By Christopher Muller
In Part 1 of this analysis of the restaurant delivery system we looked at the owner/operator models which still offer some measure of control over price and quality. This is fast becoming an issue with the rise of the Ghost Kitchen where the ODP is an integral part of the equation. Here we present the larger challenges from the dominant ODP control of the marketplace. It is good to remember that most of the ODPs themselves are still looking to find profits in what they do, a suggestion that those profits will need to come at the expense of the restaurant providers in one way or another.
5. The Aggregator or On-Line Delivery Provider (ODP) – No Driver Fleet
If someone were to say, “Let me take care of all of your delivery problems for a small cut of your revenues” many restaurant operators, especially those eager to get into the market with the least amount of upfront investment, would jump at the chance. Enter the On-Line Delivery Provider with a business model built upon a brand name customer-facing APP, website or phone number and an enormous amount of back office computing power to drive order volume.
At its core, to be successful the Aggregator needs to be a world-class matchmaker for food orders, with both a large customer database of users and a broad assortment of restaurant menus offered in major cities. Like many of what MIT’s Bill Aulet calls an Innovation Driven Enterprise (IDE) the cost of customer acquisition is the key hurdle in entering this distribution channel. What it doesn’t need is its own fleet of employee delivery drivers. Capitalizing on the DIY gig economy, drivers are hired on a contractual basis, working as independent delivery agents with their own vehicles.
The barrier to lowering this high cost of entry has favored early market entrants and large well-funded digital innovators. Worldwide, the fastest growing ODP is Uber Eats, the natural extension of car service provider, Uber, with its existing enormous data base of users, an ever expanding fleet of drivers, and the understanding for a driver that delivering food with an APP-based pre-payment system is considerably faster and easier than dealing with human passengers.
The upside for restaurant companies using an ODP such as Uber Eats, from those as dominant as McDonalds or as small as the local pizzeria, is that there is no need to hire and train non-core employees. As touted by Uber Eats delivery service can begin almost immediately upon signing up. The downside, that has a potential for long term impact, is two-fold. The fee structure for traditionally low margin restaurants can be between 20-30% of a menu item price, leaving little to cover remaining expenses. Worse though is that the restaurant gives away its brand and trade dress image to the company making the delivery to the front door. McDonalds hamburgers may be in the bag, but the name on the ordering APP and the uniform on the person handing it to the customer says Uber Eats.
6. The Consolidator – Bulk “Bus Stop”
As noted, the most expensive single piece of the delivery puzzle is getting food from the restaurant to the front door, what is called “the last mile.” One proven way to minimize that expense is to have the customer meet the food delivery at a central drop-off spot (see: Amazon ). A start-up, Yun Ban Bao, in New York City is taking advantage of ethnic Chinese food deserts through direct targeted marketing using the dominant Chinese online service provider, WeChat. By doing so it is creating a captive delivery market with the advantage of pre-ordering and payment.
Taking online requests for delivery on the next business day, then consolidating orders using a bulk delivery model, Yun Ban Bao is lowering the cost of delivery while maintaining control with its own fleet of drivers. It advertises a data analytics service for smaller restaurants as well as being a revenue growth accelerator for restaurants in suburban locations which otherwise could not find new or broader market opportunities.
Using a pre-arranged group delivery network, often outside parks, office towers or apartment buildings, the system mirrors a bus route, not the more traditional taxi route model of one-on-one delivery. This also affords the network of restaurants a way to lower operating costs by controlling the production process in advance.
7. The Aggregator ODP – Owned Fleet
Some of the largest ODP players started in the delivery business by controlling their own fleets of employee managed delivery drivers. The global leader, Just Eat, has used this model throughout the UK, Europe and worldwide. But it also has worked directly with restaurants who have their own in-house deliver fleets to create a broad partnership. Just Eat acts as the online ordering platform, but then allows the local branded company to be the face at the door.
The ability to present a standardized customer facing brand identity means that trust may be established with the customer directly. While this can come at the risk of the restaurant losing its direct brand relationship, what Just Eat has been able to master is the collection of a vast customer database of its users. It has created a relationship with many of its restaurant partners to assist them in finding ideal store locations, menu item design and creative targeted pricing and promotions programs which would not otherwise be affordable or even available to smaller companies.
For these ODP companies, the costs for maintaining their own fleets or working as a hybrid with a local restaurant creates a higher operating expense, but these are often offset with a higher fee share from both the restaurant and the consumer. It also creates a competitive advantage by building a broader network of restaurants to choose from for the customer, which builds long term loyalty and habitual purchase behaviors.
8. The ODP Aggregator – Dark Kitchens
One of the greatest threats to the bricks and mortar restaurant delivery partners is the emerging concept of a Dark Kitchen. This is a space created by an OPD to facilitate the lowest cost per delivery mile from restaurant kitchen to the highest density of users. While this is similar to the Cloud Kitchen model, in this case the OPD establishes a cluster of small dedicated but competitive restaurant kitchens in a single site. A Dark Kitchen is also similar to the trending food hall concept, but comes with no direct customer interaction—no walk-in guest visits these production facilities. In the UK this was pioneered by Deliveroo with its urban RooBox or Editions concepts. Partner restaurants rent portable kitchen space from the delivery service and pay a larger percentage fee to cover the build-out costs for their space. Restaurants staff the kitchens at their own expense, as well.
Earlier this year, Grubhub invested $1 million in Green Summit Group (see Ghost Kitchen in Part I), a startup with nine virtual restaurants operating from a single kitchen. DoorDash is renting extra space from the Santa Clara Fairgrounds in San Jose, Calif., and making it available to foodservice operators who want to create delivery-only options. In Los Angeles, Postmates leased a commissary kitchen space so its restaurants can reach new customers. And UberEATS is exploring the concept with Poke Café in Chicago — a virtual restaurant serving Hawaiian poke bowls.
“We can work with existing restaurant partners to create delivery-only menus. (They would) appear as entirely new restaurants on the UberEats app,” Ambika Krishnamachar, UberEats product manager, said in an article on Mashable.
And again, while on its face this appears to be a positive opportunity for independent or chain restaurants to lower costs or disaggregate the dine-in from the delivery production process, it is not cost free. In fact, as a logical progression would suggest, the OPD Deliveroo service has realized that the actual local restaurant in this mix is not a necessity for success. Instead by using its own “innovation fund” it will to go directly into the restaurant business itself, creating “from scratch” concepts by working with celebrity chefs and data mining information from its enormous customer data base. 
As more of the OPDs look to find profits to pass along to the aggressive investors who have funded rapid growth, they will inevitably look to cut out the middleman and provide meals themselves to increase margins. The kitchen that may actually go “dark” is the local one on the corner down the street in an independent restaurant.
This is undoubtedly both an interesting and a challenging time for the restaurant industry and the Online Delivery Providers who are feeding from it. Neither side seems to have figured out how to make the new consumer demand for off-site delivery work to their complete advantage.
It is impossible to believe that any restaurant can survive if it gives away up to 30% of its top line revenues when the average net profit is less than 10%. No amount of increased volume in sales will make up for that. As Cameron Keng wrote in his column “Why Uber Eats Will Eat You Into Bankruptcy” in March, 2018:
Based on the average profit margins above, every restaurant that engages Uber Eats will lose money on every order they take. The more orders coming from Uber Eats, the more money a restaurant would lose.
At the same time, while it is hard to get exact information, it appears that almost none of the largest On-Line Delivery Providers, in any of the described segments is actually showing a profit. Uber Eats is only profitable in 27 of its more than 100 urban markets, and while Deliveroo’s sales rose in 2017 to £277 million ($356 million), the company lost an astounding £185 million ($237 million). Yet Uber Eats is offering over $2 billion to purchase/merge with Deliveroo.
Finally, as Jonathan Maze wrote in his Bottom Line column in early October the restaurant industry is simply unprepared for what appears to be a tectonic shift in traditional restaurant segments, consumer behavior, labor utilization, Real Estate valuation and investor interest.
If delivery is the future of the restaurant business, the restaurant business as it is currently constructed is in trouble.
The service is growing rapidly. But it’s increasingly replacing existing restaurant business rather than taking business away from grocers or other food retailers. 
As we noted in the beginning, it took the lodging industry almost 20 years to begin to make this kind of tectonic change and it is nowhere near complete. A few very large hotel companies, through merger and acquisition, have consolidated enough power to start the move away from handing over all of their pricing to the OTA’s. In economic terms, hotel companies are trying to go from being Price Takers to Price Setters.
At this early stage of the restaurant OPD’s domination of the delivery cycle, it is not clear that any restaurant organization is large enough to break the fever, especially now that McDonald’s is partnering with Uber Eats. While it may appear that the On-line Delivery Provider is a restaurant’s partner, friend or even savior, it is none of those. In fact, in order to become profitable the OPD is looking to become a direct competitor.
What is certain is that few restaurant companies, and certainly no independent operations, can survive the next two decades letting third parties dictate what convenience and price mean. In fact, this might be a good time to get out of the house and go visit your favorite local restaurant. Sacrificing some convenience for a great experience is a good value and that restaurant may not be around the next time you want to show up.