Local restaurants are struggling to get customers to eat in. To capture those office workers and consumers who are too busy to eat out or take out, many restaurants are partnering with food-ordering and delivery startups such as Grubhub (US), Deliverloo (UK), and Ele.me (China). These startups can connect local restaurants with diners by posting restaurant menus online for diners to place their orders to be picked up and delivered by independent contractors. In 2018, McDonald's partnered with Uber Eats, and Dunkin' uses DoorDash. These startups make money by charging restaurants a commission fee based on the value of the orders placed through their platforms. Without owning physical assets and without employing delivery workers, these platforms can expand and scale up in different cities around the world just like Uber! No wonder Yum Brands (parent company of Pizza Hut, KFC and Taco Bell) took an ownership stake in GrubHub.
The business model is working well for GrubHub, DoorDash, Uber Eats, Deliveroo, Ele.me, etc., but it is not clear if this business model is beneficial for those partnering restaurants. Here is why. First, for high-end restaurants, they demand high profit margins by offering unparalleled on-site dining experience. Their brand image (or value proposition) will be affected negatively if they serve online customers that value convenience over experience. Second, for those restaurants that serve the mass market, they compete on price and operate with razor-thinned margins. Their margins will be squeezed even further when these platforms charge a commission fee that is 15% to 30% for each order. Third, these platforms may even cannibalize the dine-in sales with higher margins.
These platforms are good for consumers, but they can be a nightmare for traditional restaurants for the following reasons. Once customers get used to stay at home and stop eating out, many restaurants will earn a much lower margin but they still need to pay a high real estate cost. In that case, these restaurants may end up competing with cloud kitchens that enable entrepreneurs to cook meals in a shared facility exclusively for online orders without incurring the cost of prime retail space. In 2018, Deliveroo launched its cloud kitchen lots for entrepreneurs to rent in London and Paris.
If these cloud kitchens become successful, these online meal ordering and delivery platforms may no longer need to partner with local restaurants in the future. It is likely that some local restaurants will be left in the dust, while others may end up operating in the cloud.