Deliveroo's tech expansion delivers on the digital potential for fast food firms

Profile picture for user slauchlan By Stuart Lauchlan February 26, 2018
Summary:
Deliveroo is expanding its tech headcount as third party delivery services become ever more important to the fast food industry.

Deliveroo
Last year diginomica observed that there are two ‘d’s that the fast food industry is in hot pursuit of - digital and delivery, the former being an enabler for the latter.

Yesterday the market opportunity for digitally-driven delivery was re-affirmed by the news that UK firm Deliveroo is to add 250 new tech roles in London this year, ranging from data scientists and software engineers, through product designers and managers to specialists in cyber security.

The additions will take Deliveroo’s full-time staff to over 2000, not counting its 30,000 riders who deliver the food from 35,000 partner restaurants.

One reason for the uptick in techno-savvy headcount is both the continuing potential market opportunity for delivery services, but also the rise of competitors, including the likes of Just Eat and Uber Eats.

In the U.S., burger joints are at the forefront of the disruptive delivery model. Todd A. Penegor, CEO of Wendy’s, notes that within the fast food industry - or the Quick Service Restaurant (QSR) sector as he refers to it - burgers are the meal of choice:

The hamburger category owns the largest portion of traffic share, which isn't surprising when you consider that nine out of ten U.S. consumers eat at least one hamburger a month…Brands that have the resources and capital to invest in things like technology and can reach the consumer across all channels are going to have the best shot at success.

Digitally-enabled delivery has recently become a major priority for Wendy's, affirms Penegor:

In the fourth quarter, we started offering delivery with DoorDash as our partner and had more than 20% of our North American restaurants on the platform by the end of the year. We've been pleased with our partnership thus far and are excited to bring delivery into more markets as DoorDash expands their coverage into 2018. We also are looking to add additional delivery partners in an effort to expand even faster. The economics have proven to be worthwhile as early reads indicate that delivery orders are highly incremental, especially in the evening day-part and result in higher average checks, both of which are positives for our restaurant economic model.

We've got a great partner with DoorDash. They've got one 'dasher' per delivery, so we're getting high integrity of the food delivery. What we're seeing, I think, we're at like 4.5, 4.6 stars. So the consumer feels good about the proposition that we're delivering. We track overall satisfaction metrics, not only in the restaurant but delivery. The overall satisfaction for our delivery is even higher than the satisfaction in the restaurant, surprising or not, but not that surprising when you think about the consumer got it where they wanted it.

And for Wendy’s franchisees, it’s a good partnership, he argues:

The way we've structured the deal with DoorDash is really economically viable for the restaurant, but also we're making sure that it's viable for the consumer, and we're not hearing any pushback. They're feeling good about the prices that we're charging them. We don't have a big commission haircut at the restaurant level with our DoorDash arrangement like others may have with their delivery providers.

So we get to really focus on speed of order to delivery, trying to get ourselves under 30 minutes from the time they order to the time the food gets there. We're slightly over that at the moment, but then making sure that they got a good quantity food experience so they continue to do it. So our franchisees are pushing us to actually roll it out even further, find other partners, fill in more white space. So we feel good about it.

We do feel very encouraged around what delivery could add over time. We've got 20% of the system up on delivery. We continue to figure out how we build that out with DoorDash and other partners, so all of those things continue to give us confidence.

Delivering on digital

By the end of last year, 80% of Wendy’s US sales and ordering system was able to accept mobile orders via the firm’s app. Getting the mobile app right is something that other firms are still working on. Lenny Comma, CEO at Jack-in-the-Box. admits that keeping up with customer expectations is a challenge :

As for digital, we know that there are complexities to our operations. We've made a mistake. The app we've been successfully testing does exactly what consumers want today. They can easily view our menu, order, schedule pickup and pay. We also want to be able to easily integrate other features with the app when appropriate, such as delivery. We're heading in the right directions with our app and we believe we'll be in a position to roll it out system-wide by the end of the year.

But he insists that “great progress” is being made around delivery:

Since the end of Q4, we've expanded the deliveries to include an additional 478 restaurants. We're now delivering Jack in the Box food from nearly 63% of our systems. We're expecting additional restaurants to begin offering deliveries over the course of the year. We continue to see an incremental sales lift in markets where delivery is offered.

Over at Red Robin Gourmet Burgers, the “off-premise business” which includes third party delivery now accounts for just over 8% of total revenues. That’s not a particularly impressive number, but the year-on-year growth rate is 45%. CEO Denny Marie Post says:

Delivery is definitely the growing category. Third-party delivery is huge and growing rapidly. And for the fact that it's only in about half of our locations, it's over-representing right now in terms of growth. In terms of a difference in check average, [there’s] really not much difference in check average. The biggest challenge with anything in off-premise is the loss of the beverage sale, but the guest does seem to get more food, even though the average eaters per check is lower. So they take advantage of getting more food, but don't get the beverage.

DIY

What all of these examples have in common is a reliance on a third party delivery service provider. That’s a mistake, reckons Patrick Doyle, CEO at Domino’s. Given that the pizza industry has been doing delivery for as long as it has, his point of view is clearly worth listening to. And he’s adamant that Domino’s has the right model:

A reminder - nobody does more restaurant orders digitally than us and nobody does more delivery than Domino’s. We understand the economics of that, the customer behavior related to both the ordering and delivery process, better than anybody. And we have built real competitive advantage over the years by doing it ourselves.

Accessing orders and customer base is something that’s been tested many in places, but the delivery process, and the efficiency of the delivery process, is something that we know and understand very, very well. That’s not something that you are ever going to see outsourced, because we believe the only way to build long-term competitive advantage is to do something yourself. So if you use a third-party, you are basically deciding this is something where we are not going to build competitive advantage. And if you do it yourself, the only reason to do it yourself is because you think you can do it better than you could do by accessing third-parties.

Using a third party service isn’t going to give you a head start over your rivals, he insists:

Broadly, people have acquired competitive advantage or built it themselves. That’s always a choice you have. But I think ultimately if you are using a third-party that is available to anybody in the market, by definition that’s a commodity, if anybody can access it.

So could you see somebody acquire that and build competitive advantage through that acquisition? I suppose, if they restricted everybody else’s access through that technology after they made that acquisition. But if it continues to be available to everybody, then almost by definition it is a commodity and something available to everyone. So only if you acquired it and then got everybody else off of that technology,would there be an opportunity to really start to turn that into competitive advantage.

My take

As someone who’s regularly having to dodge oncoming Deliveroo riders with their own ‘unique’ interpretation of the Highway Code, it’s been clear for some time now that delivery is on the rise. I’ve said before that personally I struggle to understand why, other than very early in the morning after a big night out and with a serious case of the munchies, people want to use delivery services for the likes of McDonald’s, but there is obviously a market opp here. The digital delivery fast food wars are going to be something to keep an eye on in 2018.