Delivery apps mean feast and famine for Baltimore restaurants

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Third-party delivery services enabling customers to order food with a few clicks of a smartphone are a blessing and a curse for Baltimore restaurants.

Thriving on customer demand for convenience, companies such as GrubHub, UberEats and DoorDash are altering eateries’ business models. These services can significantly boost order volume, but they also cut into restaurants’ major profit sources, such as alcohol sales.

“In some regards it’s upending the restaurant business,” said Gino Cardinale, an owner of City Café and Tark’s Grill & Bar restaurants.

It’s difficult to gauge the overall impact of these services on the hospitality industry. Experiences differ wildly between establishments. These apps, however, provide a substantial number of orders — in one case 30 percent of tickets — and it’s plain to restaurateurs they can’t ignore the technology.

Increases in orders are largely attributable to third-party services expanding an establishment’s access to hungry diners. The services are extending the reach of their delivery area, in some instances introducing restaurants to new customers.

Delivery companies argue that their services entice customers to place larger orders, improve accuracy and efficiency. They also say they cut costs for businesses by eliminating the need to pay drivers and associated liability.

According to GrubHub, one in five client restaurants doubles their takeout revenue. Small restaurants typically see a revenue increase of 50 percent after signing up. Order processing time is cut in half. There’s anecdotal evidence, GrubHub spokeswoman Katie Norris said, that customers who place an order often make a subsequent trip to eat at an establishment.

“One year after joining Grubhub, restaurants grow monthly takeout revenue by an average of 30 percent, six times greater than restaurants not using the service,” according to Norris.

The bottom line

David Stahl, who owned Pete’s Grille in Waverly for 14 years before selling the business in January, is a big fan. Despite a rocky start with one company about two years ago, orders via third-party delivery increased his business by 30 percent. At the time he sold the diner, delivery service orders represented 30 percent of overall business. Direct carry-out orders, walk-in and telephone, represented 20 percent of tickets.

Eat-in customers, who once made up 80 percent of his business, represented only about half of overall receipts.

“It helped my top line and my bottom line,” Stahl said of the apps.

Despite those positives, restaurant owners say, there’s a distinct down side.

Companies charge restaurants commissions that reduce profits on a single order. That can be hard for businesses in an industry with thin margins. The average profit margin for restaurants is between 3 and 5 percent, according to restaurant point of sale and management firm Toast.

GrubHub doesn’t charge establishments for listing on the service. Restaurants negotiate with an account adviser to set a commission charge per order, Norris said. Those commissions are based on whether an establishment makes its own delivery or GrubHub provides a driver. Across its national network, including both levels of service, the average commission rate is 18 percent.

Various reports place UberEats take of an order at 30 percent of a ticket’s selling price. UberEats did not respond to a request for comment on this story. DoorDash, according to its website, doesn’t charge a fee to restaurants with a “formal relationship.” But the company doesn’t address the cost of establishing that association. DoorDash did not respond to a request for comment on this story.

Full-service restaurants disproportionately feel the cut in business from third-party orders. That’s in-large part because they can’t sell a glass of wine, cocktail or draft beer with a delivery order. Beyond hurting a restaurant’s income, staff suffers because they’re not receiving tips on a third-party delivery. Owners suspect the boost in delivery orders isn’t from new customers and is merely cannibalizing existing business.

Weeknight crowds at City Café are slower than they’ve been in years, Cardinale said, and he attributes it to customers ordering in. As a result, he’s running more specials to lure consumers to eat in the restaurant.

He’s leveraging marketing tools like Yelp, which rates restaurants online and recently partnered with GrubHub, to yield better return on investment for marketing dollars.

“I believe this has a hand in why you see a couple of restaurants folding,” Cardinale said.

These delivery services, owners said, have injected greater competition into an already fierce environment. Previously, an eatery’s competition was limited to its neighborhood. Now, due to delivery apps ability to bring food to nearly any neighborhood in Baltimore, restaurants compete citywide.

Quality-control issues also complicate operating in the era of popular rating websites and social media. When a third-party service arrives late with soggy French fries or with the wrong food the restaurant suffers consumer wrath online. Stahl, the former Pete’s Grille owner, estimated there was an error with 5 percent of deliveries by third parties.

Growing dependence

Ann Costlow, a former stockbroker and owner of the Sofi’s Crepes’ franchise, said she worries about firms becoming entrenched. Once restaurants are dependent on customers provided by delivery services, she said, they may ratchet up fees to an unreasonable level.

After a recent price increase from GrubHub, the service charge for some orders accounted for 30 percent of the overall price. She tried adjusting her menu prices, but GrubHub doesn’t let her alter menu pricing specifically for its services.

“They just seem really inflexible,” Costlow said, adding that she’s generally happy with the business the service has brought.

Concern over delivery services hurting restaurants extends beyond the hospitality industry. Commercial real estate brokers who focus on retail are uneasy about restaurants closing. The last thing that sector, which is already taking a beating from e-commerce, needs is more vacancy.

Mike Gioso, vice president at MacKenzie Retail LLC, said there’s no immediate evidence of apps deterring clients from expanding or discouraging new eateries from opening. Yet, he said, restaurant clients remain uneasy about how these services are changing their business.

“It’s definitely something we’re watching closely,” Gioso said.

Melvin Thompson, a lobbyist for the Restaurant Association of Maryland, said there are not currently any plans to push for government regulation of delivery services. But restaurateurs are aware of the potential impact of the services, he said, and the association is listening to what members are saying as delivery services increase in popularity.

“It’s a developing situation because it’s been growing over the last couple years,” Thompson said.

Last year was hard on Baltimore restaurants, and 2018 is off to an inauspicious start. The closure earlier this month of celebrity-chef Bryan Voltaggio’s last Baltimore eatery, Aggio, served as an exclamation point on a rash of closings, ranging from Metropolitan Coffeehouse & Wine Bar to Dinosaur Bar-B-Que.

“I know very few guys who had a very good 2017,” Stahl said.

It’s impossible to gauge exactly the role, if any, third-party delivery played in recent closures. Restaurants face innumerable, sometimes contradictory challenges including customers scared off by crime and well-heeled new players adding competition. The restaurant business is infamously difficult. Hospitality consultants Perry Group International estimates 70 percent of eateries close within three to five years of opening.

Restaurant owners who soldier on say they’re trying to embrace the situation. Even entrepreneurs disproportionately impacted by delivery services’ pitfalls acknowledge they’re now part of doing business. In some ways, the ever-mounting obstacles to keeping the doors open are among the few constants in hospitality.

“Every day (after opening City Café in 1994) was a challenge, and a big part of that challenge was how to stay relevant,” Cardinale said during a recent panel on how technology is impacting the restaurant industry.