Why Restaurants are Rejecting Third-Party Delivery

There's a line being drawn in the off-premises sand.

February 2020 Gary M. Stern

For the vast majority of restaurants, joining the third-party delivery bandwagon is a must to increase off-premises sales and capitalize on the convenience-crazed movement. As more millennials and diners prefer to order food digitally and have it delivered at home or work, most chains turned to the slew of third-party vendors including Grubhub, Seamless, DoorDash, Postmates, Uber Eats, and Caviar, to boost revenue.

Some studies have indicated delivery sales are spiking revenue 15 to 20 percent per year, explaining why so many operators leap in.

But many restaurants complain that relinquishing 20 to 30 percent of their margins is shrinking profits in an already razor-thin business. In fact, several large chains have bucked the direction altogether, including Olive Garden and Texas Roadhouse, as well as several mid-sized chains like Barcelona Wine Bar, Burtons Bar & Grill, P.J. Whelihan’s Pub & Restaurant, and Iron Hill Brewery & Restaurant.

These regional players struggle with finding extra space in cramped kitchens for delivery orders and the need to hire more staff amid a historically tight labor market.

Take Burtons Grill & Bar, based in Andover, Massachusetts, with 17 Burtons and five Red Heat Taverns, a sister restaurant. Its COO, Denise Baron Herrera, says, “We don’t build restaurants to have people take food away from us and be charged a premium price.” The brand wants to encourage people to dine there, not take-out.

Bruce Reinstein, a partner at Kinetic12, a foodservice consulting company, says many restaurants simply “aren’t making money doing it. And they can’t control the quality of their food.”

By rejecting third-party delivery, they’re “controlling the situation. Their food is better and so is their service,” Reinstein says. “The problem is today’s consumer is all about convenience.”

Hence, offering delivery fits with the lifestyle of an increasing number of Americans, says Matthew Britt, a chef and culinary instructor at Johnson & Wales University in Providence, Rhode Island. Most Americans lead a busy life, are overcommitted, work late, and “many get food delivered to their home or office and dine at home with their families,” he says.

While a growing number of restaurants embrace delivery as a way to spark revenue, Britt calls it a “disruptor. For example, they’re inputting iPads that the restaurant wasn’t designed for. The bigger restaurants have more flexibility and capital and can make the implementation work without causing damage and can afford the fees,” he says.

Texas Roadhouse

Texas Roadhouse has no interest in linking with a third-party delivery provider.

But Britt, a trained chef by trade, also laments what happens with most food delivered from the kitchen via Grubhub, Uber Eats and the others to their final destination: the customer. “As soon as the food leaves the kitchen, the quality denigrates and goes downhill,” Britt says. For most chefs, “all we have is our food and our experience,” so he understands why some resist delivery urge to guard brand value.

The restaurants that offer pick-up, without hiring third-party vendors, can reap certain benefits, too. “There’s no middleman,” Britt says. And many customers drive to the restaurants for pick-up, get to know the host or hostess, and may stop for a quick beer or glass of wine, and form a bond with the bartender.

Yet the chains that don’t hire aggregators are outspoken about their decision. There’s a definite line in the delivery sand forming. For example, CEO Kent Taylor of Texas Roadhouse said in 2017, “We encourage all our competitors to do as much delivery as they can, so they can deliver lukewarm food to the people who order it.”

Travis Doster, the 578-unit brand’s vice president of communications, is equally emphatic. “The No. 1 factor,” he says, “is we’re a value concept. We try to keep prices low. They’re going to charge 20 percent, and often they’re not reliable.”

Secondly, Doster adds, “our food doesn’t travel well.” Texas Roadhouse would prefer guests chow down on fresh food while listening to music in the background, forming relationships with the host, service staff and bartender, order beverages, and keep coming back for more the next time.

In addition, the kitchens at Texas Roadhouse can only accommodate so many orders without denigrating quality. “You don’t want to start harming the dine-in experience,” Doster says.

If the driver messes up the order or delivers food as the third stop along the way, contributing to the food getting cold or spoiling, the customer calls Texas Roadhouse and blames the restaurant—not the third-party vendor.

Aggregators “are all about convenience. We sell value and quality,” Doster says.

By analogy, Doster refers to the many hotel chains that jumped at the chance of boosting revenue with Hotels.com and other online travel sites, but now five years later, “they’ve lost direct connection with the guest” and are trying to recover it and revive loyalty with their guests.

Texas Roadhouse enables all guests to order food by phone and pick it up, and bring it back to their home, hotel room, hospital or wherever, and has its own mobile ordering service for pick-up as well.

Several of these third-party vendors, such as Grubhub, offer Texas Roadhouse food online. They order the food via Texas Roadhouse and deliver it to customers for an additional charge, without ever signing up the steakhouse chain to be a member. Obviously, Texas Roadhouse isn’t charged any fees. This is a big topic right now.

“You don’t want to start harming the dine-in experience,” says Travis Doster, Texas Roadhouse's vice president of communications.

Olive Garden

Olive Garden wants to control the experience, and thus, is keeping its delivery orders in-house and curated.

Darden-run Olive Garden has opted not to use third-party specialists but does offers delivery in a limited capacity. At the December 19, 2019 second-quarter review, CEO Gene Lee noted off-premises sales grew 17 percent for the quarter, triggered by its $5 Buy One, Take One deal.

While many millennials want easy and quick access to delivery, Olive Garden offers last-mile delivery for orders of $75 or more that are called in before 5 p.m. of the previous day.

Moreover, Lee described the pre-ordering of a $75 order at Olive Garden’s as “a big business. It’s a growing business for us. We’ve got an average check in the $300s. That’s business that’s really worth chasing and doing.”

During the call, one industry analyst pointed out to CEO Lee that “a few of your competitors have gone into third-party partnerships. They’re grabbed a few points of sales, but the profitability has become more of a focus.”

Lee responded by emphasizing Darden prefers “to control the experience” and it expects off-premises sales, including $5 take-home lunch, will continue to be a revenue driver.

Nicole Miller Regan, a managing director of equity research at Piper Sandler & Co., sees several benefits in Olive Garden’s approach. “They’re capturing high margins,” she says, and doesn’t expect them to lower that $75 minimum bar, although they may move to letting customers order at later times.

Nonetheless, Regan says Olive Garden is “losing out on some transactions of the person sitting at home” who wants to order delivery quickly. But most of those transactions aren’t from loyal customers or very profitable, she adds.

Iron Hill Brewery & Restaurants

Iron Hill Brewery recently launched a mobile app where customers can order food online and then come and pick it up.

Iron Hill Brewery & Restaurants, which has 16 stores, doesn’t partner with third-party delivers, either. “We want to bring people together inside the restaurant and create a great experience with energy and hospitality,” says Joe Kopke, director of operations.

He adds restaurants return a lot of revenue back to the third-party deliverers and “our food doesn’t travel well to meet our expectations.”

Iron Hill partnered with ezCater, though, which delivers catering services with a minimum $50 order to small businesses and office buildings. But Kopke says since it entails one partner, “We can trust their expectations to deliver.”

Iron Hill Brewery recently launched a mobile app as well, where customers can order food online and then come and pick it up.

While millennials are known as the target audience who want their food delivered quickly, Kopke, who is 43-years-old and on the cusp of that generation, notes they “want to feel attached,” and like feeling connected to restaurant’s congenial bartenders, brewers, servers and general managers.

Kopke also says he’s keeping an eye on beer delivery. “No one’s figured that out yet,” he says.

When culinary teacher Britt ponders the future, he wonders what the long-term impact of highlighting delivery will have on the restaurant industry, which could reduce people dining out in person. “We’re in a world of technology where things are moving quickly and who knows what third-party delivery will lead to in the future? What if restaurants are creating third-party 2.0s coming into your kitchen to cook?” he says.

Reinstein envisions larger chains and companies, like Darden, will eventually develop ghost kitchens and serve delivery orders from them, and the smaller-and mid-priced chains will likely collaborate and develop their own.

But the bottom line is it’s a new frontier for everyone involved. Restaurants just need to take a stand.