I’m stuck at home. You’re probably too. While we are stuck at home, we’ve been relying on connections to the outside world more so than usual. The internet, video conferencing & delivery all come to mind. I’ve been thinking a bit about delivery and want to share an idea about takeout & the restaurant industry.
My friends in the hospitality industry are getting hammered. They’ve had to shut locations, layoff staff & are working on half salary. It’s going to take a long time before any of that gets better. In the meantime, delivery is their lifeline. It’s what’s keeping the lights on and it’s a segment of their business that got radically transformed in the last decade.
Delivery used to be a mom & pop affair. Your junk drawer had a pile of takeout menus, you sifted through them, picked a place & called your order in. A restaurant employee showed up 45 minutes later, dropped it off & took your cash. Then the internet happened & restaurants were really bad at online ordering because their job was to cook food, not do IT. It got even worse when apps came around. MyTown Thai is not making a delivery app.
So enter Seamless, GrubHub and now all of these people who are launching IPOs & competing in the multi-billion dollar delivery space. Where did all that money come from? Well, some of it is a shift from dining in to takeout & more of it comes from squeezing restaurants on commission fees. Restaurants are giving up 15-35% of their revenue on orders placed through delivery apps.
How did this happen?
What delivery companies did was offer a customer benefit individual restaurants could not provide, convenience: All your favorite restaurants are in one app. You never enter your credit card after the first time. To order, you quietly click buttons instead of yelling an order into a noisy phone line. That convenience & a healthy dose of advertising scooped up everyone who ordered takeout & aggregated them onto app platforms.
Individual restaurants were helpless to combat this. They also didn’t see that by aggregating the supply side (restaurant listings), delivery apps also aggregated the buy side (customers). With that achieved, they could put restaurants over a barrel by charging commissions, delivery fees & most lucrative of all, fees for higher placement in their apps. It’s almost like someone learned from Google vs the Yellow Pages and ran the paid search model on takeout.
The order by app model is a huge improvement over the old way & it should stay. That being said, the restaurants that were intermediated by delivery apps need to do a little disintermediation and kick them out. They need to integrate the delivery model back into their businesses.
Wait, didn’t you say that restaurants suck at IT & should be focused on cooking good food? I did. Didn’t they try to do this themselves once upon a time & it failed? They did. So why is it different this time? Because the model has been proven & they just need to copy what works. The key is working together. Restaurants need to band together to produce a region-wide delivery app that lists everyone.
I’ve never designed a delivery product, but I’ve designed enough things to know that takeout software isn’t rocket science. The tech is well established & there isn’t any secret sauce. You don’t need Silicon Valley or a massive war chest. Delivery companies make money on aggregation & FOMO (fear of missing out). They aren’t tech plays. Restaurants aren’t either, nor am I suggesting they be. What we need here is a service bureau.
What’s a service bureau? It’s a business that provides business services to other businesses. That’s a bit meta & recursive so let me give you an example that you’ve probably used, ITA Software:
ITA’s first product was an airfare search and pricing system called QPX. This system has been and is used by travel companies such as Bing Travel, CheapTickets, Kayak.com, and Orbitz, and by airlines such as Alitalia, American, ANA, Cape Air, Delta Air Lines, United Airlines, US Airways, and Virgin Atlantic. ITA also hosts its own airfare search website based on QPX, called “Matrix”, although it is not possible to buy tickets from it.Wikipedia
Basically if you bought an airline ticket online, the site you used plugged into another company to find, price & book the ticket. That’s what we need here.
Step 1 of this idea is to create a similar service for ordering takeout. These companies probably exist already, you can white label almost anything.
Someone who paid attention to my title might be thinking there’s nothing decentralized about moving all orders into a single processing bureau. That’s true too, just stay with me here. We need an entity performing the core ordering service. It’s the easy part of this idea.
Step 2 is where we get to decentralization, but we do it through grouping too. The convenience of aggregation (being able to browse every damn restaurant in town in one app) has to stay. No one will give up Seamless, Door Dash, etc… if they need to download three dozen apps for takeout. That means we need delivery apps covering entire metro regions to emerge. 99% of my takeout ordering is done within my city. I’d lose little in way of convenience if I deleted GrubHub & replaced it with a NYC specific delivery app.
I’m suggesting that restaurant trade groups & local government development offices come together to create regional delivery apps. This isn’t that farfetched an idea either. New York actively promotes its dining & restaurant industry as an extension of its tourism arm.
As an example, a non-profit organization in NYC would be formed in a public private partnership between the city/state & restaurant industry. This non-profit would be responsible for the creation of a delivery app, onboarding restaurants into it, managing operations & setting fees.
That non-profit would in turn contract with the service bureau to use their software & backend. They’d pay a flat fee or a sliding scale based on volume, but no commission per order. The non-profit would then create a pretty app that’s easy to use (let’s call it DeliverNYC). This app would copy the same popular features in delivery apps, but cut out the high commissions. They’d charge the credit card processing fee, a small fixed per order fee & a delivery charge if the restaurant wasn’t using their own employees for delivery.
Once a critical mass of restaurants were loaded onto the app, those restaurants would have to take a leap of faith & cut out all the other delivery services they were using (bye bye UberEats). It’d be a hard month or two or six, but they’d be getting 10-25% of their takeout revenue back. That’s a massive contribution for a business that has single digit profit margins.
That’s it. That’s the idea.
Restaurants got walloped by tech companies that copied Google’s paid search model. These companies now own the audience, but they aren’t a loyal locked in audience. Individually restaurants cannot fight back, but collectively they can because they are holding the ace. They are the supply side of a local product that the apps cannot replicate: hot, delicious food.
The restaurant industry is going to come out of the coronavirus in terrible shape. Every penny is going to matter for them. While GrubHub is being gracious enough to defer their commissions for now, that’s not going to matter much in six months. The hospitality industry should look backwards to guilds or forwards to DAOs & choose to act collectively to reclaim a lost piece of their business.
This idea requires a leap of faith. It requires solidarity within an industry where there will be tremendous pressure to cheat. It needs critical mass to be successful. All that being said, the reward is tangible. It’s more money for restaurant operators. If they acted collectively at a regional level, they’d be big enough to offer a competing delivery product, but small enough to be in this together. They’d also have all the power over their delivery competitors because they could stop taking orders through them.
So what’s the business idea here?
One idea is to be the service bureau & convince a city like NYC to back you. There’s going to be a ton of local pride, economic development & openness to new models when we enter recovery. This is a great story to pitch. Get it to work in one location, then the next is easier & so on. Sure you won’t be getting fat commissions like GrubHub, but you also won’t have marketing expenses, sales forces or onboarding teams to pay for.
Another idea is to take this to your local economic development office & create a public private partnership. Keep more money in your local community by reclaiming that takeout revenue. I mean think of how much money is going from your favorite hole in the wall to pay for UberEats advertising. Think about how you could temporarily employ a ton of out of work hospitality staff by hiring them to onboard restaurants into your app.
Finally, if you’re in the restaurant business then share this idea with other restaurant operators. The biggest benefit is to you.