Restaurants lean on delivery as coronavirus delivers a blow to the industry
When the coronavirus began spreading in China earlier this year, chains including KFC, Pizza Hut and Starbucks began offering what seemed like a unique solution: contactless delivery. Since customers ordering food didn’t want to touch anyone else, those restaurants that were actually able to remain open found a way—literally—to deliver a solution. With contactless delivery, the delivery person drops the order at a designated spot and walks away. Then, the customer retrieves the food, without ever coming into contact with the other person.
Fast-forward a few weeks and contactless delivery has quickly become the norm for big and small restaurant operators in the U.S. after thousands of people tested positive for coronavirus. The pandemic has sent the dining industry into a tailspin, and already some wonder whether the sector will ever fully recover.
Even if restaurants find ways to exponentially grow their delivery business, “I don’t think delivery is going to save a lot of these restaurants,” says Peter Saleh, restaurant analyst at BTIG.
The coming shakeout
In early March, U.S. chains appeared to be holding up despite coronavirus concerns. Visits to Chick-fil-A, Starbucks and McDonald’s from Feb. 26 through March 7 were higher than during a similar 11-day period a year earlier, while visits to Burger King declined modestly, according to analytics company Placer.ai. Still, that activity was measured before numerous governors ordered restaurants to temporarily shutter their dining rooms. In mid-March, Starbucks decided to pull the seats inside and outside its coffee shops away from public view. Soon, McDonald's, KFC and others announced they wouldn't allow customers to congregate in its dining rooms. President Trump warned against gatherings of 10 or more people.
Lingering is now not just discouraged, it’s virtually impossible. U.S. restaurants are operating in a new reality.
Before coronavirus, delivery comprised a small yet growing sliver of the broader restaurant industry. Delivery orders accounted for 3.4 percent of all restaurant orders by the end of 2019, up from just 2 percent five years ago, according to David Portalatin, VP and food industry advisor at NPD Group.
As each restaurant tries to hold onto its piece of the market and grow its business, some shakeout is expected. Prior to coronavirus, restaurants across the board benefited from the rise of delivery as diners craved convenience.
“We’re willing to pay a premium and eat soggy fries,” says Portalatin.
According to NPD Group, 48.5 percent of the total $450 billion spent in U.S. restaurants in the 12 months ended in January, or $218 billion, came from off-premise orders including carryout, delivery and drive-thru. Those types of orders should still be feasible under current conditions, assuming consumers opt to dine on restaurant items rather than making their own meals.
Even if the consumer demand is there, that doesn’t mean the companies that have started to promote delivery are making money from it. Restaurants with large dining rooms need to ponder whether to scale back or eliminate those spaces and instead operate what are known as ghost kitchens, spaces where food is prepared for delivery, rather than for dine-in meals.
“I think it’s fair to ponder over the long term how this might influence the brick-and-mortar landscape,” says Portalatin.
A big winner: pizza
Some parts of the U.S. restaurant industry appear to be better placed to make it through the coronavirus outbreak. The main winner, if there is such a thing, is expected to be the pizza industry. That’s because big pizza players, and even the mom-and-pop joints, are already delivery pros.
“Pizza travels well, it feeds an entire family, it’s a good value for the money,” says Saleh.
Now, numerous chains have begun to offer contactless delivery. Domino’s even has an illustrated how-to guide to walk diners through the steps of placing and receiving a touch-free order. Restaurants are firing off upbeat yet somber messages, saying that their food arrives in sealed packaging. Plenty are reducing or waiving delivery fees as they try to remain afloat.
“Delivery is probably set to weather this storm, I think, best, versus I would say traditional casual diners or dine-in,” says Saleh.
Still, other than in the pizza category, Saleh doesn’t see delivery becoming a massive part of the overall industry. “It may grow significantly, but is it ever going to be 30 percent? I don’t think so.”
Prior to coronavirus, NPD’s Portalatin says, more than half of delivery orders came from a pizza restaurant. And even before coronavirus, “delivery orders from pizza restaurants were not growing,” Portalatin says.
In recent months, pizza chains including Domino’s often emphasized carryout orders in ad campaigns. That’s because they need to keep their delivery costs in check as a variety of competitors from burger joints such as Burger King and Shake Shack to sit-down chains such as Chili’s and Olive Garden have started to offer delivery, often through third-party delivery services such as Caviar, DoorDash, Grubhub, Postmates, Seamless and Uber Eats. Now, any restaurant that can increase its delivery capability is doing so. Chipotle just added Uber Eats as an additional delivery partner, while Starbucks said its delivery via Uber Eats should be available nationwide by the end of April.
Even Domino’s, the top pizza chain since 2017, is feeling the heat.
“We don't know how these folks are going to behave,” Domino’s CEO Ritch Allison said of third-party delivery operators on a Feb. 20 conference call. “The best metaphor I can think of is they're standing in a circular firing squad right now and they are going to continue to keep advertising, going to continue to keep discounting, because I don't think they have any choice. And so while we're not in the middle of the firing squad, we might get hit by a few stray bullets along the way.”
After Domino’s stock soared to a new high of $381.86 on Feb. 20, buoyed by its fourth-quarter report, it fell below $287 on March 16.
At non-pizza restaurants, about 80 percent of orders are being placed through third-party players, says Portalatin.
Those growing yet largely unprofitable third-party delivery services are doing what they can to retain and add restaurants. The same goes for the diners who place orders.
Grubhub, which also operates Seamless, warned in the fall that newer diners order less frequently than new diners used to in the past. That’s in part because if someone is a new diner on the Grubhub or Seamless platform at this point, that customer likely already orders from other services. It recently began trying to woo diners with offers such as free delivery from certain restaurants for a flat fee of $9.99 per month.
Grubhub says that to encourage the drivers it works with to accept smaller orders, like those from fast-food chains, it often needs to provide a subsidy, adding to its costs. Grubhub handles delivery for fast-feeders including KFC, fast-casual chains including Just Salad, and casual chains more closely associated with dine-in meals, such as Dine Brands’ Applebee’s and IHOP.
“I would think in this environment that there may be a surge in the usage of these third-party guys, and I’m not sure if that’s a good thing or a bad thing for them,” says Saleh, because they’re losing money on each transaction.
In a February 5 letter to investors, Grubhub issued a reminder that costs including marketing, technology, sales, account management, rent and other corporate overhead totaled about $2.50 per order in 2019. That’s a lot to digest even without free delivery, which is often offered to recruit new diners to the platform. “We realize it’s easy to forget these overhead costs when evaluating growth businesses, but they are real, critical operating costs,” Grubhub CEO Matt Maloney and Chief Financial Officer Adam DeWitt wrote in that letter.
Grubhub lost nearly $18.6 million in 2019 after posting a profit of nearly $78.5 million in 2018. During the coronavirus outbreak, it has been trying to boost orders by offering discounts such as 25 percent off to lapsed users. Grubhub on March 13 also said it was pausing the collection of up to $100 million in commission payments from independent restaurants to lessen the financial blow they face. Postmates temporarily waived commission fees for businesses in the San Francisco Bay Area. DoorDash and Caviar made similar moves nationwide.
In a March 15 email to customers, Grubhub pointed out that dine-in at restaurants was down as much as 75 percent. And that was before dining rooms in a number of states were ordered to close.
Smaller restaurants are rapidly changing how they operate amid coronavirus. Lou Malnati’s, a Chicago-area pizza chain that offers sit-down, carryout and delivery, had to shutter its dining rooms through at least March 30, under orders from Illinois Gov. J.B. Pritzker. It is now filling carryout orders through a curbside pick-up system rather than having patrons enter the restaurant, to cut down on personal contact. It is also encouraging those who opt for delivery to pay by credit card and to choose no-contact delivery, and reminded customers that its delivery drivers’ health is being monitored by managers.
Prior to coronavirus, across the U.S. more dinner meals from a restaurant were consumed at home than in a restaurant dining room, says Portalatin. The behavior, whether that meant picking up a quick meal at a drive-thru, grabbing a carryout order, or getting a meal delivered, was already there. Now, with consumers being told to stay home, including curfews in some places, delivery is set to become more prevalent.
One potential bright spot is fast food, which already counts on drive-thru orders for about 70 percent of its business. But if more people stay home they can’t be tempted to stop by a McDonald’s, Dunkin’ or another outlet on the way to or from the office.