Amazon's restaurant delivery service still needs to solve one major problem

Key Points
  • Amazon announced a new partnership with Olo, a restaurant ordering software, to make it easier for Olo's restaurant customers to use Amazon's food delivery service.
  • But some believe Amazon's service is too expensive, as it charges restaurants more than competitors such as GrubHub.
  • Still, GrubHub shares dropped by as much as 7 percent after Friday's announcement.
Olo CEO Noah Glass: Providing restaurants new online business through Amazon
Olo CEO Noah Glass: Providing restaurants new online business through Amazon

Amazon showed it remains committed to the restaurant delivery business Friday by announcing , a restaurant ordering software maker.

The partnership will give Amazon access to the thousands of restaurant customers using Olo's software, potentially opening up a huge untapped market for Amazon Restaurants, its food delivery service. GrubHub, the leader in this space, saw its stock drop by as much as 7 percent after the announcement.

But for Amazon Restaurants to really grow, it may first need to solve one major concern: It's too expensive.

According to Cowen & Co. analyst Thomas Champion, some investors have expressed concerns over Amazon Restaurants' high take rate, which is reported to be close to 30 percent. That means Amazon charges restaurants 30 cents for every dollar made from each food delivery.

Amazon didn't immediately respond to a request for comment.

Getty Images

The 30 percent take rate is substantially higher than what some of the competitors in the food delivery space charge. The NY Post reported last year that market leaders such as GrubHub and Seamless charge somewhere between 12 and 24 percent, while upstarts such as DoorDash and Postmates have a take rate in the range of 15 to 23 percent.

In fact, Ruby Tuesday, which is running a pilot program with Amazon Restaurants, said in its most recent earnings call that Amazon's food delivery program is indeed costly. Ruby Tuesday CEO James Hyatt pointed out it's something every restaurant will have to test before deciding if they should build their own delivery network or not.

"It is a little expensive," Hyatt said, referring to delivery programs by Amazon, Uber and Lyft. "It is a bite of the apple there for sure, and it seems to be something that every brand is going to have to measure right now, which I think you see some of the brands determining that they want to make that an internal mechanism instead of using a third-party."

Amazon may be able to lower its take rate once it reaches broader scale, and its partnership with Olo could be one way to solve the problem.

But Cowen's Champion said it shouldn't be a major concern to incumbents such as GrubHub, at least for now, pointing out that Amazon Restaurants is still only the fifth-most-used delivery service with less than a third of GrubHub's usage, based on a recent survey.

"It remains an expansive $40 billion-plus market in the US, with solid growth characteristics. We expect the delivery market to remain competitive and we think GrubHub will compete just fine," he wrote.