Anyone keeping an eye on the restaurant industry knows that delivery is the dominant narrative. This isn’t expected to change anytime soon, especially as most major brands partner with third-party aggregates and as those aggregates find favor from public investors.
Earlier this month, for example, Postmates confidentially filed for an IPO. It joins market leader Grubhub on the market, with UberEats and perhaps even DoorDash expected to follow suit this year.
Investors clearly like the potential they see in this space, and perhaps for good reason – delivery is here to stay. To adapt with consumer demands, most major restaurant brands are feeling their way through the landscape, partnering with aggregates (in some cases multiple aggregates) to make the logistics happen quickly and to ensure their convenience-seeking customers are happy.
As a result, UBS forecasts that online food ordering may rise by more than 20% each year to reach $365 billion by 2030. Further, analysts at Morgan Stanley believe that delivery could eventually top 40% of restaurant sales.
That doesn’t mean delivery is an easy silver bullet for a stagnant growth environment, however. As delivery aggregates jockey for dominance, the restaurant companies that are using them to scale delivery are navigating a number of challenges. For starters, they’re compromising the relationship with their customers by not being the deliverer. They’re also relinquishing those customers’ data. And, they’re often on the hook for some pretty hefty commission fees – 15 to 30% in most cases.
In a thin-margined industry with strengthening headwinds (like labor and food costs) this can be a burden too great to bear for many operators. As indicated last week by a group of frustrated McDonald’s franchisees, this issue seems to be reaching an inflection point.
In an email obtained by Crain’s Chicago Business, those franchisees expressed concerns over shrinking cashflows to support delivery, noting that their margins do not allow for the commissions that Uber (McDonald’s delivery partner) is taking.
Such challenges are non-factors for Panera, which introduced its own delivery fleet in 2015. At that time, having an in-house delivery model was only a thing for pizza and Chinese companies and Jimmy John’s. In a world filled with aggregates, it’s still pretty rare.
Panera tested several models, including third parties, but chose to go in-house for several reasons.
“First and foremost, we believed the delivery experience needed to live up to our expectations and what our customers expect of us. The most important thing to us was the ability to directly control our own destiny when it came to the customer experience,” said Dan Wegiel, EVP, chief growth and strategy officer.
The company also discovered it could drive more volume through direct delivery, yielding higher profits.
“Once we got it off the ground, we found quickly that using our own drivers was far more economical than paying a fee,” Wegiel said.
The company’s delivery business was made possible from its massive 2.0 investment, which laid the e-commerce foundation to facilitate the channel.
“Adapting that e-commerce platform for delivery was fairly easy. All we really had to do then was hire the drivers,” Wegiel said. “We know for a fact – because we track customer purchases and the MyPanera Rewards program – that when a customer engages in delivery, their purchases go up, their frequency goes up and the incremental value of their orders go up. The return is very clear for us. If you go through a third party, you don’t have that visibility.”
He estimates that “conservatively,” Panera yields approximately $5,000 in sales per week, per location.
“That is well beyond our break-even point with delivery, which we achieved within 90 to 180 days of launching,” he said. “The model is far more profitable than using a third party.”
That doesn’t mean Panera has been without its challenges. The company had to hire and retain thousands of drivers and put the infrastructure in place for essentially an entirely new business. Rising labor costs and turnover rates didn’t help.
“We had to develop a rapid and national-scale recruiting capability alongside a new operating model for our cafes,” Wegiel said. “All drivers and associates go through appropriate training and there are other logistics involved – hiring, integration, insurance – that most concepts wouldn’t touch. We put in the work and pulled on our expertise to launch a successful model.”
The delivery business continues to grow at a double-digit rate and has been Panera’s largest growth driver for the past few years. In November, the company expanded delivery to breakfast, illustrating the company’s confidence in the channel to translate across all dayparts. Wegiel has been involved since the beginning – leading Panera’s delivery and catering businesses from 2014 to 2017 prior to his current role – and said delivery has “definitely” exceeded his expectations.
“We knew it was an opportunity and early reads from consumer research showed that it could be significant, but we were surprised as to how significant,” he said. “There was clearly a need for these options.”
That need continues, but if or how the delivery space will play out remains a mystery. The marketplace is rapidly evolving and a disconnect is forming, as evidenced by the McDonald’s franchisees’ concerns – operators recognize the need to have delivery but don’t want to give up control and costs. This challenge is compounded when considering most delivery companies are still not profitable.
“When you inject a third party into your business, many of whom are still not profitable, that is an indicator of the future. By definition, you are splitting the pie up and everyone needs a share of that pie,” Wegiel said. “The million dollar question is, who bears the burden of that lack of profit? Is it corporate, the customers, the franchisees or the delivery companies? This model has not reached equilibrium yet. The economics have to get to a point where restaurants and franchisees feel they are sustainable.”
He thinks that will happen eventually, and said Panera is certainly keeping an eye on the segment to see how it evolves or if it poses a competitive threat. For now, however, he is focused on what is working for his company.
“I am comfortable saying this is a competitive advantage and it puts our franchisees in a better position,” Wegiel said. “We have seen remarkable results to date with delivery and it’s only the beginning for us.”
This article originally appeared on Forbes