Grubhub, Uber Eats and DoorDash made online food delivery a $10 billion business. Restaurants aren't happy about it

Key Points
  • In this decade, more and more consumers have shifted to ordering their food online through delivery aggregators like Uber Eats and DoorDash.
  • Consumers looking for convenient meals ordered $10.2 billion from third-party delivery services in 2018, according to Technomic.
  • Restaurants adapting to the changing landscape will likely have new challenges in the next decade, including a focus on food quality and increased consolidation of third-party delivery providers.
Uber Eats workers wait for orders in central Kiev, Ukraine July 31, 2019.
Valentyn Ogirenko | Reuters

A decade ago, ordering in for dinner often meant choosing between pizza and General Tso's chicken that may or may not show up lukewarm at the doorstep.

The rise in online food delivery has changed that. Now, consumers can have anything from a steaming bowl of ramen to filet mignon sent to their front doors.

A 2011 Cornell survey of 372 U.S. restaurant operators found that less than 10% of takeout or delivery orders were done online. Since then, third-party delivery apps like DoorDash and Uber Eats have transformed the delivery market. Consumers looking for convenient meals ordered $10.2 billion from delivery aggregators in 2018, which would make the third-party delivery market the size of the fifth-largest U.S. restaurant chain, according to Technomic.

"The consumer migrated towards having this expectation of things being at our fingertips, from other industries — the Amazon effect, you could argue, contributed to some of this," said Aaron Allen, CEO of restaurant consultancy Aaron Allen & Associates.

As consumers embrace delivery convenience and abundant options, restaurants are still trying to adapt to the huge change brought by the service.

McDonald's, Starbucks and Chipotle Mexican Grill are among the many national restaurant chains that have partnered with delivery services. But for some, the extra sales from delivery also mean lower profit margins and major operational changes.

Chipotle, for example, started adding second kitchen lines to locations in 2016 to handle online orders. Employees assemble digital and delivery orders on the second line to speed up service. The chain completed the project this year.

"We see this a lot more in the sophisticated restaurant chains that are beginning to really embrace off-premise and delivery," said Trevor Boomstra, director of AlixPartners' restaurants, leisure and hospitality practice. "They're adapting their physical presence and their layouts."

Increased delivery costs weighed on Chipotle's profits during the third quarter.

'The honeymoon is over'

The boom in food delivery started when up-and-coming aggregators began partnering with independent restaurants. Postmates was founded in 2011. DoorDash began delivering food in Palo Alto, California, two years later, and Uber launched its food delivery business in 2014. Fueled by cash from venture capitalists and private equity firms, tech-focused delivery companies expanded nationally and internationally, luring large national restaurant chains.

"Two and a half years ago, some of the largest delivery companies in the world were still trying to convince chain operators of the merits of it," Allen said.

According to Technomic principal Melissa Wilson, the game-changer was when McDonald's, the largest U.S. restaurant chain by sales, started offering delivery through an exclusive partnership with Uber Eats in 2017. The arrangement irked its U.S. franchisees, who complained about the high fees they had to pay the delivery provider for every order.

Delivery providers typically charge restaurants 15% to 30% on every order they fulfill. But commission fees have been decreasing in part because of competition.

"Restaurants are now pushing back and figuring out how to be better partners and find better partners and get to leverage this off-premise channel more," Boomstra said. "The honeymoon is over."

This year, McDonald's renegotiated its Uber Eats contract, reportedly pushing for a lower commission fee and ending its exclusive contract. It later announced partnerships with DoorDash and GrubHub. The fast-food chain is forecasting $4 billion in global delivery sales in 2019.

As overall delivery sales have surged, third-party aggregators have stolen market share from the two types of eateries that typically deliver their own food: Chinese restaurants and pizzerias.

Domino's, in the face of growing competition from delivery providers, has stuck to delivering its own pizza, even as its same-store sales growth has taken a hit and competitors like Pizza Hut and Papa John's have teamed with aggregators. Others that initially rejected outsourcing delivery, including Panera Bread, have since changed, seeing aggregators as a new type of marketing and a way to address a labor shortage.

Domino's, on the other hand, is betting that the business models of delivery providers are unsustainable. GrubHub, the only profitable delivery provider, reported third-quarter net income of $1 million, down from $23 million a year earlier.

As questions about delivery apps' profitability remain unanswered, both DoorDash, which overtook GrubHub this year as the market leader, and No. 4 aggregator Postmates are looking to go public in 2020.

A distributor of Deliveroo is seen riding his bike with a package with food on a street on July 31, 2019 in Madrid, Spain.
Jesús Hellín | Europa Press | Getty Images

GrubHub's stock, which has a market value of $3.7 billion, is up 17% since its 2014 public offering. It hit an all-time high of $149.35 in 2017 but is now trading at about $40 a share. This past May, Uber had a lackluster initial public offering. The company's market cap, valued at $48.5 billion, has fallen 36% since its IPO. Its delivery business accounted for 17% of its third-quarter revenue.

Besides the challenge of profitability, third-party providers could also be facing a crackdown. The District of Columbia is suing DoorDash over its former tipping policy. The New York City Council may soon be considering legislation that would target commission rates.

The battle for delivery customers could lead to more mergers and acquisitions down the road as companies in the industry seek to cut costs and combine resources. In August, DoorDash announced an agreement to buy Square's Caviar in an effort to boost its market share. Earlier in the summer, Amazon shut down its food delivery business, Amazon Restaurants, before announcing a stake in U.K. delivery company Deliveroo. The deal has raised antitrust concerns from a British watchdog.

"It's important for the restaurants to be thinking about and know how to select the right partner, knowing that there's going to be consolidation likely going to happen," AlixPartners' Boomstra said.

Another change that could be coming to the delivery market is an improvement to the quality of food that does not traditionally travel well, like French fries or cheeseburgers.

"A lot of operators are looking at packaging or new product options for addressing that," Technomic's Wilson said.

As restaurants grapple with the problems posed by delivery, they are also exploring the use of ghost kitchens, offsite locations that are used exclusively for delivery orders. Venture capitalists have been pouring money into ghost start-ups like Kitchen United and Zuul Kitchens as chains like Wendy's, Chick-fil-A and Sweetgreen explore them as an option.

"A lot of this is a means of improving productivity for a decades-old business model that needed to be reinvented — the labor model, the cost of building out restaurants, where to put them," consultant Allen said.

But restaurants should be wary of leaning too much on delivery sales. If the economy slows down, consumers will have less disposable income and be less inclined to spend money on deliveries.

"Restaurants will lose some of those incremental sales, so they'll have to figure out to respond to that loss in value," Boomstra said.

Postmates CEO: The food delivery space is not a winner-take-all market
Postmates CEO: The food delivery space is not a winner-take-all market