Online Food Delivery Service Trends and Reliability

1.     Introduction:

In today’s digital world, the internet has dramatically changed the face of retail market by giving consumers different features/alternatives such as comparing and reviewing the products, making buying decisions and providing feedback through the online medium. Today, like other industries, online food industry has seen rapid growth and with just a single tap on their phone, customers can order their favorite food from a range of restaurants offered by the various online food delivery platforms. Online food delivery services have gained popularity mostly because of the many benefits it offers ranging from doorstep delivery to cashless payment options. With online restaurant delivery sales expected to grow from $25 billion to $62billion in 2022, by 2030 there could be a scenario where majority of the meals would be ordered online from either restaurants or central kitchens rather than being cooked at home.

2.     Problem Overview

The current trends in the online food delivery service market include – increased frequency and consumers ordering food online, critical role played by technology and fierce competition among restaurants and platform service deliveries. Beneath this intense competition among the players, restaurateurs are scrambling to purchase the technology that allows ordering food online as well as retaining the current employees else, they will be unable to compete in the market and ultimately survive. With 33% restaurant meals consumed at home, restaurants cannot afford to ignore the delivery as customers relate the food quality directly to the quality of delivery. Hence, the question arises how efficient and reliable the delivery is. How are restaurants and delivery services planning to cope up with the growing online demand with the high attrition rate among delivery/restaurant staff? Will there be any quality lapses? With issues ranging from low wages, absence of employee benefits, small or no incentives to work during the bad weather, the deliverers seem to bear the most disadvantages, leading to a high turnover rate.

3.     Problem Statement

With food delivery becoming popular every single day, restaurants need to offer flawless delivery services to retain the customers. While the in-house delivery option provides a much more control over the customer experience with reduced communication issues, the complexity of handling the delivery logistics to ensure smooth operations and satisfied customers are high. This entails to encountering greater risk of inefficiencies that can ultimately impact the business reputation / brand given that 92% percent of customers read online reviews.

On the other hand, third party delivery platforms allow restaurants to concentrate more on the product, adding more value to customers while losing control over customer experience by relying on quality of service of the chosen third party.

In the intense competition, restaurants are often pushed to fight the discount-driven battle to thrive in the competitive market. With third party in the equation, it often asks for a heavy chunk of the order price, with margins ranging from 25-35%. Restaurants are left with very small profits and a fraction of that to the deliverers. Similarly, restaurants need approximately $10 with packing and delivering, but cannot charge more than $6 or $7 as might turn the customers away. Bad wage and working conditions are a result of it, leading to unreliable supply chain eventually disappointing the customers. Hence, with high turnover rate in the restaurant industry the delivery may take a bad hit if the if the delivery resources/staff fall short in number.

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4.     Methodology

The paper is based on research analysis gathered from various sources. For this paper, majority of the work done is based on the qualitative approach. With online food ordering and delivery restructuring the US restaurant industry, the first step was to understand the current demand vs the expected future demand based on the number of people who had ordered food online and the frequency at which they had ordered in a given week. This step helped in forecasting the future needs and measures required by the restaurant managers to retain employees and smooth running of business operations with online delivery becoming the new norm.

While both types of restaurant delivery services i.e. in-house (aka restaurant-to-consumer) and third party (aka platform-to-consumer) offer an increase in potential revenue with exposure to loyal and new customer base, the next step in this analysis included percentage distribution between the two services, which allowed to focus and research more on that service sector, and accordingly providing recommendations.

As per the findings from online data- explained in detail in section 6 of this paper, it was identified that the Restaurant-to-Consumer industry is the leading category and the market’s largest segment. Hence, in this step we analyzed the current state of the restaurant industry and how they plan in future by focusing on questions as –

1. How many orders approximately does the restaurant currently process annually?
2. How much is the expected growth?
3. How does the restaurant plan to handle the increasing online demand? Does it plan to add more staff or change layout strategies?
4. Lastly, what challenges are faced by the restaurant staff in processing these online orders. Are they well equipped to handle them, are they paid fairly, are the working conditions favorable etc.

Lastly, in the final step we studied the challenges faced by the deliverers in the platform-delivery service model to identify if there were any common issues between the in-house and third platform delivery service that could be addressed by a common solution.

The paper is concluded by presenting the findings on above points and providing recommendations that could help the restaurants retain the restaurant staff and reduce the turnover rate, helping them win in a digital future as the industry growth won’t be decreasing into 2019 and beyond.

5.     Assumptions

In most cases, business occurs in an uncertain setting and its necessary to make assumptions, which are ideas that we assume to be true in order to plan, design and develop a strategy. Below are the assumptions considered for the online food delivery service for whom having a great online presence through the restaurant’s website or social media is now a necessity for success.

1. Firstly, the assumption that the online ordering trend would continue further in future years and the consumers would still be keen to order food from their favorite restaurants, thereby generating sufficient sales to make profit in the long run
2. Secondly, with more than half of delivery consumers ordering food directly from restaurant’s app or website, its assumed that the restaurant’s website/app is updated with their menu and prices to reflect the customer demand and interest, thereby boosting engagement
3. Thirdly, the assumption that an average delivery fee is charged by the restaurants or third-party services as charging more risks as well as drives off the customers. According to Wall Street Journal, 85% of consumers aren’t willing to pay more than $5 for restaurant delivery based on a recent survey of 2000 fast food and casual dining customers.
4. Lastly, for the data analyzed / calculated in section 6 for the number of restaurants currently delivering food online, let’s assume that the restaurants are closed 1 day a week (i.e. 312 working days) and offer meals only in two dayparts.

6.     Findings

Delivery now being the expectation of consumers, digital ordering and delivery has grown 300 percent faster than the traditional dine-in traffic since 2014 with 70% consumers preferring to order the food directly from the restaurant. As per the online food delivery statistics gathered from different sources-

• 60% of US consumers order delivery or takeout once a week while 31% use the third-party delivery services at least twice a week
• There is an increasing need for time and convenience and delivery solves many of these problems for millennials. Online food delivery revenue measured by Statista for 2019 is about $18 billion and anticipates growing to $24bilion by 2023.
• As per the stats in the below graph, with Restaurant-to-consumer industry the largest and leading segment, by 2023 the number of users is expected to rise to 80.2million as compared to 61.1 million for platform-to-delivery with millennials making up the largest demographic – around 57-59%.

There are around 1million+ restaurants in USA as per the National Restaurant Association. Assuming 14% of them deliver food online – based on the study performed by bringmethat.com, there would be around 140,000 restaurants. Hence, assuming 50 meals in each daypart the number of annual meals currently served by restaurants would be –

312 days x 100 meals x 140,000 = 4,368,000,000 meals

As sales drive the revenues, and as per the online statistics, by 2023 revenue for platform to consumer delivery segment  is expected to grow at an annual growth rate of 8.2% and 5.3% for restaurant to consumer delivery. Hence, we can expect the number of meals served annually to increase by 589,680,000, serving approximately 4,957,680,000 meals by 2023.

Delivery is crucial to all restaurant’s chains’ growth. With convenience becoming important for millennials, it’s becoming the driving force for restaurants to change their strategies and take advantage of the delivery trends. As per the NPD group, apart from the pizza chain the restaurant delivery traffic has risen by 33% since 2012. Hence, we can expect the number of restaurants offering delivery to be more than 14% by 2023, resulting in a greater number of meals served daily and annually.

High turnover rate is an ongoing issue in the restaurant industry because of long and exhausting work hours, and relatively low wages. Every year recruiting and training new employees is a challenging and an expensive affair. As per the National Restaurant association (NRA) the employee turnover across the entire restaurant industry was 73% in 2017 and twice as high for the front-line workers.  As per NRAEF Executive Vice President, in the next 10 years 1.6 million additional restaurant jobs will be created in the restaurant industry with more than one third of operators having job openings, which would be difficult to fill with the topmost challenge being recruiting and retaining employees. Research and surveys identified the below reasons for high turnover –

1. According to NRA, restaurant industry is the largest industry to employ teenagers. Because of seasonality and part-time work nature, restaurants attract younger workforce typically Gen Z and millennials. According to the Bureau of Labor Statistics, one in three working teenagers is employed at a restaurant. As most of these 1.6million teenagers get their first job experience in restaurants hence, they are likely to move on. Thus, this is a major contributor to the declining workforce
2. With restaurants booming with rising online delivery orders, the financial rewards don’t benefit restaurant employees. With fewer customers to dine in employees are losing on tipped income, and when tipping is involved in food deliveries it goes to the driver
3.  Economic factors are another cause for high turnover rate. When the economy is healthy, high turnover increases, as more restaurants are hiring, and the employees are likely to leave their jobs for a better pay and advancement opportunities. While on the other hand, during an economic downturn, turnover rates decline as employees are more likely to stay with their current jobs.
4. Although, transient work nature, poor working conditions and lack of advancement opportunities contribute towards high turnover rates, the restaurant industry may be the cause itself. Based on the survey of 300,000+ restaurant users (cooks, servers etc.) conducted by 7shifts, below are the findings that demonstrated different aspects of work that affects employee happiness, and hence the turnover

• Pay Increase – With the wage stats shown below, 62% of employees feel that a pay raise would have a great impact on their happiness, increasing workplace satisfaction.
• Promotion–  Apart from pay raise, 60% of employees demonstrated the need of recognition for their work done in the form of senior job title or responsibilities
• Recognition from Management-Every employee regardless of age or job title pointed out that  they need some form of recognition from management that could increase their workplace satisfaction
  • 67% – voted for paid bonuses
  • 38% – voted for public kudos, and
  • 32%- voted for promotions
• Team Building– Teamwork is essential in any industry and it was no surprise when 60% of the restaurant staff voiced their opinion mentioning team building activities could increase and enhance the workplace happiness. Currently, many of the restaurants are not having any such activities as reported by over 50% of restaurant employees.
• Training- “Being further trained and promoted to a more senior title would make me happier” – Anonymous Respondent. Nearly 70% of employees expressed their need to get practical training from their managers or follow senior employees that could help them in their job advancement, thus increasing their job satisfaction levels.

Challenges for Platform –To-Consumer Drivers

Based on a survey reported by coworker.org with 50 workers who worked for different platform delivery services such as DoorDash, eat24, Grubhub etc., below mentioned were the issues identified –

1. Similar to restaurant workers, 84% responded with low pay rates as they received pay plus bonus on the number of miles driven and not for the time they have been driving or been in traffic
2. 60% responded issues due to traffic delays, parking and wait times of up to 10 minutes for the restaurants to finish the order. Deliverers are not paid for the time they wait, and majority of the time are being held responsible for these delays, affecting their ratings.

7.     Recommendations

Food and labor are the restaurants primary operations as well as the biggest cost centers. Customers prioritize quality when food is being delivered either by the restaurant or by the third-party service. For any restaurant or third-party service, the most important thing is maintaining the “brand “name, and if the delivery fails to represent quality it would negatively impact the brand and business. Employees are a vital component contributing to the success of an organization, and with the growing online delivery trend, it’s crucial for the restaurant industry to drive down the employee turnover rate with few recommendations mentioned below –

• Restaurants should incentivize their employees by increasing the hourly wage rate.

Low pay does not save money in the long run. Employee turnover could cost approximately $5,684 per employee based on the study conducted by Cornell University. As compared to other industries, the restaurant industry’s wage is below minimum and with dine-in traffic declining considerably, reducing the income via tipped amounts, it’s essential for the restaurant management to retain their employees through increased pay. This could also attract more people in joining the restaurant industry rather than just the teenagers, which could eventually help in filling up open positions created by more than third of operators

• Secondly, restaurant managers should reward star performers. Results that go un-noticed can be very demotivating and a reason to look for a job elsewhere. Managers must find ways to motivate employees in addition to fair compensation and treatment to all. A small token of appreciation or a paid bonus can go a long way, inspiring the employees to continue their efforts.
• To develop retention strategies, restaurant managers should consider career mobility. Most of the times restaurants being the launch platform for career growth, career advancement often happens when employees change jobs from one to other. It’s been observed that after their first job, 9 out of 10 employees in the restaurant industry have moved onto a higher paying job regardless of their position. Training and promotional opportunities are forces of motivation that could spark positive behaviors, demonstrating exceptional results, thereby by increasing employee’s self-respect and loyalty, and facilitating reduced employee turnover.
• Lastly, restaurants need to change the layout strategies of their current restaurants to cope up with the increasing delivery orders since many of them are designed for in-person service. Reducing the dine-in space and increasing the kitchen space for processing online deliveries can help in processing more orders without impacting the in-house service. Also, simple solution like adding pick-up shelves where food is bagged up and labeled by names, can reduce the wait times for the couriers as well as customers who had ordered online, thereby enhancing customer satisfaction and reducing frustration for third-party service deliverers. This solution was tested by Chipotle in one of the NYC solutions and proved to be an instant success with measurable impact on delivery times of Chipotle.

Restaurants can increase the wages of the employees either by passing it to the customers -increasing the menu prices for in-house customers or by raising the delivery fees for online orders or they can consume it themselves. With restaurants facing low profit margins on online deliveries the probability of them consuming the expense is very low. Hence, even if the assumption of charging an average delivery fee is modified to include the increased delivery prices, the analysis made above will not have any major impact. Customers are extremely sensitive to price and increase in delivery or menu prices poses a risk of turning off the price-averse customers limiting the growth of delivery sales and impacting profitability. However, experiments conducted by few restaurants demonstrated that by increasing the prices they have seen little impact. A casual Italian chain Fazoli’s in Dayton Ohio tested higher delivery prices and saw no changes in the business – confirmed by Carl Howard, CEO.

In today’s world, convenience has become a product and with the comfort of home delivery, customers are willing to pay more for the convenience in food chain ranging from online grocery delivery to food take-out. Hence, the finding of the above analysis would still hold true if the assumption pertaining to delivery charges is modified.

8.     Conclusion

Of all the delivery orders digital ordering represents 53%, an increase from 33% since 2013. Hence, with the dramatic growth it’s obvious that the delivery trend won’t decline but would only continue to trend further. Restaurants fall under service-oriented businesses category that relies on employee performance and productivity for competitive advantage. Hence, employees become the most valued possessions of an organization. Therefore, with prolonged economic expansion leading to tighter labor market, managing employee issues such as retention has become a priority for restaurants. High turnover requires management to spend additional time and money on hiring and training staff, and unqualified staff affects the quality and customer service. Thus, increase in online demand and shortage of labor staff will directly have an impact on the business operations with restaurants losing their business to their competitors. Therefore, in order to thrive in the competition and reduce operational disruptions and profit degradation, restaurants need to take the above-mentioned measures/recommendations. Experimenting with different layout and human resource strategies that works best for the restaurant, restaurants should make the necessary layout changes and keep the employees happy with paid bonuses or advancement opportunities thereby reducing employee turnover.

9.     References

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