What’s Cooking, America?
Running A Restaurant In The Age Of Uber Eats, Doordash, Postmates, (And Now Coronavirus) Needs A Better Strategy
Restaurants have been one of the most frequented places until even a couple of years ago. Celebrating the first job, an engagement, a big bonus, marriage anniversary — all of these had one thing in common, a restaurant.
Recently, with the surge of food delivery applications, restaurants have been observing an ever decreasing traffic. Joe Hargrave, co-owner of Tacolicious, mentioned that the number of lunch customers has decreased by 35 percent although revenue rose by 8 percent. Hudson Riehle, senior vice president of the National Restaurant Association’s Research and Knowledge Group, says that “63 percent of restaurant traffic now is off-premises.”
The food delivery services are helping increase the revenue with a major caveat of decreasing in-restaurant traffic.
But why is a decreasing foot-traffic bad when the revenue is on the rise?
Increased Commoditization
The food delivery apps promise food and delivery, not food from particular restaurants. One can search “Mexican food” and order from a restaurant that has decent to high ratings and low delivery fees.
Let’s take Uber Eats for example. We are able to select food by cuisine, which then takes us to a page containing restaurant names, ratings, and prices. More often than not, I decide based on the delivery fees I need to pay if the restaurant has decent ratings.
Decreasing Brand Loyalty
This is directly correlated with commoditization. Brand loyalty develops through brand interaction — visiting the restaurant, getting a taste of the service quality, and leaving with a great experience. The food delivery apps have created a brand experience wall. We have started associating the restaurant’s quality based on the experience we have on these platforms.
Food quality matters but not if we experience a 2-hour delay. Customers end up giving bad reviews and lower ratings in such situations that add to the restaurant’s existing rating.
Some companies, such as Uber Eats, are trying to de-couple the experience by asking for individual feedback for the food and the delivery. But in instances such as a delayed delivery or a cold order, it’s often difficult for the customers to decide who was at fault. They end up giving an overall low rating.
If we equate rating to brand loyalty in this gig-economy era, restaurants end up with much lower brand loyalty for the marginal increase in revenue over time.
Increasing Customer Acquisition Cost
Commoditization and decreasing brand loyalty feed directly into an ever-increasing customer acquisition cost should the restaurant ever decide to change its strategy of selling through the aggregators (the delivery companies) and go on its own.
Look at Grubhub’s updated model. Instead of an upfront discount to buy food from anywhere, each restaurant has its own associated coupon (see below).
One of two things could have happened here:
- Grubhub analyzed the low visibility restaurants on its platform and took a distributed approach to help those restaurants drive revenue.
- Instead of Grubhub spending money on discounts to drive customer acquisition, it handed over the responsibility to individual restaurants (brilliant!).
If the second is true, it brings back my point on the ever-increasing customer acquisition cost.
On top of that, the fixed costs of labor, rent, and maintenance eat up a lot of margins.
What did The CoronaVirus do?
The Coronavirus amplified everything that I have been talking about since the beginning. No physical contact so no more dine-in. This further decreased the chances of restaurants that were on the path to developing some brand loyalty. They ended up facing increased commoditization and increasing CAC. They can’t differentiate on food quality anymore since no one knows how the food tastes until they actually order it. Restaurants would eventually be forced to play on price (even though we haven’t seen it happen yet).
So What Can The Restaurants Do?
In an era when the power largely shifts to whoever is aggregating the demand, there are a few possibilities to explore.
- Reducing Costs Through Cloud Kitchens — I’m talking about the concept in general and not about Travis Kalanick’s new startup specifically. Cloud Kitchens offer a subscription model to the restaurant business where instead of having to own real estate, the restaurant owner can just utilize a “kitchen” for takeout only. Added benefits of using cloud kitchens are a more streamlined supply chain and labor efficiency. While this would help with the costs, this wouldn’t necessarily help with brand loyalty.
- More Immersive Experience For Customers — Gamification is an old concept, but businesses are discovering novel ways to apply them. Imagine a restaurant experience where you can cook your own meal in your virtual kitchen! You select the ingredients, you cook in your own virtual kitchen, you can even consult your “VR friends” on how to improve upon the recipe. You finish your cooking and the food looks delicious. Within 10 more minutes, you get the exact same food delivered — same look. same ingredients. picture perfect!
Restaurants can apply a variety of such techniques to gamify the experience. Gamification has the potential to increase brand loyalty to a great extent. But it’s not feasible for a smaller one-off restaurant. Given the huge investment and potential partnerships required for this, national chains can “potentially” take an aim at this until Google or Facebook decides to open-source a plug-and-play solution.
Finally, it’s really difficult for a restaurant to stick their head up among the crowd when the demand is not on their side. To a great extent, they are bound to get commoditized. But certain critical decisions can help them optimize their businesses better.
Image source: Google