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PHOTO ILLUSTRATION BY JOHN KUCZALA; ISTOCK (6);

SIMON DAWSON/BLOOMBERG/GETTY IMAGES

THE DELIVERY WARS

Consumers Love Food

Delivery. Restaurants and
Grocers Hate It.
Fresh food sellers can’t afford to ignore the consumer
demand, even though most orders lose money

By Heather Haddon and Julie 134 COMMENTS

Jargon
March 9, 2019 12:00 a.m. ET

Consumers expect to order books, toys, shoes and

anything else they want online and have it show up
at their doors quickly and inexpensively.
Restaurants and grocers are rushing to satisfy the
exact same demand. They’re having a hard time.

A hungry customer in Denver might order a $9.99

Cuban sandwich from Panera Bread Co., which can
arrive at her door in about 30 minutes.

The problem for Panera is that each delivery costs

about $5 after accounting for labor, gas and
packaging. Yet to avoid turning away customers, it
continues to charge a flat delivery fee of $3 per
order in most markets, which means they have to
sell a lot more per order to absorb those costs.

Food delivery is proving to be a thorny, expensive

and crucial puzzle for restaurants, grocers and
investors. Billions of dollars have been spent in a
quest to build services that reliably move fresh
food from one place to another, yet many in the
business wonder if they will ever get the economics
right. Most delivery orders remain unprofitable.
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The first in a series exploring food delivery’s prospects and

challenges.

Companies are willing to put up with losses, for

now, because they aren’t seeing much growth
inside their stores. And while delivery currently
represents only a tiny fraction of overall food-
buying, restaurant and supermarket companies
expect people to increasingly shop that way. Big-
city dwellers remain the largest consumers of food
delivery, but the phenomenon is spreading to
suburbs and smaller urban areas.

“Customers have raised their expectations. The

whole framework has changed,” said Frans Muller,
chief executive of Royal Ahold Delhaize NV, which
is trying to boost sales of its Peapod grocery
delivery service. Peapod has previously s​ aid it is
profitable in only a handful of its markets.

Online grocery sales are expected to grow to

around $86 billion in 2022 from $17 billion in 2017,
according to a report from UBS Group AG.
Investment firm William Blair & Co. estimated
sales of online restaurant delivery will grow to $62
billion in 2022 from about $25 billion today.

Profits to Go
Delivery and packaging fees take a big cut of
restaurant profits, and deliveries often don’t
include beverages, which provide
high margins.

Ribs and a salad Beverage

In-unit labor Packaging Delivery fee
Served on premises

Total
$30.00
check

Cost 9.25

Profit: $20.75
(69% of total check)

Delivered via third party

Total
$25.00
check

Cost 15.38

Profit: $9.63
(39% of total check)

Note: Food margin is 67%, compared to 85% for

beverages. Packaging cost is 3.5% of total check;
delivery fee: 25% of total check.
Source: Pentallect

For now, it’s an expensive slog. Kroger Co. reported

lower profit on Thursday for its latest quarter, in
part due to investments of hundreds of millions of
dollars in online operations, and its shares fell 10%
that day on the news.

Although grocers and restaurants have their own

separate challenges, they face similar problems.

Both are dependent on foot traffic and have fallen

behind other retailers in adopting order-taking
technology. Both operate on low margins—
typically 15% to 19% for restaurants for dine-in
customers, and 1% to 3% for grocers—and
customers are only willing to pay so much for
convenience.

It costs supermarkets an average of $10 an order to

deliver food, but grocers only recoup around $8
from customers because charging more risks
turning off shoppers, according to a survey of
supermarket executives by consulting firm
Capgemini . Only 1% of 2,874 consumers surveyed
by the research firm were willing to pay the full
cost of grocery delivery.

And 85% of consumers aren’t willing to pay more

than $5 for restaurant delivery, according to a
recent survey of 2,000 fast-food and fast-casual
customers conducted by online ordering platform
Tillster.

Amazon.com Inc.’s purchase of Whole Foods in

2017 and its rapid rollout of grocery delivery across
those stores intensified the pressure for other
supermarkets to offer delivery. Separate from
Whole Foods, Amazon is now planning to push into
the grocery business with dozens of new stores in
several major cities, as recently reported by The
Wall Street Journal—a sign of how difficult food
delivery is when done only online.

Along with Kroger, Target Corp. and Walmart Inc.

are spending billions of dollars to develop their
own delivery systems through acquisitions and
investments. The retailers have seen their margins
suffer in recent quarters as a result.

Shelf Life
A relatively small share of U.S. grocery sales
happen online, but sales are projected to grow
quickly through 2022.

Online sales, 2017, billions

Clothing and shoes $83

Electronics 53
Grocery 17
Sports equipment 16
Home improvement 15
Auto parts 7
Pet supplies 6
Toys 6
Bath bedding 3

Percentage of sales value done online, 2017

Clothing and shoes 23%

Electronics 25
Grocery 2
Sports equipment 20
Home improvement 4
Autoparts 8
Pet supplies 20
Toys 23
Bath bedding 8

Annual online sales growth, 2017-22*

Clothing and shoes 8%

Electronics 6
Grocery 38
Sports equipment 12
Home improvement 22
Autoparts 22
Pet supplies 16
Toys 10
Bath and bedding 20

*Compound annual growth rate

Source: UBS

“I’ll be honest, it’s not easy,” John Mulligan, chief

operating officer for Target, said in an interview.
Target bought online grocery service Shipt Inc. for
$550 million in 2017. “From a pure relevance
standpoint, you have to figure it out, because that’s
how shoppers are going to interact with you,” he
said.

Walmart now offers grocery delivery through

nearly a half-dozen third parties and through
Jet.com, an e-commerce site it bought for $3.3
billion in 2016. Delivery sales are growing, but the
company says its e-commerce losses are expected
to increase this fiscal year.

Many grocers have had to invest money to

reconfigure their stores, installing coolers for
delivery orders, creating dedicated checkout lanes
for online-order shoppers and redesigning
backrooms and parking lots. Online orders draw
down inventory in ways that grocers are still
working to predict, which risks cannibalizing in-
store sales.

Unlike easy-to-ship household items, groceries

must be packaged carefully and sent in
refrigerated trucks. That makes the “last mile” of
the delivery process—from the warehouse to the
consumer’s door—a costly, often perilous journey.
The average online grocery order contains dozens
of items, with different temperature and handling
requirements.

Restaurant meals must likewise be packed in

special containers and delivered within a short
window.

Restaurants can’t ignore delivery. Nearly a third of

restaurant meals in the year ending in September
were consumed at home, up 2% from the previous
year, according to the NPD Group Inc. The number
of meals eaten at restaurants was flat over the
same period.

Orders of Magnitude
Delivery is expected to become a bigger part
of U.S. restaurants’ business, with third-party
services handling the majority of online orders
and deliveries.

Delivery as a share of restaurant sales*

12%
ESTIMATES
9

0
2016 ’17 ’18 ’19 ’20 ’21 ’22

Online restaurant delivery sales

Third-party restaurant platforms

Restaurant’s app or website
$40 billion
ESTIMATES
30

20

10

0
2016 ’17 ’18 ’19 ’20 ’21 ’22

*Commercial restaurant sales. Excludes catering and

drinking establishments.
Source: William Blair

Yet few chains can afford to do delivery

themselves, due to the cost of developing order-
taking technology and of employing drivers.
Restaurants need to generate at least 25% to 30% of
their orders from delivery for the labor economics
to make sense, according to Dylan Bolden, senior
partner at Boston Consulting Group.

Panera employs its own drivers to handle

deliveries in most cities. The chain spent six years
and an estimated more than $100 million to
develop the technology to process its own online
orders. Its investment cut into profits for three
years, until the effort began to pay off in 2016.

The company now derives 10% to 15% of its sales

from delivery in markets where it has been offered
for a long time. “We are substantially better off
doing delivery than not,” Chief Executive Blaine
Hurst said.

Panera and some other restaurants say that for

now, delivery is attracting diners who wouldn’t
otherwise come to eat in and that the extra sales
volume they’re generating from delivery offsets
the cost. Also, when people order delivery, they
tend to order for larger groups, so the average
check is higher than it is for dine-in orders.

To help fulfill orders, many restaurants have

turned to one of roughly a dozen delivery services,
such as Grubhub Inc., the oldest and largest in
gross food sales, as well as DoorDash Inc. and Uber
Technologies Inc.’s Uber Eats.

Taking a Bite
Restaurants and supermarkets increasingly
rely on outside services to handle delivery.

Third-party restaurant platforms

U.S. gross food sales, billions*
2018
estimate

Caviar Uber Eats

2022
$3.7
0.7 projection

11.6
1.9

DoorDash†
1.9
Grubhub
5.1 10.6

11.6

Other
1.8
Postmates†
1.2 4.3

7.3

Third-party grocery platform

Share of U.S. consumers who
can order from Instacart 80%

Instacart is the largest

60
independent third-
party grocery
provider, with 12.5% 40
market share in 2017.
Instacart
20

0
2012 ’13 ’14 ’15 ’16 ’17 ’18

*Includes takeout and delivery †Food only

Sources: William Blair (third-party restaurant
platforms–estimates and projections); the company
(Instacart accessibility); Deutsche Bank (Instacart
market share)

Venture-capital firms put $5 billion into U.S. food

and grocery delivery services last year, more than
four times the amount they invested in 2017,
according to data provider PitchBook Data Inc.
Some, including Postmates Inc., are considering
public offerings.

Chicago-based Grubhub, founded in 2004 and now

valued at $7 billion, allows diners to order food
from more than 105,000 restaurants in more than
2,000 U.S. cities and London. After investing
heavily in advertising due to increasing
competition and spending money to recruit drivers
and bring in diners in new markets, Grubhub
swung to a loss in the fourth quarter. Its adjusted
profit per order was $0.98, down from $1.57 in the
third quarter.

A Grubhub spokeswoman said, “We expect our

marketing investment will result in more orders
throughout 2019 and our new delivery markets will
become more efficient throughout the year.”

Newer entrants such as DoorDash, founded in 2013,

have attracted venture capital that have enabled
them to expand rapidly. After another funding
round last month, DoorDash is now valued at $7.1
billion and is available in all 50 states.

A Doordash delivery person in New York City. PHOTO: MICHAEL

BUCHER/THE WALL STREET JOURNAL

Supermarkets have also been turning to outside

firms, particularly Instacart Inc. and Target’s
Shipt. The companies allow shoppers to order
groceries from multiple supermarkets signed up in
a given area, and sends gig economy workers to
pick up and deliver orders.

Instacart, the largest independent third-party

grocery service with an estimated $2 billion in
sales in 2017, continues to lose money on orders,
according to people familiar with the metrics.
Nilam Ganenthiran, Instacart’s chief business
officer, said the company averages profitable
margins on orders when not accounting for
administrative expenses.

Third-party services currently handle 52% of

online restaurant orders, according to William
Blair. They handle delivery for around half of the
online grocery market for food, according to
consulting firm Pentallect Inc.

Delivery Deals
Although the number of deals has shrunk,
funding is up globally for third-party
restaurant and grocery store delivery services
since 2016.

Restaurant
$8

2018
6

2017
2
2016

0
0 50 100 150

DEALS

Grocery

$4
2018

2017
2
2016

0
0 50 100 150

Source: CB Insights

Food sellers pay the services an average fee of 10%

to 25% on each order, which means the actual
deliveries often lose money. Better placement on
the services’ websites or apps costs even more.

KFC and Taco Bell work with Grubhub to handle

delivery. Scott Catlett, general counsel of Yum
Brands Inc., owner of the two chains, said offering
delivery is essential to keep convenience-seeking
consumers. “Brands that don’t provide an easy
experience ultimately won’t win in the end, so
we’re very focused on the concept of easy,” he said.

Texas Roadhouse Inc., a steakhouse with more

than 500 restaurants in the U.S., decided not to
offer delivery after tests with two services last
year. Consumers complained that the food quality
wasn’t good and that prices were higher than in the
restaurants.

Scott Colosi, president of Texas Roadhouse, said he

is skeptical that delivery sales will be great enough
to offset the cost. “I mean, people will try it when
it’s new, but how long will they do it?” he said.

McDonald’s Corp. started using San Francisco-

based Uber Eats for delivery in January 2017. In a
survey that a newly formed association of
franchisees conducted of its members in January,
565 respondents said that delivery is not
contributing positive net cash flow to the business,
while 198 said it is.

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A McDonald’s spokeswoman deferred to a recent

earnings call, in which executives said
approximately 70% of delivery orders come from
people who don’t come into the restaurant to eat,
and that the average check for delivery orders is
around twice that of in-store orders.

When an order of fries shows up cold or a bunch of

lettuce arrives wilted, consumers tend to blame the
food seller, not the service. Many restaurants and
grocers that work with third parties also lose
control over customer data, which food apps can
use to drive customers to other outlets.

Some chains are taking a hybrid approach by

handling the order-taking through their apps but
outsourcing the actual delivery to third-party
services, which saves them 10% to 15% in
commission fees.

Large chains such as Yum Brands have the scale to

negotiate favorable terms, unlike smaller chains or
independents.

“We said up front that access to data is table stakes

and we wouldn’t consider any deal that doesn’t
include that,” said Yum’s Mr. Catlett. Yum also
arranged to pay Grubhub a per-order commission
fee that Mr. Catlett said is “nowhere close to 20% to
30%.”

Grubhub Chief Executive Matt Maloney said he

understands restaurants’ fears about losing
customer data and decided the key to their mutual
long-term success would be to come up with a way
to share data with restaurants.

Theresa Tepper, a 41-year-old Manhattan public

relations professional who orders groceries from
FreshDirect LLC and takeout from Grubhub’s
Seamless service, sees little of the downsides of
low-cost delivery.

“Delivery makes my life so much easier,” she said.

RELATED READING

Soggy Fries vs. Sagging Profits: Restaurants Face

Delivery Dilemma
Online Orders Force Supermarkets to Rethink Their
Stores
Grubhub Still the Big Cheese in Online Food Delivery
Food Delivery Startups Cook Up New Model That’s
All About the Kitchen
GM, DoorDash to Test Autonomous Food Deliveries

Write to Heather Haddon at