The Year of the Predicament
Where we are, where we're going, how I think we'll get there
This is the last edition of Expedite for the year. Thank you so much for reading and for your support. Happy holidays and cheers to a better year ahead.
My spouse, who works in technology, recently shared a good point with me: when launching a new product or iterating on a new idea, you must ask: Is this a problem or a predicament? Is this something to solve, or something to work our way out of?
This is an apt question to ask with regard to 2020 restaurant technology. This pandemic is one massive predicament, and challenges facing restaurant businesses can not be unilaterally “solved.” Of course, there are plenty of problems that contribute to this predicament we find ourselves in, and many of those can be solved with technological solutions. BUT: how many of those problems already existed for restaurants in the first place? Most of them!
We’re not problem solving for a pandemic, we’re problem solving in a pandemic, which gives certain technical solutions outsized weight — they work right now, and they’ll work in the future, further narrowing restaurants’ options.
It is worth wondering how these solutions will outlast the Covid predicament. In its IPO filing, DoorDash admits that its lone profitable quarter, April, May, and June 2020 may not be replicable due to the unique forces at play: a massive shut down order that landed just as the company was hitting its stride in growth. Would DoorDash have had as profitable a Q2 2019 had Covid arrived just one year earlier? (I don’t know the answer to this, I’m sure if you ask the company they’d tell you the infrastructure and business model they built from the beginning was ready to withstand the test of Covid.)
Technology’s contributions to the restaurant industry this year are undeniable and they’ve enjoyed explosive growth and customer acquisition. Priorities have been adjusted, products pivoted, and competition has never been tougher. It’s an exciting time for the future of restaurant tech, but I’m still wondering if restaurants are feeling the same energy with regard to the future of their businesses.
As usual, I have more questions than answers. Here are the big ones that I’m thinking through as we close the books on 2020:
What do increased independent restaurant frustrations mean for big delivery?
The commissions that third-party delivery companies charge independent restaurants are well documented, and consumer understanding of exactly how these services work is increasing. Many diners actively seek out ways to support restaurants that don’t involve giant $50 billion companies.
Local delivery services with alternative business models have popped up in cities across the country (here’s coverage of one in SF from KQED). These services aren’t necessarily made to scale or even to take down Big Delivery — instead they’re meant to give restaurants an option at a time when options seem… harder to come by.
Of course, it’s silly to think that DoorDash, Uber, et al., would consider abandoning independent restaurants altogether in favor of the more lucrative enterprise deals. DoorDash maintains Caviar, which feels like a premium offering even though the backend technology is now the same. That is, all Caviar orders run through DoorDash software. Uber maintains Postmates as its own brand, and I suspect the reasoning is partly the same — it offers local restaurants an option that feels smaller and more intimate as compared to a giant corporation that works with McDonald’s and advertises on primetime TV.
Repeat business is important to these companies. In its IPO filing, DoorDash revealed its existing customers are spending the most on orders in 2020, or at least, the spend from existing customers is growing faster than spend from new. As of Q3 2020, new customers accounted for 15 percent of orders to existing customers’ 85 percent (as measured by gross order value).
Then there’s the added dynamic of delivery companies competing against each other to do what’s “right.” On Tuesday, Grubhub took aim at DoorDash with an announcement that it would offer its premium product, Grubhub+, to restaurants and customers in New York and Chicago for free this winter. “This contrasts with others in the space who are adding diner fees in markets affected by fee caps,” a Grubhub rep wrote in an email. “We have no intention of charging restaurants a higher fee to be a part of Grubhub+ when they're impacted by a temporary fee cap.” This is, of course, in contrast with news that DoorDash would raise its fees in certain locations and/or add extra charges in cities where regulators imposed limits on commissions delivery platforms can charge.
Plenty of restaurants are adding direct ordering to their arsenal, through products like Toast and ChowNow, but say that they’ll remain on third-party platforms because of the business they generate. I do think with increasing consumer awareness — and, soon, the ability to actually, safely, dine at a restaurant — these platforms could continue to grow and maybe even threaten parts of big delivery’s business model.
What’s next for gig employment in food delivery?
Most days, a promoted tweet from DoorDash ends up in my Twitter feed. “No passengers. No Bosses. Just you,” it reads. After an expensive victory in California this year, large players in the gig economy are doubling down on flexible work messaging across the country. When California passed the law requiring these companies to classify independent contractors — drivers — as employees, they fought back swiftly and soundly, spending hundreds of millions to overturn the measure. And they did, with the passing of Proposition 22 in November.
This week, DoorDash introduced a prepaid Visa card and mobile banking app for its Dashers that includes 2 percent cash-back on gasoline, an easy perk for drivers. “Over seven million households in the U.S. are without a checking or savings account, and through DasherDirect we'll be able to serve the underbanked and unbanked population, opening doors for Dashers to access earnings in new ways,” a company spokesperson wrote in an email.
Meanwhile, Uber’s CEO is advocating for drivers on the platforms to receive early access to the Covid vaccine. I suspect to see more of this — advocating for gig workers on their platforms while maintaining their status as independent contractors.
What comes next as larger delivery companies chase profitability?
How long will the stock market tolerate unprofitable companies? I mean… remember $TWTR? One early DoorDash investor told TechCrunch he believes the company is still poised for 10x growth. It is, of course, easy to be an optimistic investor on a good day, but all of the valuation hubbub amid a devastating year for the restaurant businesses upon which DoorDash has been built illustrate the two very different sides of the same story: a company that is widely accepted to be of questionable value to many restaurants has room, runway, and support for even more explosive growth.
It’s a tale of two companies, the one that actually works with restaurants and services consumers and the one that promises results to investors and Wall Street. Right now those “results” are still growth at all costs and increased market penetration. Again, in its IPO filing, DoorDash noted one profitable quarter thanks to so-called Covid tailwinds, but doesn’t expect to be able to put up those numbers in the long term.
Uber’s CEO, on the other hand, has promised profitability soon, across the company. It’s used Uber Eats to make up some of the hits taken by the rideshare business this year, ducked out of food delivery in some competitive markets, and doubled down on grocery delivery in an effort to diversify and streamline all at the same time. In a presentation to investors earlier this year, the company said it’s looking to increase its per order take rate on delivery orders to 15 percent (this metric is different than the commission rate it charges restaurants) — and given the economics of the delivery business it’ll need to hit at least that number to eventually turn a profit. What happens if it doesn’t?
Will reservations services ever be relevant again?
They’ve been doing well by their customers, waiving service and software fees and introducing new pandemic-era features, but at some point, these companies are going to start fighting for relevance. This is an interesting shift. For years, OpenTable was top of mind as I covered the restaurant industry, one of the original restaurant technology companies that changed the way consumers and restaurants interact. But as discussed a few weeks ago, third-party delivery companies have stepped in to offer some of the same services (namely, demand generation) that OpenTable arguably did best.
According to an OpenTable data analysis, restaurant closures are up 28 percent this year worldwide, and 32 percent in the U.S. as compared to pre-Covid levels. Forty-three percent of diners say safety measures are the most important factor when choosing to dine out; just 25 percent rank “good food” as most important.
Whether or not this will change with a vaccine remains to be seen, obviously, but restaurants have to be able to actually stay open through the winter to be able to serve guests on the other side. OpenTable has committed to offering its products to restaurants for free through the first quarter of 2021, and, given its history, would likely consider extending this offer if the market dictated. But at some point they’re going to have to charge restaurants to use their software, and with a new expense on the balance sheet, restaurants are likely to reevaluate the tech partners they work with.
Where is there room for innovation?
Most weeks, I receive a couple responses to this newsletter asking if I think X, Y, or Z is a good idea. I am humbled that my opinion on your business matters, and largely I think that the ideas presented are good ideas.
For example: just because there are 100 (that’s a guess, the actual number is probably higher) direct ordering solutions for restaurants, does that mean the world doesn’t need another one?
My answer: building an ordering solution from scratch today solely meant to unseat DoorDash is probably not a viable business proposition.
If you want to attack the problem right now, here’s where I’d vote you focus your efforts: How can a restaurant meaningfully convert a guest that comes to them via a third party? Right now that third party is probably DoorDash or Uber Eats, but it could be OpenTable, or Google, or Yelp. Demand-generating tech companies take varying cuts for referring a guest, but it’s always been in the restaurant’s best interest to make sure they retain those guests. This is easier to do in some circumstances than others. One path to restaurant tech success ion 2021: find a way for restaurants to own and leverage *all* of their own data.
And before my inbox is inundated, YES, yes there are companies who do this. I see you! I always have! But this problem, more than any other this year, is in dire need of a solution that works for any variety of restaurant business inside the pandemic and, soon, on the other side. Keep ‘em coming.
Ok! That’s a wrap on the year. There was going to be more here, but I’ve run out of words. Take care, stay safe, let’s put this hell year behind us, see you in 2021.