Third-party delivery (such as UberEats, Grubhub, and Doordash) has gained a bad reputation due to the exorbitant fees charged by the platforms. However, changes in Americans’ eating habits are making these platforms vital for the survival of restaurants. About half of all restaurant sales in the US are consumed off-premises, and these off-premises options (catering, delivery, and takeout) continue to be the highest-growing channel in the industry. The food delivery market has tripled since 2017, and in the US, the market doubled during the COVID-19 pandemic. Americans have shifted from cooking at home to buying from restaurants. According to Carl Orsbourn and Meredith Sandland in their book, Delivering the Digital Restaurant, in 2014, restaurant revenues surpassed that of grocery stores for the first time in American history, meaning households are spending more for restaurants than for take-home groceries. If you’re not offering delivery, you could fall behind your competitors or, even worse, not generate enough sales to keep your restaurant’s space. Although the fees seem high, third-party delivery is effectively the cheapest form of direct advertising in terms of customer acquisition cost, and if done right, is the fastest way to maximize your profits. This article will show you how to maximize profit with third-party delivery.
Identifying if Sales are Too Low in a Restaurant
Implementing third-party delivery should be considered when sales are not high enough for your space or the amount of fixed labor you have. Your sales are not high enough for the space that you’re in if your occupancy costs are greater than 8% of sales (more on this here). Fixed labor is not just management salaries that must be paid regardless of sales volume, it’s also the hourly employees you need to schedule on the slowest hours, meal periods, and days of the week so that you can stay open. Typically, fixed labor as a percentage of sales will increase if sales decrease. Therefore, if you notice that labor increases as a percentage of sales when sales decline or vice versa, determine whether it is the fixed labor causing that. If so, it’s a sales issue, not a labor issue. The example below shows a quick-service restaurant’s labor as a percentage of sales at different sales levels.
In scenarios 1 and 2, the fixed labor amount does not change; the variable labor ratio stays the same, and the sales increase by $100k in scenario 2. When sales are at $400,000, labor as a percentage of sales is 5% lower. Ideally, labor cost as a percentage of sales should be a percentage that allows for total labor and food cost (prime costs) to not exceed 65% in a full-service restaurant and 60% in a quick-service restaurant. A high sales number makes this more feasible.
Ensuring Profitability of Third-party Delivery Sales
To ensure your third-party delivery sales are profitable, ensure you’re not reducing capacity for on-premise dining and direct off-premise dining by using too much labor or kitchen resources to fill those third-party sales orders. If your kitchen space is fully utilized or you need to add more labor to service third-party delivery sales, then making a profit on third-party delivery sales will be difficult. The next set of scenarios shows the same restaurant as above at different sales levels and how adding third-party delivery affects net income.
These scenarios mirror the first set with the same differences in sales, the same fixed labor costs, and a 35% cost of goods sold. In scenario A, the restaurant does not have third-party delivery sales and only brings in $300,000 in sales, resulting in a net loss of $5,990. In scenario B, the same restaurant introduces third-party delivery sales but with increased variable labor. Unfortunately, this 33% increase in sales requires an increase in labor costs but still nets a $10,480 profit. The same restaurant implements third-party delivery sales in scenario C without additional variable labor costs. As you can see by the net income of $29,000, this is the ideal type of scenario.
The restaurant above was not profitable before implementing third-party delivery because its sales were not high enough for its space, and its kitchen was not fully utilized. After implementing third-party delivery, the restaurant will be profitable, assuming the sales would increase by 33% due to third-party delivery. This example assumes that prices are not increased by the restaurant when selling through third-party delivery, a practice that can be used to add some risk cushion to achieve the same results as above.
Unless you’re already operating with a little extra labor, it’s unlikely that you’ll be able to generate a significant amount of third-party delivery sales without some increase in variable labor costs. However, you may be able to add variable labor at a lower rate than your regular in-house team, resulting in something between scenarios B and C above.
This analysis assumes that the restaurant generates most of its sales from on-premises dining or direct off-premise ordering. If third-party delivery sales require more employees or labor hours, the additional sales may not be sustainable or profitable. The restaurant must balance in-store and delivery sales to ensure a positive net impact. At a certain point in time, if most of the sales are derived from off-premises dining, then it might make sense to move operations to a ghost kitchen so that the third-party delivery fees can be offset by lower occupancy and labor costs.
We haven’t covered the indirect benefits of third-party delivery, such as the ultra-competitive customer acquisition cost and strategies for building brand awareness as discussed in Delivering the Digital Restaurant, but in addition to implementing the strategy above, restaurants can also capitalize on building brand loyalty through third-party delivery apps so that patrons order directly through their website in the future. If you need help improving the accuracy, timing, and consistency of your bookkeeping and accounting so that you can strategically analyze your financials as we have done above, please feel free to contact us.