As we wrote about this morning, the restaurant industry is undergoing a major shift in the way it interacts with consumers—to the point that it is creating a new business model.
And it’s a bigger change than you probably think.
“One of the more pivotal, long-term strategic decisions the restaurant community faces now is whether to essentially become a retailer or a wholesaler,” said Hudson Riehle, senior vice president of the research and knowledge group for the National Restaurant Association, in an interview.
“The advent of these third-party platforms and the currency associated with them makes some operators wholesalers of meals now.”
Think about it: Restaurants’ customers are increasingly the delivery-service drivers and not the consumer. That has massive implications all around.
First, at this point we’re still talking about a tiny percentage of the overall industry. And third-party services themselves have a lot to prove before we can say that they represent the future of the restaurant business. Notably: They have to be able to make a profit. And at this point, whether they can is not fully clear.
Still, third-party services are growing rapidly. More than half of consumers use them, as do two-thirds of operators. And there’s plenty of evidence to suggest that restaurants’ customers are increasingly becoming those providers.
For instance, Auntie Anne’s President Heather Neary told me on a recent episode of the "A Deeper Dive" podcast that the company has started offering incentives for delivery drivers to pick up orders from the chain’s mall locations.
The idea is to encourage the people responsible for getting food to customers to actually take the order.
Meanwhile, two restaurant companies that had been developing their own delivery services have decided, rather quickly, to shift to a hybrid model. Outback Steakhouse owner Bloomin’ Brands, as well as Panera Bread, have each inked contracts with third-party providers.
Pizza chains Papa John’s and Pizza Hut have both worked with third-party providers, while chains such as Jimmy John’s and Domino’s Pizza have faced various levels of pressure after opting to avoid such deals.
Third-party services have their own market and their own customers. And restaurants increasingly have little choice but to deal with them. I’ve spoken with more than one operator who privately lamented the fact that they have to make such deals but view it as a necessary part of the business.
As industry observers know, the advent of third-party services has increased the importance of things such as to-go packaging while making pickup shelves more common inside of restaurants.
It’s already making seating areas less important, as Mendocino Farms co-founder Mario Del Pero pointed out recently.
And even developers are recognizing this shift, as Kitchen United demonstrated with its recent fundraising round, which largely came from property developers looking for ways to get food options into their projects that meet current trends.
All of this means that restaurants will not have control over the customer relationship in a growing number of occasions. That’s a frightening thought for a service business in the midst of an intense period of competition.
That will elevate the importance of the customer relationships they do have.
Another question is traffic. Consumers are ultimately going to pay for delivery services, and probably by paying both the restaurant and the provider. But if these charges are higher, will it lead to reduced transactions over time as the services become the norm?
These questions are inevitable. As more third parties do the order-taking for restaurants, the restaurant business becomes more of a wholesaler.
“That’s a fundamental difference both in terms of the characteristics of the business and how they’re executed,” Riehle said. “Over the long term, some operations will be entirely wholesalers. Some will be part retail, part wholesale. Some will remain retailers.”
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