Third Party Restaurant Delivery: Co-opetition in a Post-COVID World
The restaurant industry was devastated by COVID-19 and, even as of November 2021, over 30% of diners remained uncomfortable dining out.
Delivery, largely through third-party delivery platforms (“platforms”), provided a lifeline to mitigate losses and maintain customers, but as the world returns to normal, will online delivery help or hinder a dine-in recovery?
The Age of Apps
Online food delivery sales jumped 40% from 2019 and investors have taken notice, with $2.4 billion raised by delivery start-ups in 2Q21 alone. Consolidation in the sector is rampant, and since 2019, more than $27 billion in transactions have been completed. Doordash, the largest player by market-cap, recently announced the $8.1 billion acquisition of European-based Wolt. For these platforms, scale is key to success, driven by the ability to monetize order data and last-mile capabilities efficiently and effectively.
The Fox in the Henhouse
Beyond pricing and consent issues, rising traffic on delivery platforms also increases risks for restaurant partners through poor customer experience and a growing data imbalance.
Restaurateurs invest heavily on customer experience – from store location to furnishings, staff training, and other factors. Through the use of platforms, restaurants rely on third parties to power the customer experience, often to their detriment. Menus are not displayed the same way as in the restaurant, promotions and recommendations may be different, and restaurants have limited control over how meals are handled and presented on delivery.
Platforms now control item-level data (food, drink, and consumer details) in ways no restaurant or chain has before. This data imbalance makes restaurants dependent on these platforms for marketing, while increasing risk of losing traffic to another paid search if they do not. This feedback loop raises ad costs while not necessarily driving net growth. And while the delivery platforms have not announced plans for their own branded restaurants, they fully understand what, how, and when diners eat. Similar disruption in other sectors (e.g., AmazonBasics) has been significant. Doordash recently tested a concept kitchen to replicate menus for certain restaurant partners – it may only be a matter of time before they expand competition in unforeseen ways (such as enabling nation-wide delivery of chosen partners) or compete directly.
Survival Playbook
Despite the significant risks presented, delivery platforms and native delivery capabilities can provide an accretive solution to restaurants. For example, a recent QSR analysis reported 50%+ higher average check sizes for delivery purchases versus in-store or drive-thru. While some major players (e.g., Darden) have said they will not pursue delivery, most operators need a playbook to mitigate risks and optimize profitability and we propose the following:
Capture Customer Traffic
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Optimize web presence for the online/delivery customer – interactive menu, rich descriptions, photos, and updated listings (e.g., rotating specials)
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Drive traffic to your site with things like search engine optimization or QR inserts on deliveries
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Identify which platform(s) to compete in and optimize pricing based on target customers
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Enable Perfect Experience
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Curate delivery food and beverage menu to ensure items are “travel-friendly”
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Package deliveries to increase food quality, presentation, and perceived value (e.g., premium containers, moisture- and temperature-controlled packaging, plating instructions)
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Offer premium add-ons to add to ticket prices
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Manage Utilization and Cost
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Adjust pricing and promotion levers to maximize kitchen and/or delivery fleet utilization
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Optimize delivery platform costs– evaluate customer acquisition costs versus lifetime value to optimize profitability
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Evaluate fulfilling deliveries directly and optimize delivery zones
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Maximizing Returns in the Post-COVID World
The past year has seen a remarkable rebound in investment activity deal flow. While this provides ample exit opportunities for companies and Sponsors, it also raises the stakes for new owners to generate future returns. As entry multiples reach all-time highs, Sponsors must have multiple avenues to drive value creation in their platform investments.
Priced for Perfection
A number of factors are driving increased competition for quality platforms, from the continued increase in capital flows and dry powder to the dramatic post-COVID economic recovery. The end result is the same — Sponsors are paying top dollar for new investments, leaving little room for error in executing the investment thesis. Outsized returns will often rely on accretive add-on investments, as purchase prices fully reflect organic growth opportunities. To succeed in the current market, Sponsors must work with their management teams to identify and integrate accretive acquisitions.
We have looked across the hundreds of transactions we supported and have identified three common issues, as well as steps Sponsors can take to position themselves for success. While no plan is ever perfect, focusing on these critical success factors will help teams identify and avoid key integration risks.
1) Maximize Synergies
Acquisition integrations often do not fully achieve their targeted synergies and/or timeline, either because of unforeseen issues, insufficient implementation funding, or lack of attention post-closing. The good news is Sponsors can address these issues by incorporating stronger central governance.
Centralized management of both integration and other transformation capex ensures that (i) costs to achieve are properly funded and (ii) reporting and scorecards are implemented across the entire leadership team, driving accountability for results. Formalizing a set of “vertical” (e.g., business line) and “horizontal” (e.g., expense line) owners and targets is typically a best practice. For example, both business line leaders and the CIO should have explicit targets and accountability for IT synergies, addressing both “demand” (e.g., support requirements) and “supply” (e.g., labor sourcing/cost) levers.
2) Emphasize Talent and Culture Fit
Culture is a key part of a successful merger; however, it is often an afterthought during due diligence. Teams are merged in name only, where redundant processes may continue, or managers have vague or overlapping responsibilities. Best in class operators can avoid these pitfalls by implementing platform-like processes and capabilities to absorb additional workload. This provides a scalable way to grow, minimizes management layers, and maintains a strong linkage between leadership roles and accountabilities (e.g., throughput or quality metrics for processes).
3) Minimize Operational Risk
As competition for deals increases, teams are under more and more pressure to move quickly, leading to due diligence shortcuts or time constraints. Management teams can easily get stretched thin between reviewing acquisition opportunities and managing their day jobs. While there can be pressure to use internal teams to manage costs or because they have the best working knowledge of the acquiring organization, distractions or mistakes in due diligence can create long-term challenges for value creation and also increase the risk of an over-leveraged capital structure.
Sponsors should recognize the significant workload involved in typical due diligence and work with a network of advisors who have a robust and proven playbook to efficiently validate financial and operational fit. Then an exhaustive vetting of potential show-stopper risks can be conducted with the proper information, analysis, and attention. Leveraging teams that specialize in this process can provide a significant advantage for management and enable the best chances for success.
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