Before the internet, publishers were in a very privileged position. Controlling the printing press was a true competitive advantage. Similar to other mass-produced goods, the machinery necessary to replicate the news of the day at national scale came at a high cost and the right to participate in the news creation did so too. As a result, the publishers controlled their geographies, their audience, and the advertisers who wanted to reach their audience.
Then along came the internet. Fixed costs for content production dropped down to (almost) zero. What used to be restricted information became abundant and personalization rules in abundance. Google and Facebook are the clear winners of the information economy and advertising online was the prize.
Mistaking a platform for a channel
Both won by imposing their own rules in the discovery and distribution of content, and eventually owning the audience. Initially, both were heralded as great marketing innovations.
Publishers were mesmerized at the potential of a new global, growing reach. Before programmatic advertising and the maturity of hyper-targeting this was great news. Google and Facebook were seen as channels serving them, not as platforms serving themselves.
The shift from paper to digital delivery of news left publishers with a fraction of the advertising revenue they used to gain and a steep decline of the print circulation revenue. A double whammy.
This has been a bleak and deteriorating reality ever since. The scariest part of which is that it’s been 26 years since major publications launched online and it’s only now that the first signs of economic sustainability appear.
Perhaps not obvious at first, but the restaurant industry is following the same footsteps, commoditizing itself one delivery at a time.
Food delivery as a utility.
In the UK, Deliveroo, like many a great company, started with providing value to a niche. Casual dining was the target. Connecting those establishments which didn’t offer delivery to the upper-end consumer who valued quality and convenience above cost, the goal.
“We are a restaurant, not a takeaway place” was a common thought for a lot of restaurants initially.
Deliveroo’s offer (and their sales) was hard to ignore. Off the back of the normal operation, why not make extra money? Deliveroo would make money from the extra fees clients paid. The restaurant didn’t pay but a small fee (if anything).
In the beginning, Deliveroo was the perfect utility. Since the cost was zero or very low, restaurants were incentivized to inform their local base that now they could reach them even more conveniently; they could deliver the same quality of food at home.
This was fantastic and it didn’t affect the restaurant’s economics. Deliveroo was a (near) free marketing channel.
Abundance, commodity and owning discovery
While hindsight is 20/20, in the moment it is not easy to spot the inflection point where a short-term opportunity turns to a perilous force. And this is because there was no qualitative change in the nature of the service to inform of the upcoming disruption. It was the users’ attention that shifted as a result of repetitively using the service.
Initially, customers would use Deliveroo or the other delivery companies (mainly Uber Eats) to get their favorite meals delivered, from their favorite places delivered. As the value of the service was higher than the delivery fees associated, usage increased and eventually the nature of the question changed from “how can we get X delivered” to “What are we eating tonight?”.
What started as an “add-to-basket-and-go” experience, was now turning into a discovery session.
As customers got habituated to using one place to get food delivered and, more importantly, to get inspiration, the power dynamics gradually shifted. Customers had less of a reason to stay loyal to the local pizza shop nearby. Why would they? Another authentic Italian Pizza place with great reviews was now able to reach them, sometimes enticing them at an even lower price, courtesy of the delivery companies.
To the discerning eye, the power to sway customer preferences is a pivotal moment. The channel was on its way to become the platform.
At the same time, this was but an imperceptible change for restaurants themselves; each place kept seeing their delivery revenue steadily increase and so did the confidence they placed on this quickly growing stream of revenue, devoid of quantitative concerns stemming from a drop in customer lifetime revenue. After all, such are the concerns befitting a tech company, not a restaurant. To their detriment, this is a view a lot of restaurant owners share as they prefer focus on the creative part of the experience.
The delicate balance of indulging their customers in trying the various options available whilst continuously growing revenues for restaurants was sponsored by the humongous growth of the delivery economy with the Venture Capital industry picking up the bill. In other words, the volume of orders for each restaurant was a derivative of market growth, not the performance of an individual operation.
The result might seem obvious now but not so much then, especially not from the perspective of the restaurateur who experienced a booming business. For every new order they accepted however, the relationship with existing clients was diminishing and new clients were not represented by a name; a fleeting order ID sufficed.
More choice for clients equaled a lower volume of repeat orders to individual restaurants. In return, as restaurants had a wider addressable reach of clients, an equilibrium was found.
Finally, customers were now loyal to food delivery companies which dictated the discovery, delivery, and payment for food.
And for this endless growth to be sustained the rake doubled to about 30%, charges were placed on the restaurants rather than the end consumer (or both) and delivery fees became “variable” (increased). Delivery companies now control the value chain and it’s time to squeeze as much value of the proceeds as possible, leading restaurants to re-think their razor-thin margins and business relationship with delivery companies.
COVID and the acceleration of disruption in the restaurant industry.
This was a slow process but then COVID-19 happened. And any lingering doubts were removed. Restaurants had two options: sign up to the delivery platforms or shut down. Or both. But one thing was clear: this was not the promised land they signed up for.
At the current pace and given the dynamics of the industry here’s what to expect.
Kitchen and restaurant unbundling. Low cost space “dark kitchens” become mainstream. Restaurants are struggling to compete in an industry where their sole contribution to the value chain is a commoditized product. All other value-adding services have been stripped away from them. Marketing, payments, delivery operations, and real estate (dark kitchens) belong to delivery platforms.
And just like that, restaurants are in the shoes of the publishers. Losing their customers attention means gradually giving up on their sovereignty.
Dominant marketplaces inevitably give birth to individual creators
But we have seen this cycle before. When a network reaches maturity and moves to a value capture phase there’s inevitably an economic incentive for creators, solopreneurs and SMEs to compete against the network and capture value from customers on the fringes of the network, kicking in another cycle of creative change.
As Amazon grows to unprecedented level, Shopify is growing even faster.
Substack grows in tandem with Medium and traditional media as the appetite for content is at an all time high.
This should inform us as to what might happen in the restaurant industry too. Restaurants have traditionally been low-tech, focused on fly-by traffic and didn’t have incentive enough to act any different.
However, there have been significant changes in the past 5 years. It is now possible to outsource delivery, have a direct relationship with customers and finally, capture the whole transactional value. And of course, now it is a matter of survival. How can they compete? Customer loyalty.
Lessons from the publishing industry moving forward
I’d be surprised if the dominance of the platforms was to be challenged anytime soon. In a way, it’s too soon. It’s the boiling frog effect once again and things won’t change before they get any worse. Delivery platforms play a significant part in keeping the lights on and, as such, it’s difficult to envision radical change.
But were things to take on a drastic change of course there’s a few lessons from the publishing industry and there is a few reasons for drawing that parallel.
In the attempt to own their audiences, publications have turned to multiple media and in doing so generate revenue from multiple sources. Subscriptions are starting to work, podcasts attract a different set of advertisers, events capture the value of an audience and social media drives premium newsletter sign ups that allows publishers to connect with their audience. Additionally, these exact same tools are available to micro, small or large enterprises.
A similar path seems possible for the restaurant industry.
From loyal customer to member: a viable path ahead
Despite the recent slump in retention, restaurants are indeed a high loyalty sector which becomes obvious with a quick glance at Deloitte’s report on restaurant spend. 49% of visitors spend at least 25% of their total restaurant budget in one place.
A loyal customer would be someone eating there once per month which looking at the graph above should be represented by the segment of people who spend 25% of more of their total restaurant budget, assuming eating out once per week that would be once per month. If that was the case there’s 49% of people that each given restaurant could target to convert.
Of the roughly 100 customers an average restaurant (25 seater) serves per day, or 3,000 per month we can assume that at least 10% will become repeat customers. This means that a restaurant hosts roughly 300 loyal customers monthly.
The second important metric that Deloitte points out was that (in casual dining) 9% claimed they’d be amenable to a subscription offered by the restaurants they visit and they’re likely to dine again.
It’s reasonable for a restaurant to convert 10% of its 300 loyal customers each month and expect these customers to do so with an increased spend. This would equal 1% of the total footfall.
In other words, this restaurant, assuming no churn for simplicity, should aim at 360 members in a year.
Taking an Italian restaurant as an example and £15 as the cost of a pizza, it’s safe to assume the average member spend could be £25, the price of two pizzas discounted by ~16%, as an example of a simple membership perk.
That would amount to gross sales of £108,000 in annual recurring revenue or roughly 60% of the total revenue the restaurant would need to be viable.
The restaurant owns its audience.
Starting as low tech as a QR code on the food box offering a perk and later through a combination of email, SMS or even a Facebook Group the new wave of restaurant operators would have the ability and the mindset to harness a community.
In an era where people are spending more time than ever in their local area and their social fabric has been eroded, the community feel (even virtual to begin with) is more important than ever.
Community, multiple touchpoints and revenue diversification.
On the basis of creating a community, a restaurant would seek to use an array of channels to deliver and capture a higher part of the value of their members. Educate on all culinary topics, offer exclusive perks (e.g. private dining after hours is a great one), exclusive meals (specials of the day) and/or cooking classes “how to cook X on your own” are some very basic examples. Especially since once owning a community, monetization opportunities present themselves.
Restaurateurs as creators
Operating a community, subscription management, and payments is a solved problem and very much in the scope of being a creator. Finally, delivery can be outsourced to a 3rd party, dedicated delivery service companies like Stuart.
And this is already a big part of the value chain.
Expect steps in this space and along these lines to be few and far in between as well as clunky for a while until dedicated SaaS platforms (an opportunity there) to arise to streamline these operations for a fraction of the cost.
I’d be keen to hear from operators. If you’re in the space thinking along these lines, feel free to reach out, I’d like to hear from you.
Restaurants* there is an implicit assumption that for sheer takeaway places things might stay the same since their margins were already low; in this article I mainly refer to restaurants offering seating which also didn’t offer delivery traditionally aka the casual dining part of the market.