Last week, DoorDash released its S-1 filing in preparation of going public. Optimistic readers saw astronomical growth in 2020 – revenues from the first three quarters of 2020 reached $1.9B, an increase of 226% from the same period of the previous year. Gross margins for the delivery giant have also improved, alleviating ongoing concerns about marketplace profitability.
But there’s more to the story. Much of this growth stemmed from a COVID-induced influx of new restaurants onto third party delivery (3PD) platforms – restaurants whose dining rooms had closed and who lacked any digital or off-premise presence. DoorDash and other 3PDs welcomed these restaurants onto their apps with delivery fees reaching 30% and incremental “advertising” charges (all but necessary for a favorable spot on the app). DoorDash announces their impressive revenue figures as nearly 100,000 restaurants – the businesses whose cuisine, hospitality, and profits are funding the DoorDash spike – experience long-term or permanent closure due to unsustainable margins.
Restaurants are paying attention. This week, marketing leaders pushing the envelope on customer engagement gathered around a virtual roundtable to discuss winning in an increasingly competitive and digital world. They explored the dynamic and complicated relationships with DoorDash and other 3PD companies, powerful players who eat into their margins and obfuscate customer data while at the same time offer a turnkey and attractive acquisition channel. They also shared their proactive strategies for combating this challenge: investing in direct ordering channels and giving repeat customers a reason to choose those channels, rather than 3PD marketplaces.
Here are our top five learnings from the discussion:
#5. 3PDs are here to stay, and as they combine forces and go public their pockets will only deepen. But relying on 3PD alone for digital and off-premise orders is a recipe for failure – when 3PD fees can reach 30%, restaurants realize minimal (if any) profitability.
#4. Investing in a direct ordering channel is key to thriving in a digital, highly competitive world. Not only are margins higher on every order (as one panelist said, “We couldn’t keep losing money by depending on the third parties”); but direct channels also offer access to customer purchase data, which empowers them to remarket and bring customers back for incremental purchases.
#3. Operators are increasingly testing out owned delivery, allowing them to control the end-to-end guest experience and preventing issues like cold food and inaccurate menus that they often encountered on 3PD platforms. What’s more, self-fulfillment of delivery orders allows higher throughput, as third-party fulfillment prioritizes their own orders first and depending on geo, can result in more than a few missed deliveries.
#2. Raising prices on 3PD marketplaces is a crucial next step in building viable relationships with 3PDs and in a surprising twist, does not seem to discourage guests (no one who implemented price increases saw ordering volume or revenue decrease – much the opposite). As profitability per order increases – one panelist nearly tripled 3PD profitability after increasing prices – price-sensitive customers are incentivized to use direct ordering channels.
Drum roll…and the number one takeaway from our session:
#1. With the appropriate price levers in place, merchants can make 3PD start working for them, rather than against them. While some previously would have called 3PD the enemy, now 3PD is considered a neutral or even attractive acquisition channel especially when customers are rather quickly moved over to direct channels through low-price guarantees, exclusive menu items, and other economic and non-economic incentives. For top strategies for promoting order direct, check out this article.
To participate in our next roundtable discussion or learn more, email Emily Rugaber, VP of Marketing, at email@example.com.