Are food delivery platforms a boon or threat for restaurants?

One of the most defining disruptions in the global restaurant space over the last decade has been the advent of food delivery platforms. In the past, most people would have had to visit a restaurant physically even if they had wanted a takeout. Only a few very popular restaurants had home delivery services since it is costly to build and maintain such services. However, with the advent of delivery platform aggregators like Foodpanda, Delivery Hero, GrubHub, Doordash, Uber Eats and the likes, the scenario has changed completely, and now almost any restaurant can take advantage of these start-ups to deliver food conveniently to their customers.

Food delivery platforms predominantly provide customer service, marketing, and logistics support to a restaurant. For the first two, they charge a commission rate to the restaurant, while for delivery it is usually the customer who pays. The marketing aspect here is crucial to note because this is touted by the platforms as the greatest value proposition they deliver. The claim is that once a food outlet is listed on their marketplace, they will gain a significant boost in visibility from potential customers, thus driving up their sales. The commission they pay to the platform is made up by the extra revenue they are now generating.

The platforms also provide restaurants with a valuable avenue to start a conversation with potential customers. For example, if they want to run a discount campaign or a BOGO offer, they can reach a much wider audience if they broadcast them through their marketplace.

Delivery platforms, on their part, essentially create value for themselves by aggregating customer demand. Their objective is to have a restaurant list as much comprehensive as possible so that they can have the most eyeballs on their app. In a finer sense, they are putting themselves between customers and restaurants and taking control of the relationship. Many of the customers ordering from a particular restaurant via the app may not be very loyal. So if the platform delists that restaurant, those customers may simply order from another option in the list. This is where a particular food delivery marketplace starts to wield huge market power.

In a capitalist system, the power imbalance among any set of economic players is highly likely to be exploited to the limit. In many parts of the world, and now in Bangladesh there are strong indications of such an imbalance creating discontentment in the food delivery space. For example, a not-so-well-known restaurant witnesses a 30 per cent revenue increase after being enlisted by a food delivery platform. To provide service to its new customers, the restaurant expands, by hiring more cooks, buying more equipment, etc. In return, the platform has been charging the restaurant a reasonable 25 per cent commission on each sale. But at some point, the platform begins to exercise its power in the relationship and hikes the commission to 35 per cent. With restaurants notoriously being a very low margin business, the extra percentage is too high for the restaurant to bear. But if the platform delists the restaurant, it is going to suffer losses anyway in the form of investments already made and would have to go through layoffs.

Much of the sale generated in food delivery platforms comes the big brands who have such a strong relationship with their customers that if they left, the customers would follow suit. So the big brands, which bring the majority of the eyeballs to the app, are usually left alone. Instead, the smaller players are the ones bullied in this manner into a high take rate.

The tendency to pressure restaurants into giving untenable commissions took a defining shape during the pandemic in particular when restaurants were already suffering from a drastic drop in in-store sales. Foodpanda, the leading food delivery platform in the country, was accused by a number of restaurants, including the food business owned by the author, of demanding 28-35 per cent in commissions and an additional 20-25 per cent in discounts. The platform basically wanted to capitalise on the preference of home deliveries during the pandemic by offering discounts to further incentivise customers and achieve a behavioural shift by targeting those who in general would not consider home delivery. However, chaos ensued when the restaurants were expected to bear the full brunt of those discounts. If a restaurant has to sacrifice 40-50 per cent of its margins via commission and discount, it will not survive for long.

As of now, there is no reason to assume that Foodpanda is the only delivery platform that will utilise its outsized market power to force restaurants into deep bleeding. If some other platforms were to take the crown tomorrow, they might work in the same manner. One persistent reason is that the food delivery aggregator model itself has not proved to be highly profitable under regular circumstances, which is forcing players across the world into finding ways of increasing margins.

Another looming threat for restaurants is the advent of cloud kitchens coupled with private labels from the platforms. For example, since Foodpanda controls so much of the consumers’ attention in the restaurant food space, it can one day start its own food brand within a cloud kitchen and sell food directly to customers. By manipulating the platform, it can ensure maximum coverage and promotion of its own brand over competing restaurants. This can also cause a catastrophic drop in revenues for lesser-known restaurants.

In countries like India, Indonesia, China, the United States, etc. there has already been strong pushback against food delivery marketplaces over such predatory and unfair practices. One would not be surprised to encounter the same at some point in Bangladesh. Therefore, at present, it is a burning question of whether food delivery platforms are actually beneficial or harmful for restaurants at large.

For now, the only option for a restaurant to escape from becoming a victim of a “bait-and-switch” manoeuvre by a delivery marketplace is to start their own home delivery service. This should ideally be supplemented by a strong online presence and a mobile app. Domino’s is a notable example in this regard. However, it is definitely easier said than done because a particular customer would not entertain keeping 10 different restaurant apps on their phone. Therefore, a bigger challenge would be to build a brand  that is strong enough to attain that top-of-mind position in the customer’s mind.

The writer is the CEO of Alpha Catering. He can be reached at [email protected]