A new contract proposed by a researcher at the University of Texas at Dallas and his colleagues could help alleviate the main sources of conflict between restaurants and food delivery platforms.
In a study published online March 28 in the journal INFORMS management scienceDr. Andrew Frazelle, assistant professor of operations management at the Naveen Jindal School of Management, and co-authors Dr. Pnina Feldman of Boston University and Dr. Robert Swinney of Duke University, examined how to structure better the relationships between food delivery platforms and the restaurants with which they are partners.
Other sharing economy platforms, such as ridesharing and vacation rental services, allow people to sell access to resources that otherwise would generate no income for them, Frazelle said. . The interests of the resource owner and the platform are reasonably well aligned in that more transactions are good for both.
“However, restaurant delivery is different,” Frazelle said. “Delivery orders represent an additional business on top of the restaurant’s existing restaurant operation. More business sounds good, but it comes at the cost of a commission charged by the delivery platform.”
Platforms such as Grubhub, DoorDash and Uber Eats collect online customer orders, transmit them to restaurants and deliver the orders to customers. While this service helps restaurants expand their markets, the study found the relationship has inherent flaws.
The most common contractual relationship between platforms and restaurants, in which the platform takes a commission, or percentage off, from each delivery order, has two key issues, the study found.
First, the standard contractual relationship offered by most platforms is that of simple revenue sharing. The revenue from each order is split between the platform and the restaurant according to a pre-negotiated rate. The platform’s revenue share is typically around 15% to 30%, leaving the restaurant with only 70% to 85% of its normal revenue on each item sold.
Second, a large volume of delivery orders could strain restaurant operations.
“The platform’s delivery orders can potentially harm the dining experience by clogging and slowing down the kitchen, and expecting a long delay could deter higher-margin customers from purchasing,” said said Frazel. “Combine that with the fact that the platform only makes money on delivery orders, while the restaurant makes money on both food and delivery orders – but different amounts for each because of the platform’s commission – and we have a recipe for conflict.”
Food delivery during COVID-19
Frazelle said food delivery was already increasing before the COVID-19 pandemic, but received a significant boost when people were under varying degrees of stay-at-home orders.
DoorDash reported that over 6 million people delivered orders on its platform in 2021.
“At the start of the pandemic, delivery and takeout were restaurants’ only sources of revenue, and delivery platforms were arguably critical to their survival, especially for smaller independent restaurants,” Frazelle said. “But given the platforms’ commissions and the already low margins in the restaurant industry, delivery orders are often not very profitable, if at all, for restaurants, many of which do not have the clout to negotiate. more favorable conditions.
Cities including New York, Seattle and San Francisco have instituted laws limiting the commissions platforms could charge to protect restaurant profit margins.
The commission caps were well-intentioned, Frazelle said, but they didn’t change the fact that platforms and restaurants have different goals.
resolve the conflict
This motivated the researchers to identify an alternative contract – a variation of the current industry standard – that improves results while giving full pricing power to the restaurant for the dining channel and the platform for the channel. Delivery.
The researchers developed a model and found that different possible pairs of restaurant and delivery prices would generate higher or lower overall revenue, or the sum of restaurant and delivery revenue, with some prices reaching the maximum possible overall revenue, said Frazel. The optimal solution offsets the additional revenue from delivery orders against the negative impact these orders have on restaurant revenue due to the excessive congestion they generate, by striking the right balance between restaurants and deliveries.
“If the same company controlled both the restaurant and delivery channels, it would jointly determine the respective prices to maximize overall revenue,” he said. “But of course, prices are usually set by two different companies, and each seeks to maximize its own revenue. The key is to design a contract that is structured appropriately so that when each party maximizes its individual revenue, the resulting prices result also maximizes aggregate revenue.”
The researchers propose that for each delivery order, the platform pays the restaurant a percentage of revenue sharing and a fixed fee. They find that appropriately chosen values for these parameters generate the maximum overall revenue, thus providing a simple and achievable way to mitigate common problems and improve food supply chain coordination.
While not as ideal as the proposed contract implementation, Frazelle said if a restaurant had some influence over the price of the menu on the delivery platform, they could set that price higher than on its catering menu to offset the platform’s commission.
The study also has implications for consumers, Frazelle said. When deciding whether or not to use a food delivery platform, it’s important to understand the different contributors to price and the revenue split between the restaurant, the platform, and the delivery driver.
“The app doesn’t always reveal this outage,” he said. “It may only show a food total, service charge, and delivery charge. Even if the food total shows $25, the restaurant may receive significantly less than that.”
If customers notice that a given restaurant’s menu prices are higher on the platform than for on-site dining, they should consider that it may be the restaurant that is protecting its profit margin. Even with the price increase, after deducting the platform commission, the restaurant could receive even less than if the customer dined there.
Frazelle said delivery platforms are widely seen as a necessity for many restaurants, despite the lower profit margin on a delivery order. A restaurant that is not on a delivery platform risks losing an order to competitors that are, and that loss could be that of a regular customer.
“Time will tell to what extent eating habits change permanently, but delivery is indeed expected to retain a significant market share even after the pandemic,” he said. “This makes it all the more urgent to improve the relationship between restaurants and platforms.”