Inc., called delivery the biggest change in the quick-service restaurant industry since drive-thru. He’s not wrong. Just look at all the mall retailers that have vanished or are in disarray because they were late to adapt to the digital swell. The same fate could befall restaurants if they don’t hurry up.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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