Who Will Win The Restaurant Aggregator Race?

Foot traffic is flat as digital dominates top-line growth.

Purchases are shifting from individual brands to marketplaces.

Mobile influences the purchasing and ordering process, regardless of whether the product is ultimately delivered or picked up in-store.

Scale economies help big players, and brand affinity helps hyperlocal players compete – while brands in the oversaturated middle struggle to differentiate.

Rewards and loyalty programs are being retooled to drive personalized offers and promotions to acquire and retain customers.

Logistics and delivery are now make-or-break, as consumers have many options to find and purchase the same or similar products.

Just like retail, this is the state of the restaurant industry as we kick off 2020: caught in the throes of a digital reinvention as the role of the physical footprint is being rethought, and as tech plays as much of a starring role in its top- and bottom-line success as the products it produces and delivers.

Restaurants on the Digital Chopping Block

Like retail, the restaurant industry is rethinking its product, merchandising and delivery model to balance the consumer’s desire for a great experience with their demand for efficiency and convenience.

Like retail, the industry is adjusting to the changing preferences of increasingly time-challenged consumers living in increasingly connected homes, who like the experience of a restaurant meal – only eaten at home.

It’s an industry, like retail, that is faced with new competition – the direct-to-consumer brands that leverage mobile, scaled efficiencies in food preparation, new contextual commerce channels and logistics providers, threatening to destabilize how the traditional players keep their customers and find new ones.

And like retail, the restaurant industry is struggling to find the balance between teaming up with aggregators that provide reach, distribution and marketing efficiencies with the economics of paying as much as a third of the order value to these aggregators to market, deliver and process orders for customers.

And where the aggregator is intensifying competition for the customer by putting so much choice at the diner’s fingertips.

None of these issues are new, but the conversation about them took a new twist last week.

That’s when the news broke that Grubhub was pursuing a number of strategic options, including a sale, in an effort to deflect the potential attention of an activist investor. Its stock price rose by more than 17 percent on that news, and Uber’s stock price saw a slight uptick. Grubhub later denied such claims, after which its stock took a drubbing from presumably disappointed investors.

You don’t have to be a stock market analyst to interpret their reaction: that the food delivery space would be better off with fewer players burning cash to find and keep consumers and restaurants onboard – and that maybe Grubhub found a buyer to kick off that consolidation trend.

Grubhub saw its market cap reduced to $4.79 billion on Jan. 10, 2020, down from a high of $13 billion in September 2018 and $7.3 billion this time last year. Investors seem to be losing confidence – and patience – in the firm’s ability to find its way to profits and scale.

The Restaurant/Aggregator Fork in the Road

Restaurants and aggregators are at an interesting crossroads.

Restaurants are trying hard not to follow in the footsteps of their retail brethren a decade or so ago, when they ignored the impact of digital, mobile and voice – and the proliferation of connected devices –on their businesses.

Many recognize that, although small in terms of percentage of sales, the digital and delivery channel is growing more rapidly than visits to physical establishments. And in an effort to not miss out on those trends, they are following the classic digital commerce playbook: Be where the consumers are.

And if the consumer is going to aggregators to find stuff to eat and have delivered, instead of walking into their establishment to order or sit down at a table to eat, they need to make sure that they are there, too. It’s actually not an unfamiliar move – many restaurants paid to get on OpenTable, Yelp, and other reservation platforms years ago in order to fill seats in their dining rooms.

At the same time, accommodating this digital shift puts new pressure on those restaurants to anticipate demand from these new and unfamiliar channels, and to prepare those orders for delivery 30 to 40 minutes from when they are placed.

All while tracking and juggling the orders across the variety of aggregators they may support, and while ensuring that the quality of the food, when delivered, meets the consumer’s expectations for that order.

And do it without jeopardizing the experience of those who are in the establishments ordering, or are seated at a table to eat. That’s still the preponderance of their sales – not to mention the ambience and vibe that builds customer loyalty and repeat visits.

Aggregators have their own issues to address.

Grubhub CEO Matt Maloney told The Wall Street Journal in October of 2019 that the delivery space was “in some sort of a weird bubble ready to burst” after reports that restaurants were pressuring aggregators to lower fees and boost marketing and promotion for their brands. The race to the bottom for the aggregators competing for that business was described by restaurant operators as “dialing for dollars,” with the bigger brand names calling the shots and naming the terms.

Maloney also told investors during Grubhub’s Q3 2019 earnings call that the delivery space was commoditizing, as delivery capabilities – along with the supply side of the platform – looked largely similar across all of the aggregators. The opportunity for differentiation, he said, was on the diner side, where efforts to find and keep “promiscuous diners” loyal was the ticket to their top-line growth and profitability.

Of course, it is ultimately the consumer who decides the winners and the losers, and all platforms need buyers to thrive and survive. But consumers are only loyal to marketplaces that have enough density of supply to attract them the first time and keep them on board. Restaurants are the supply-side of the platform, and the reason consumers try out an aggregator in the first place – and why they hopefully stick around.

Keeping restaurants on board, and paying enough to keep the platform afloat, is a big part of delivering that diner’s experience – and is potentially the restaurant aggregator’s biggest vulnerability.

Your Margin Is My Opportunity

Aggregators make money in several ways: the demand generation or marketing fees they charge restaurants on the platform to drive demand, their delivery fee and their order processing fee.

Aggregators, however, make their margins one way – and that is on the marketing fees they charge on the supply side of their platform to drive demand, which is reportedly roughly 20 percent of the ticket.  The big brands aren’t contributing to that because they don’t need aggregators to build demand – they just need them to deliver their food. Aggregators keep the big brands on board as anchor tenants that attract consumers and drive consumer demand, but don’t really pay the freight.

Smaller restaurants do pay – and represent a big chunk of aggregator margins today.

These small brands don’t have the wherewithal to subsidize food orders, buy TV ads, blast social media with clever marketing campaigns, or otherwise let consumers know what they are doing and what new menu items are on offer. They probably haven’t invested in mobile apps, and perhaps have only bare-bones rewards and loyalty programs that lack the personalized experiences that create important touchpoints for their loyal patrons.

Like small, third-party sellers on Amazon, these small restaurants will pay to participate if they want to be online, and they believe their investments will deliver enough incremental volume from enough customers to fill in the gaps. And hopefully, they can somehow transition repeat customers into their own, less expensive digital channels over time.

Restaurants make their money, of course, by getting more butts in seats (at the restaurant or at home), which is why demand gen from aggregators can be valuable – at the right price, given their costs.

Restaurants could make more money and margin if they could find a way to get their costs of producing the food down and expand their capacity. New businesses models are giving restaurants of all sizes that chance.

Delivery-only (aka ghost) kitchens can expand existing restaurant capacity for delivery-only orders without compromising the dining experience in their establishments. This opportunity to handle delivery-only orders in delivery-only facilities gives restaurants more control over the margins made on those orders and more chances to add incremental volume to their business.

Large restaurant chains are creating their own delivery-only kitchens, and some are closing less trafficked storefronts to do that and drive higher margin orders. New ventures, like Travis Kalanick’s CloudKitchens, operate these kitchens without any physical restaurants.

In a ghost kitchen model, it isn’t clear that there’s much room for restaurant aggregators to drive margin from demand gen fees.  As more food orders move to ghost kitchens, that could be large enough to do their own marketing, aggregators are mainly providing delivery – a nearly commodity service.

What’s Next

Today, restaurant aggregators are both marketing and logistics platforms trying to create density on both sides. For as much progress as they’ve made, they are still quite small – 22 million active diners and 140,000 restaurants across 2,700 cities for Grubhub, for example. The challenge for them, and others, is building enough of a critical mass of hyperlocal demand and supply to create a profitable business just around restaurant delivery. And drive enough volume at the right price points to the smaller establishments to keep them interested, on board and paying to get notices.

At the same time, tech and software platforms are giving all restaurants new ways to get noticed – at the expense of aggregator demand gen margin.

Google is using a third-party platform to power order-ahead and delivery for restaurants that consumers discover when they search for places to eat near them – leveraging aggregators’ logistics expertise to deliver the meal, but little more. This traffic, directly to the restaurant site, provides an opportunity to convert a browser into a buyer, and create a relationship without an intermediary in between. Loyalty and rewards platforms that are integrated into the restaurant’s point of sale are helping even the smallest restaurants to embed loyalty with payments and create seamless, personalized experiences and a valuable digital touchpoint, as well.

Most expect Amazon to enter this space at some point, leveraging their 300 million Prime Member consumer engine, demand gen and logistics expertise to capture more share of the consumer’s spend on food. Amazon has scaled back its restaurant order and delivery plans over the last several years here in the U.S. but has made a strategic investment in U.K.’s Deliveroo. But Amazon owns Whole Foods, says it will open a new chain, has opened Amazon Go, with plans to open more, delivers groceries for free for Prime Members, has expanded their meal kit business, and makes it easy to order and refresh pantry stables from its website. Amazon and Google, both, have the potential to be the aggregator for food – not just the narrow vertical of it called delivery.

As we have seen from the retail reinvention over the last decade, the future of the restaurant aggregation space isn’t an either/or proposition, but one in which tech and logistics proficiencies increasingly drive consumer preference. Aggregators will be pressured to examine where they can drive the most efficiencies and get profits and scale. Maybe that’s by being marketing and delivery for restaurant takeout. Maybe that’s by being hyperlocal delivery across numerous verticals – helping retailers across all verticals solve their last mile challenges.

What’s obvious is that consumers like the new way of using digital channels to find and order their food – whether that’s to order ahead for pickup, make a reservation to dine in the restaurant or have it delivered to the places most convenient for them to eat it. But like physical retail, the restaurant industry itself seems ripe for disruption.

Just as there were opportunities for pure online retail with no physical stores, there will be opportunities for pure online food delivery without physical restaurants.

There will be opportunities for large players to operate large, online (delivery-only) kitchens and physical chains – using more economical facilities to prepare food for delivery for a single order or for catering and even tailoring menus to make those options more efficient and profitable.

Unfortunately, many small, independent restaurants, are caught in the squeeze. Cheap delivery, mobile ordering, and restaurant aggregators create a new powerful type of competitor, even if they, today, provide a channel that gets them playing the digital game.

Small restaurants can participate, too, just like specialty boutiques have survived – but not all will make it through. They may be the ones driving the aggregators’ margins today – but like the stores that lined the malls between the anchor stores in the physical malls, they are at risk, as the big players find new places to meet customers, leaving smaller players to fend for themselves in ghost malls.