Traditionally, restaurants assess their profits against three main expenses: food (28% - 32% expenditures), labor (28% - 32%), and real estate-related charges (22% - 29%). With costs amounting to between 78% - 93% of revenue, profit margins should run between 7% - 22% of revenue (outlet fees not considered).
Enter the pandemic era of booming delivery orders. These orders were formerly thought of as additional tables for restaurants, with the food being served by a driver or delivery person, rather than a server. Delivery drivers were paid minimum wage and compensated with customer tips. These drivers often delivered several orders at a time within a certain radius of the restaurant. Restaurant owners appreciated deliveries as a means of increasing the income of a restaurant by boosting the use of its kitchen while maintaining a reasonable profit margin.
During the coronavirus pandemic, delivery services proved to be a lifesaver for eateries. Lockdowns of all types, including dining facilities for restaurants, casual dining, and quick service restaurants (QSR) threaten their livelihood and very existence. Throughout 2020-2022, the restaurant and QSR market quickly pivoted and migrated to online ordering models, using robust solutions like Quick Start QSR and QSR Accelerators. These allowed guests to order their desired food items online, with the option of either picking up or having the order delivered to them—with a commission fee. As such, food delivery services flourished, at the cost of customers, when the delivery companies did not fully charge restaurants.
But how does the restaurant and QSR market get out of this predicament? Is the market hopelessly stuck being commoditized by the food delivery apps? Or is there a practical way to reduce restaurant delivery costs for a restaurant chain or outlet?
McKinsey found that when delivery orders become a greater portion of a restaurant's operation, the conventional profit margins of 7% - 22% make funding the platforms' delivery charges—which range from 15% - 30%—unsustainable. In-house customers, who consume high-margin items like fountain drinks, or alcoholic beverages, may defray the expenses of occupancy and labor, making this less of a concern. But the economic model is seriously jeopardized if in-house eating continues to decline post-lockdown periods.
Growing total sales through delivery appears to be a wise strategy for reducing fixed costs. However, restaurants that place too much emphasis on increasing deliveries may see their in-house dining suffer, resulting in a reduction in the base from which their fixed costs are distributed. This concept has given rise to the dark kitchen, also known as ghost restaurants. These virtual restaurants may outsource their kitchen preparation and completely forego any physical locations, in favor of exclusive online order and delivery.
At the same time, a thriving delivery service may need more effort on the part of everyone involved, from the chefs to the management to the maintenance personnel. Restaurants need to implement new procedures and systems to meet the large number of delivery requests. Finally, restaurants should carefully weigh the benefits of delivery against the costs of other aspects of their operations to ensure the overall result is beneficial.
Restaurants wishing to continue serving dine-in, pickup, and delivery clients need to alter their pricing to match delivery’s increased expenses.
Let’s face it, the world has turned to digital methods to fulfill many of their purchasing needs. This is not going to change, even after the pandemic fades into a distant memory. If your chain or outlet is not there yet or needs a serious upgrade to a more robust solution, look at a rapid deployment of a custom solution with a QSR Accelerator. It is your fastest option to a system that gives you exactly what you need, now.
First, make sure you have your own reliable platform for online ordering. With your online and mobile platform ready for orders, give your customers the choice. Let them pre-order for a quick dine-in experience. Alternatively, promote the option for them to come in to do a quick pickup of their own. Although this option requires additional hot storage space, it keeps food delivery service fees under control. It also reduces the pressure of needing to build up your own delivery service option.
Then, also give your customers the option to get a full delivery service to their door. However, make this a third option, and pass on the additional fees to the guest. Doing so can be done with clear messaging that to maintain price consistency, your chain is providing guests with their choice of ordering. If guests still want full delivery, it is there as an option for an additional fee—that does not force a price increase across all customers.
By now, customers understand that delivery services are not free. There are premiums to be paid to cover these additional services. Another option is to provide a delivery menu, distinct from the pickup and dine-in menu. In this case, some restaurants boost their delivery menu prices to offset the additional fees.
On the delivery side, the restaurant and QSR market have three choices for the new world of food ordering. We suggest promoting dine-in (when possible) and pickup orders as the first two options. They can easily be done through the restaurant's online ordering solution.
And, not to lose clients who genuinely want delivery, offer this as a third option. Make it clear to these guests that delivery costs the most, and that your brand needs to be conscious of these additional fees, to not raise the overall cost of your services. As such, these fees are passed on to delivery-determined guests, either as an additional service fee or as a higher-priced, distinct menu.
Charles brings more than 20 years of experience in marketing, sales, product development, and management. With depth and breadth in varied markets, he drives the right go-to-market and demand generation strategies for OSF’s core products. A lifelong learner, he graduated from the University of Waterloo with degrees in management, business economics, and engineering. Charles also holds several certifications in leadership and marketing.