Pizza Demonstrates How to Make Money in Delivery
A NEW ERA OF FOOD DELIVERY IS AHEAD OF US: ONE WHERE PURPOSE-BUILT DELIVERY RESTAURANTS HAVE DIRECT RELATIONSHIPS WITH THEIR CONSUMERS.
OCTOBER 31, 2022 | MEREDITH SANDLAND
Over the last five years since becoming heavily involved in restaurant food delivery, I have heard in various forms again and again, “delivery doesn’t work.” Industry veterans say things like, “restaurants only profit on a marginal basis” (that is to say, assuming their fixed costs are already covered by their dine-in business). Restaurants with 40 percent or more of their business going out the door via delivery claim there is no way to make the business work, even on a marginal basis: the fees sink the entire P&L.
Restaurants now raise their menu prices on the third-party platforms 15–30 percent above their dine-in and first-party offerings. Consumers are paying too much meanwhile, “the delivery companies aren’t even making money,” the restaurants exclaim.
My response to this has consistently been, “pizza has been delivered for years, and last time I checked, Domino’s was a pretty profitable company.” It still is, as are Papa Johns and a host of other delivery-oriented pizza companies. Consumers have demonstrated that they want delivery in categories other than just pizza, and smart restaurateurs will innovate ways to meet that demand in a way that works for everyone involved—consumers, restaurants, restaurant workers, and drivers alike. The wise will look to the model that pizza developed, and consider how to apply it to other categories.
The evolution of the pizza industry foreshadows what’s to come for other cuisine types. Fifty years ago, most pizza places were dine-in. Domino’s disrupted the category by designing its business around delivery. Since that time, Domino’s has continued to invest in a better-delivered pizza, and has spawned many similar delivery-centric pizza brands. Even Pizza Hut has capitulated, shifting its asset base to “delcos” (delivery/carry-out) rather than its traditional “Red Roofs” (dine-in).
Of course, good food consistently served is the basis for any business model. No amount of business model adaptation or technology will fix bad food. Assuming your restaurant has good food and is able to consistently execute it, then making that food more easily accessible will grow your business. Five major aspects make the delivered pizza model more sustainable, efficient, and effective as compared to other categories’ current incremental mindset.
1: Purpose-Built, Delivery-Centric Kitchens
While it seems like the obvious form factor now, Domino’s radically changed the whole idea of what a restaurant is. A typical Domino’s is off the main drag, has no dine-in seating, and is about 1,000 square feet. In many ways, Domino’s was the original “ghost kitchen.” This little restaurant kitchen, designed exclusively for the ordering, baking and fulfillment of off-premises pizza, makes much more financial sense than a large, décor-heavy dine-in concept at Main on Main when most of the sales are delivery.
Other restaurant categories will increasingly bifurcate into dine-in and off-premises prototypes. The dine-in-focused locations will do what they do best: create a great experience for guests choosing to go out for a meal. The off-premises-focused locations will increasingly do what they do best: innovate a better delivery experience.
2: Restaurants Scaled to Serve a Tight Delivery Radius
Delivery pizza restaurants are cheaper to build and cheaper to operate than their dine-in peers. The business-model is right-sized for lower average unit volumes (AUVs) than what a dine-in restaurant requires to succeed. This is because the drive times around a delivery-focused restaurant need to be fast enough to fully utilize the drivers (more deliveries per hour) and to reduce the time between cooking and consumer (order-to-delivery time). Former CEO of Wingstop, Charlie Morrison (now at Salad and Go) said in “Delivering the Digital Restaurant” that drive times could be no more than 14 minutes from restaurant to consumer. CEO of multi-concept ghost-kitchen ClusterTruck, Chris Baggott, believes that number should be even lower: 6 minutes. Pizza tends to be right in between, at 10.
Whether the right number for your cuisine type is 5 minutes or 15, it is certainly not 20. A smaller delivery radius means the business needs to survive on lower AUVs (as pizza does) or it needs to drive more frequency out of fewer consumers (as ClusterTruck does). Either way, the business has to be geared towards consumers who are a short drive away from the restaurant.
3: Consumer Journey and Technology as Important as the Food Itself
There’s no question that good food consistently executed well is table stakes in the restaurant world. Increasingly, “frictionless” consumer journeys, enabled by technology, are the difference between a good concept and a great one. Domino’s was early to understand this, embracing technology long before the third-party ordering marketplaces became household names. They have continued to innovate, and often advertise aspects of their technology as a feature, just as other brands might do for a limited time offer.
During COVID, this “frictionless” expectation became the norm beyond pizza. Restaurants of all kinds rushed to enable first-party ordering and technology companies were there to support them. Companies like Olo and Toast went public. Lunchbox and ChowNow raised money at significant valuations to sign on restaurants as quickly as possible. Now that the existential crisis of COVID has largely passed for the industry, restaurants have the opportunity to further innovate their consumer journeys until ordering a bowl is as easy as ordering a pizza.
4: First-Party Ordering First
Domino’s has famously stayed away from third-party ordering marketplaces, choosing instead to focus on creating a great first-party ordering experience. This focus has enabled Domino’s to invest heavily in a tech platform that includes the triumvirate of great first-party ordering: integrated product ordering, payments, and loyalty. Domino’s takes this integrated approach a step further with a holistic system that connects consumer demand to back of house capacity and driver availability. It is this integration that enables magical features like the pizza tracker.
This is not to say that all pizza does (or should) avoid third-party. Papa Johns selectively adds both third-party sales and third-party logistics to drive incremental benefit. But the heart of their business remains first-party.
This is also not to say that a successful first-party business requires capital-intense in-house technology builds. Many SaaS (software-as-a-service) companies have emerged over the last 10 years to help restaurants with no IT departments create excellent first-party ordering experiences.
However, the current restaurant delivery ecosystem for non-pizza categories makes first-party delivery difficult. While consolidation among the technology players is starting, software remains fragmented, requiring restaurants to figure out how to stitch various point solutions to create the systems the digital greats have at their disposal. Navigating through this complexity is critical to convince consumers that your restaurant can offer them as good an experience as they have come to expect from third-party marketplaces. Integrated solutions, like Empower Delivery, and platforms with app marketplaces, like Toast, make providing a great technology experience like Domino’s easier for every restaurant—including Independents.
5: Dedicated Drivers
Finally, whether 1099 or W2, delivery pizza establishments leverage dedicated drivers that are tied to specific restaurant locations. This driver pool increases availability, reduces delivery times, and enables batch delivery. It also prevents the broken hospitality chain inherent in a restaurant handing its food off to a driver who is employed by, managed by, and therefore responsible to … no one.
In the current labor environment, dealing with a dedicated driver pool feels hard. It seems much easier just to leverage the drivers on DoorDash, UberEats, or Lyft and let these large, well-funded companies deal with finding enough drivers. But imagine if the waste and margins paid to others baked into the third-party system were instead reinvested into the restaurant, the consumer, and the drivers. Maybe it wouldn’t be so hard, after all.
These five aspects of delivered pizza are starting to come together in other cuisine categories. As delivery-dedicated kitchens integrate these lessons from pizza, a new era of food delivery will emerge: one where purpose-built delivery restaurants have direct relationships with their consumers. In this model, the consumer, the restaurant, the restaurant worker, and the driver all win with lower prices, higher margins and better pay.
Meredith Sandland is the CEO of Empower Delivery—a software company that enables purpose-built, delivery-centric restaurants to own their off-premise destiny through native first-party ordering, resource-aware meal production, and delivery fleet orchestration. Meredith is the co-author of the best-selling Delivering the Digital Restaurant: Your Roadmap to the Future of Food and its accompanying playbook Delivering the Digital Restaurant: The Path to Digital Maturity, due out on Amazon this winter. Previously, Meredith was the founding COO of Kitchen United and the head of development for Taco Bell, a Yum! Brands restaurant chain.
This article was originally posted in FSR Magazine.