The plight of restaurant delivery services continues

With third-party delivery companies charging high commissions and consumers reluctant to pay higher prices for delivered food, restaurants are trying to drive customers to their own ordering channels. This is particularly evident in the pizza segment.

The category has a complicated relationship with aggregators. Having long had their own delivery capabilities, many pizza brands initially resisted third-party delivery until post-COVID staffing issues forced them to rethink that hardline stance.

“The evidence shows that the answer is yes, you have to work with third parties,” says Zach Goldstein, founder and CEO of Thanx, a loyalty and guest retention platform. “It’s part of what guests expect from restaurants.”

It’s not just about higher prices and lower margins. Restaurants miss out on valuable data and the opportunity to build direct relationships with guests when orders come through third-party channels.

“It’s a battle for the lifetime value of the customer,” says Goldstein. “It’s very difficult to get customers to make repeat purchases from third-party retailers when you have no real way to influence them.”

Variety is a key feature that drives many diners’ behavior, he adds, and restaurants will never be able to compete in that regard. But there are other battles restaurants can win to close the gap. Third-party marketplaces have created digital experiences that are easy to use and reuse. They’ve made the process of selecting and purchasing food simple and intuitive. Goldstein says that’s not an advantage restaurants can leave to aggregators. They need to be just as convenient, if not more so.

Loyalty programs are essential to encourage first-time deliveries and encourage repeat business, but relying solely on routine discounts is not enough.

“Rewarding your best guests with a special experience, giving loyalty members early or extended access to LTOs, offering exclusive merchandise – we’re seeing brands focus on a number of things that are more experience-focused,” says Goldstein. “Using data from the loyalty program to make personalized recommendations also really works. Innovating and using that data to recognize that not every guest is the same is what makes a modern loyalty program successful.”

A key metric for predicting future traffic growth is third-purchase activation. It measures how effective a brand is at getting a first-time visitor back for two more orders. The best way to get someone to come back for a third time is with great food. There’s no getting around that. It’s also about making it convenient for guests to shop.

“It’s pretty difficult to break through the noise of all the brands trying to talk to consumers,” says Goldstein. “Have you learned from the first or second purchase so that the message you’re sending them is relevant and personalized? And are you getting more personalized and segmented as the data grows? You have to constantly work on the program. You can’t just set it and forget it. That’s one of the things we highlight as a key element of Thanx. We want to make it easier to dynamically evolve your program so you don’t need a huge team of marketers and data analysts.”

The pizza segment has been a pioneer in both delivery and customer loyalty, he adds. Transparency in order status, for example, has become an investment in customer loyalty for many pizza brands.

“It’s about differentiating your first-party channel to drive customer loyalty beyond just using discounts,” says Goldstein. “However, we’re seeing some really interesting things around price differentials and the ability to get special offers on first-party sales. It’s about communicating to consumers why they should come direct.”

Frictionless digital experiences, personalized rewards and other incentives for choosing first-party channels are only part of the equation. Pizza companies looking to generate more direct orders must also focus on the delivery experience.

“It’s important to differentiate between third-party ordering and third-party delivery to figure out where the problems are,” says Meredith Sandland, CEO of Empower Delivery, a software-as-a-service company that operates takeout-focused kitchens. “A lot of resources have gone into developing wonderful first-party ordering platforms and loyalty programs, which is very important, but now we have a whole bunch of restaurants that have invested in the front end while the back end is still broken. It’s still disjointed because they’re initiating first-party orders and then fulfilling them with third-party providers.”

This rise in second-delivery models is being driven by several factors. Restaurants are laying off their W-2 drivers and outsourcing their work to third-party couriers because they can pay per delivery instead of per hour. This is becoming more common as labor costs continue to rise and there are moves across the country to eliminate the tip credit.

Sandland says drivers are also increasingly preferring the flexibility that comes with 1099 contracts. Combined with rising minimum wages, this makes it more difficult to find and retain W-2 drivers at a reasonable price. And while outsourcing these activities reduces the burden of managing your own delivery fleet, it also exacerbates other challenges.

“The restaurant loses control of delivery,” she says. “It loses the ability to win back customers. It creates a mismatch between pizza readiness and driver availability. It’s subject to batches it can’t control. And if it forgets the salad dressing or something like that, it can’t fix it because it’s hired a third-party to deliver the product.”

Empower Delivery has developed a product that helps restaurants take advantage of third-party and in-house fleets with dedicated, on-demand 1099 delivery drivers. The tool makes it easy to match orders to drivers, assign routes to delivery drivers, give restaurants visibility into courier locations, and provide customers with real-time order tracking. Pizza companies only pay for completed deliveries on a contract basis, eliminating the need to forecast sales, schedule drivers, and put employees on payroll, as well as eliminating problems with calls, no-shows, and overstaffing.

“It feels like the easiest way to stop having delivery drivers is to just outsource the work and have the customer pay for it,” says Sandland. “But ultimately, all you do is make things more complex and increase costs for the customer. And customers are telling us very clearly that everything has become too expensive.”

As a result, growth in delivery volume has stagnated recently and may decline slightly in the short term, although further growth is expected in the medium to long term, she adds. Sandland expects volume to ultimately increase tenfold from its current size.

“What happens between here and there if we’re in a stagnant or declining delivery world that’s going to be 10 times bigger one day than it is today? Well, the model has to get more efficient,” she says. “People are working on drones, self-driving cars, underground delivery tubes, all kinds of cool things. But if you add capital costs to an inefficient system, you’re just going to have a more expensive system that’s still inefficient. So the first thing we need to do is clean up the mess. I think this is actually a lot more like the original pizza model, which was first order, first delivery, although updated for this modern gig work world.”