That Ain't Working, That's the Way You Do It
Your money for nothing and your "clicks" for free
I recently got off a 45-minute phone call with a 3rd party delivery app billing department. I was desperate to understand their remittance report. As a CFO, it is my job to reconcile the fiction surrounding the funds deposited into my bank account by the 3rd party delivery companies against the reality that occurred in our stores. The one thing I will say after this exchange is that I am dumber for having endured that phone call. It was 45 minutes of my life that I will never get back.
For restaurants that wish to get into the delivery game, setting up agreements with 3rd party delivery apps like DoorDash, Uber, as well as others, is a necessary part of the game. Just like the travel industry's necessary reliance on online apps like Expedia and TripAdvisor to feed their revenue models, restaurants have come to rely on 3rd party delivery apps to fill this customer demand as well.
Restaurant 3rd party delivery apps serve three primary functions. They provide a fleet of independent drivers to pick up food orders from restaurants and deliver products to customers, thus they are a delivery business. These apps also generate orders via their own website marketplace, so they are also an ordering business. Finally, as these apps gather loads of information regarding their customers and partner restaurants, so they are a data marketing business. Whether restaurants like it or not, just like the apps that feed the travel industry for flights, hotel bookings and rental cars are a necessary part of their business models, 3rd party delivery apps are becoming essential to the restaurant delivery space and are here to stay. As such, the restaurant industry must learn how to manage this seemingly one-sided business relationship.
Here's what I learned in my 45-minute exchange with the delivery app billing department. That buried somewhere in the recesses of their website rules and my contractual agreement was the clause that promotions offered by the 3rd party app are deducted from my remittances. So, in this scenario, this app offers a monthly subscription fee to its customers. One of the perks of subscription is the waiving of all delivery fees. Now, when we established our agreement with the app, we built into our profile the same delivery fee our customers would pay if they ordered from us directly. Collecting that fee would, in part, offset our cost of the 3rd party delivery fee. What I discovered was, that when a subscription customer orders food from our restaurant, the 3rd party app doesn't absorb the waived delivery fee, they pass the cost onto the participating restaurants - they remove it from my remittance. Think about the beauty of this business model. They charge their customer a monthly service fee that includes the benefit of free delivery. They then turn around and discount that benefit to their customers from their member restaurants final remittance. As I hung up the phone, I said to myself, "That ain't work, that's the way you do it. Money for nothing and your ‘clicks’ for free."
Then I thought to myself, what the 3rd party delivery apps are doing is taking a page out of the credit card business play book. Because the same scenario occurs with credit card companies as well. When the credit card company offers their customers cash back or five times purchase bonus points towards travel, they are not opening their checkbook to pay for those benefits to their cardmembers. The merchants that accept those credit cards are paying the benefit. Based on the type of card and rewards offer, the exchange rate merchants pay for credit cards accepted varies from just over 1% to as much as 4% of the purchase. When a customer clunks down that super deluxe titanium credit card to pay for their meal, the merchant, who has no choice but to accept the card, pays for those rewards benefits in the form of higher exchange rates. To review, credit card companies collect huge annual fees from customers to qualify them for “rewards,” then hit up merchants with higher exchange rates to fund those benefits.
If truth in advertising were a thing of integrity, both these practices are suspect. I will go so far as to say they are deceitful. The grift being, these companies collect membership fees from customers to “qualify” them for privileged perks, then charge the merchant for the cost of those benefits. The reality is the merchant accepting those credit cards or utilizing the 3rd party app is paying for the benefits. I'm sure most membership holding customers are unaware of this razzle-dazzle, three card Monty game played with their benefits. Merchants, however, are keenly aware and must include the costs of the benefits in their retail price models. It is like a tax, where the customer absorbs the full burden of the program in the form of higher retail prices but receives a mere fraction of value that inflated cost yields as a "benefit."
As I said, 3rd party delivery apps are here to stay, but restaurants must conquer the 3rd party delivery app fee conundrum, or they simply will not survive. Working with 3rd party apps requires a keen understanding of the contract, tight operations that can verifiably prove that orders left the building complete and at proper temperature and well-oiled and timely reconciliation procedures. For the “make or break” of using 3rd party apps will be in mitigating the customer refunds withheld by those vendors. That plus adjusting the retail menu offerings on 3rd party websites to accommodate the convenience cost of using those services.
The reason there is animosity between 3rd party delivery companies and their partner restaurants has to do with fail rates. Even in the best run restaurants, there is a small percentage of failures. These include meals that are mis-prepared, cooked to the wrong temperature, or simply missed in the ordering process. When these mistakes occur in a restaurant, the operator absorbs the cost of remaking the item or discounting the final bill. Because customer satisfaction is job number one for most restaurants, they work diligently to mitigate these mistakes. 3rd party apps also have failures. There is a certain number of orders placed by 3rd party apps that simply go undelivered because a driver never shows up. Unlike a mishap within a restaurant that causes a discount charge, when a third-party app makes a mistake, the restaurant pays twice. First, they pay by making a product that never got picked up, secondly, they pay by getting a negative review from the 3rd party app customer that blames the restaurant, not their fee collecting delivery app company, for the mistake. In the 3rd party app delivery world, they are simply playing a numbers game. They know that a certain percentage of orders fail. But when they generate thousands of orders spread over multiple restaurants, they operate to a lower acceptable fail rate for their business model then restaurants. Simply put, restaurants and 3rd party delivery Apps place different priorities on customer service and acceptable fail rates. As such, there will always be contention between these two parties.