As someone who’s utterly obsessed with food, I’ve always been fascinated by the way our dining habits and menu offerings have evolved over time. It’s like watching the culinary landscape shift and reshape itself, constantly adapting to the ever-changing preferences and dietary needs of consumers.
Just a couple of decades ago, restaurant-quality meal delivery was still largely limited to classic staples like pizza and Chinese food. But boy, have things changed! Nowadays, the global food delivery market has exploded, more than tripling in size since 2017 and reaching a staggering value of over $150 billion. And in the U.S. alone, the market has more than doubled during the COVID-19 pandemic, following a healthy historical growth of 8% per year.
The Rise of Tech-Enabled Dining
What’s behind this remarkable transformation? Well, a lot of it has to do with the advent of those appealing, user-friendly delivery apps and the expansion of tech-enabled driver networks. Suddenly, “ready-to-eat food delivery” has become a major category, unlocking a whole new world of dining possibilities for consumers. And let’s not forget the role that the pandemic played – with lockdowns and physical distancing requirements, delivery became a true lifeline for the restaurant industry.
But the evolution of the food delivery ecosystem doesn’t stop there. As the landscape continues to shift, new challenges and opportunities are emerging for a complex web of players, including delivery platforms, restaurants, drivers, consumers, and other tech enablers. And let’s not forget about the rapid delivery and “quick-commerce” platforms that have been raising significant funding, adding a whole new class of competitors to the fight for “share of stomach.”
Navigating the Delivery Dilemma
One of the key issues facing restaurants in this brave new world of delivery is the impact on their traditional profit margins. You see, historically, restaurants have measured their profits against three basic costs: food (28-32% of total), labor (28-32%), and occupancy/real estate (22-29%). This means that a typical restaurant should be running at around 78-93% of its total costs, leaving a profit margin of 7-22%.
However, as delivery orders have become a larger part of a restaurant’s business, that traditional profit model has been seriously threatened. After all, those delivery platform commissions of 15-30% can be pretty tough to swallow, especially when in-house diners who order high-margin items like wine and cocktails are no longer there to help cover the costs of occupancy and labor.
Restaurants are really having to think carefully about how to balance their delivery business against other parts of their operations. Some may choose to specialize in either dine-in or delivery, anchoring their business model around that singular focus. Others may have to get creative with their pricing, potentially raising overall menu prices or creating separate, higher-priced delivery menus to cover those additional costs.
The Delivery Platform Conundrum
But it’s not just the restaurants that are grappling with this evolving landscape – the delivery platforms themselves are facing their own set of challenges. Despite the explosive growth in the market, many of these platforms are still struggling to turn a profit. In fact, as the Wall Street Journal has reported, they’re not expected to become profitable for quite some time.
So, what’s the deal? Well, the platforms’ current economics are largely driven by those fees and commissions they charge to both restaurants and customers, as well as the delivery costs they incur. Our analysis shows an average contribution margin of around 3%, or roughly $12 on the average $40 order. And the cost of delivery isn’t exactly going down, as the economics of last-mile delivery remain a real challenge across the board, especially with increasing expectations for speedy, 30-minute-or-less delivery.
However, there’s still a lot of room for these platforms to optimize and find new revenue streams. Things like autonomous delivery robots, improved routing, and the ability to “stack” multiple orders per delivery could help cut those delivery costs. And as the industry continues to consolidate through acquisitions, the platforms may be able to reduce their variable marketing costs, which have been a major drain on their finances.
Evolving Consumer Expectations
Of course, at the heart of all this change are the customers who are fueling the surge in food delivery. And boy, are their expectations evolving! These days, they’re not just looking for convenience – they want a premium experience, and they’re willing to pay a significant premium for it.
In fact, our data shows that if a typical $25 meal from a fast-casual restaurant is ordered through a delivery platform, the customer might end up paying around $35 all-in, including delivery fees, driver tips, and platform service fees. That’s a 40% premium they’re shelling out for the privilege of having their food brought right to their doorstep.
But as the pandemic wears on and dining options start to increase, customers are going to be looking for even more from their food delivery services. They’ll likely prioritize features like fast, reliable delivery, the ability to customize their meals, and the option to bundle orders from multiple restaurants. And as the delivery ecosystem expands to serve more diverse customer segments, platforms and restaurants will need to figure out how to effectively meet the needs of everyone from the big-ticket spenders to those living in more sparsely populated areas.
Unlocking New Revenue Pools
So, what does all of this mean for the future of the dining industry? Well, it’s clear that the way people eat is continuing to evolve, and with that, new revenue pools are emerging. And the businesses that are able to tap into them will be the ones that come out on top.
One promising avenue is the data-driven, customized menu approach. By leveraging the wealth of customer data generated through delivery platforms, restaurants can build highly personalized menus that cater to individual preferences, increase order value, and improve conversion rates. It’s a win-win for both the business and the customer.
Another interesting development is the rise of “dark kitchens” or “ghost kitchens” – restaurants that have no physical storefront and focus solely on delivery. These lower-overhead operations can often afford to pay the higher platform commissions, and they give established restaurants the opportunity to experiment with new concepts and cuisine types without the risks associated with a traditional brick-and-mortar expansion.
And let’s not forget about the potential of virtual brands, which allow restaurants to leverage their existing brand equity to target new demographics or meal occasions. Take the example of Au Cheval, the renowned Chicago diner, which has spawned a successful spin-off called Small Cheval that offers a simplified menu. In a digital world, the possibilities for this kind of brand extension are truly endless.
Innovative Delivery Partnerships
Of course, the delivery platforms themselves are also getting in on the action, exploring new and innovative ways to improve the customer experience and drive efficiency. One interesting approach is the “food hall” model, where customers can place a single order that includes items from multiple restaurants. Solutions like Toronto’s Kitchen Hub Food Hall make it easy for families or groups to satisfy everyone’s cravings without the hassle of coordinating separate deliveries.
And speaking of efficiency, the platforms are also experimenting with “order stacking” and virtual concierge services that allow drivers to combine deliveries or even run additional errands for customers. Services like Rappi’s RappiFavor in Bogotá, Colombia, are showing how delivery can become a one-stop-shop for all sorts of daily tasks.
Rethinking Restaurant Design
Heck, the changes aren’t even limited to the menu and delivery models – the physical design of restaurants is also evolving to meet the demands of this new era. Take Burger King, for example, which recently unveiled plans for a restaurant that’s 60% smaller than its traditional outposts, with features like “pickup lockers” and dedicated curbside-delivery parking spots to accommodate the influx of to-go orders.
And who knows what other creative solutions we might see in the future? Perhaps a “taste your favorite cooking shows at home” type of offering, where meals are delivered so that viewers can dine alongside their favorite celebrity chefs. Or maybe a delivery service that lets you order a fully-equipped picnic basket to enjoy in your local park. The possibilities are truly endless!
Embracing the Evolving Landscape
At the end of the day, it’s clear that the dining industry is in the midst of a remarkable transformation. From the explosion of tech-enabled food delivery to the rise of customized menus and innovative delivery partnerships, the way we think about and experience dining is changing before our very eyes.
And for those of us who are truly passionate about food, it’s an incredibly exciting time. Sure, there are challenges to navigate – from the economic pressures facing restaurants to the logistical hurdles for delivery platforms. But the businesses that are willing to adapt, experiment, and embrace the changing landscape are the ones that are poised to come out on top.
So, whether you’re a restaurant owner, a delivery platform executive, or simply a food-loving consumer, keep your eyes peeled and your taste buds ready. Because the culinary revolution is just getting started, and the menu of the future is going to be truly mouthwatering.
