Off-premise initiatives

At the height of the pandemic, some restaurants began to seek out virtual brand partnerships or develop their own digital-only concepts as a band-aid for revenue loss. But virtual brands hold much more potential — and require much more thoughtful precision — than the bolt-on side hustle some operators believe these concepts to be, Nextbite Chief Growth Officer Geoff Madding told Restaurant Dive at the National Restaurant Association Show. 

“[Virtual brands were] definitely a life preserver, and that’s great. We were happy to help with that. But we really believe the industry is moving this way,” Madding said.

Nextbite, which is powered by online ordering platform Ordermark, creates turnkey digital brands that can be applied to a broad swath of restaurants depending on their latent capacity and staffing levels. Many of the company’s concepts are built around buzzy celebrity ambassadors, including chef Tom Colicchio’s sandwich concept 'Wichcraft and Wiz Khalifa’s Packed Bowls. 

Nextbite can develop virtual brand innovation easily with enterprise chains like IHOP, which launched Thrilled Cheese and Super Mega Dilla in March, thanks to available financing, supply chain and marketing capabilities, Madding said. But half of the company’s client mix is made up of small operators, and independents have the ability to make virtual brands successful on their own as well, he said. 

To start, operators need to answer a few key questions.

“Is there unmet demand in the marketplace by consumers you are trying to meet? Is it going to be an operational fit, so not disruptive to your kitchen?” Madding said. “Then if you take it as seriously as your brick-and-mortar business, you’ll be successful. If you don’t, you probably won’t,” Madding said. 

Forty-one percent of independent restaurants already operate virtual brands, according to a January report commissioned by Grubhub and executed by Technomic, and 68% of these respondents say their concepts are permanent additions. Going forward, 46% of independents plan to open three or more virtual brands over the next year.

For restaurants looking to take the leap into virtual operations, Madding lays out what to consider before investing and what opportunities the future may hold.

This interview has been edited for clarity and brevity. 

RESTAURANT DIVE: I’m seeing a lot of virtual brands that are very focused on current trends. Are these concepts becoming LTOs?

GEOFF MADDING: It can feel like that operationally — you have a new product, you have to do some new marketing, maybe you’re trying to capture a specific trend or a season. At the core, it always has to start with consumer expectations, meeting or exceeding, plus food that is of a certain quality, plus an experience that is delivered in some way. It’s not a small amount of work to do that. Have you figured out the math behind that? Is it going to be profitable for you? Are you using the virtual brand to generate excitement around your own brand? 

I like to think virtual brands can be more of an extended LTO, where as opposed to a few months you could have a few years of success with it. The nice thing about this approach is that trends change. If you build a virtual brand that does really well for three to five years and then you rebrand to something else, there’s not much sunk cost there and it’s pretty easy to pivot.

To deliver a compelling experience, do virtual brands need a hook like a celebrity partnership?

MADDING: I think in some way you’re going to have to stand out because it has become a very crowded marketplace. So the question is how are you standing out? That can be done by partnering with celebrities, which we’ve done, partnering with celebrity chefs, which we’ve done. Brand equity that was there already can help. And you can stand out by launching in an interesting way, by marketing in an interesting way, and by finding pockets of unmet demand. 

For example, some of our breakfast concepts are our best-selling brands, and there was a thought not that long ago that breakfast delivery is not gonna work. But we’ve seen a ton of demand, and there’s not enough supply for it. So what you can do is be first to market in those areas and start building a consumer base, so when it does get crowded — if you’ve done a good job — consumers are still going to come to you because they trust you.

What does a restaurant need to make a virtual brand successful?

MADDING: The single most predictive thing for us, for the success of our partners, is that we have a good concept match with what they’re doing because it needs to fit into their operations. But it needs to be truly incremental to their existing market or occasion use, and we can’t be cannibalizing the business. So getting the right concept, or concepts, to fit is really important. That’s number one. 

Number two, our partners need to think of virtual brand deployment as strategic and not an aside they can half do. They really have to train their staff on it, we have to really reinforce quality, we have to monitor it closely, and they have to be very invested in that process. If they are, they are literally always successful.

Let’s zoom in on that. What nuts and bolts are necessary? 

MADDING: It starts with excess capacity. And what I mean by that is, do you have kitchen staff on site on certain days and dayparts that are not as busy as they could be? If the answer is yes, you’re probably a good candidate. Everything else is what are you a good candidate for. For instance, you could be a sandwich shop with limited equipment, but you have a panini press. Then you could do our ‘Wichcraft virtual brand, especially if you tend to be busier at night, because this brand is more busy during the day. That’s the kind of match you need at the start when we’re looking at this.

Then it almost becomes a math problem. What equipment do you have? What SKUs do you already bring in? What kind of food are you making? When are those slower days? And then for us, we see if we have brands that look like that. For our larger partners, we may not, and then we may go ahead and make brands for them. We look very closely at who their customers are; when those folks are ordering; when it’s not as busy; how to get incremental reach on different occasions for those existing customers and how to acquire new customers. 

That can be done by any company. If you’re a small business, you can do it. It’s easier for us because we have a lot of data. We have a lot of resources. It’s not impossible for small businesses, but it’s tough… You can’t just have something that consumers want, and you can’t just have something that works in your operations. You have to have both.”

There’s been discussion of how virtual brands could offer a gateway to Web3. What opportunities are you seeing?

MADDING: It’s clearly going to be a technology that’s massively disruptive to our space. … We’re always trying to think about ‘If something crazy happens, how are we going to be able to play in that world?’ The nice thing about having virtual brands is you don’t have the serious capital investment problems, and also potentially some of the cost problems, that you do with physical locations. So you’re able to pivot very quickly as we see new technologies and new avenues pop up. It’s not like we’re steering an aircraft carrier. We’ve got a speedboat that you can quickly turn around and take advantage of stuff as it comes along… We’re in a space where if we can think of something, we can probably do it… But Web3 doesn’t have to displace restaurants. Restaurants can take advantage of all these other channels and do all this other stuff to enable them to do business. So that's the exciting thing to me.

How do you see the virtual brand space maturing?

MADDING: I think we’re gonna have to grow up for a while — eventually we will mature. But we have a lot of fun toddler and teenage years ahead of us. I think we’ve barely scratched the surface of what’s going on, because people are just starting to take virtual brands seriously. They’re just starting to lean into them. We’re getting some really smart people who are starting to focus on it. Anytime that happens, that’s when things really start to get fun.

In 2018, Chipotle was facing a problem. While same-store sales and transactions were up, customers felt the chain had too few restaurants. Diners were frustrated that the only way to buy from Chipotle was to order inside a restaurant, said Tabassum Zalotrawala, Chipotle’s chief development officer. 

“[We focused] on one, how we can become more visible and relevant and two, how can we extend access and convenience so we let people Chipotle when, where and how they want,” Zalotrawala said. “And how can we leverage technology and innovation to drive that digital growth?”

One way to bring all of these elements together was a mobile order pickup window, later dubbed the Chipotlane. The chain leveraged its app and online ordering capabilities to let customers order their food without waiting in line behind another car or giving their order to a speaker box, Zalotrawala said.

Transactions at a Chipotlane take less than 30 seconds, far less than a traditional drive-thru, Zalotrawala said. Taco Bell’s drive-thru speed of service time averages 221 seconds, for example, which is the fastest restaurant drive-thru time for 2022, according to a QSR Magazine report on the 10 quickest drive-thru chains. Chick-fil-A, which had the worst speed of service time of those brands, came in at 325 seconds. 

“By 2019, we saw promise in the concept,” Zalotrawala said. “We could see that the sales margins and returns are far higher in restaurants that had a Chipotlane versus non-Chipotlane.” 

In November, Chipotle opened its 500th Chipotlanes and most of its future pipeline will contain these pickup lanes. In 2022, the company is on track to open between 235 and 250 restaurants, 80% of which will have a Chipotlane, CFO Jack Hartung said in October 2022 during an earnings call. It is also targeting 255 to 285 restaurant openings in 2023, and 80% of new restaurants in 2022 and 2023 will feature Chipotlanes. This channel, which generates roughly 15% higher sales than a traditional Chipotle restaurant, led to a shift in real estate, construction and labor strategy, Zalotrawala said. 

“Our priority for development will always be the Chipotlane,” Zalotrawala said. “Wherever possible, whenever possible, we want to try to work really hard to get that pickup window.”

Overcoming initial challenges

The company shifted gears, even revising some pending leases to convert buildings to include a pickup window with a vehicular lane, Zalotrawala said. 

“It’s one thing if you’re building 10 restaurants a year to make that change, but imagine implementing those changes into over 200 restaurants that are opening that year,” Zalotrawala said. 

Going back and adding a pickup window to sites that were already approved was difficult. Construction plans had to be redrawn and the permitting processes redone, Zalotrawala said. This took a lot of coordination among various departments — including the operations services team, which innovates around equipment — and the operations team in the field to see what worked and what didn’t work, she said. 

“Adding the Chipotlane pretty much required a redesign of our restaurant, both dining and kitchen … and that was a pretty mammoth task for us,” Zalotrawala said. 

Digital makelines needed to be an exact replica of the frontline, which for Chipotle meant making sure there were full pans that held cold and hot wells, she said. Staff also needed to work in the exact same manner as they did at the front line

Figuring out the right amount of labor was a learning process, she said. The operations team in the field and operation services team, which innovates around equipment, crunched numbers to see how many employees were needed on the digital makeline and how much that would cost. Chipotlanes typically contribute about $1 million to restaurants annually, so staff needed to be in place to run restaurants efficiently and with speed and accuracy, she said. 

Chipotle learned quickly that it needed to acclimate consumers to the pickup windows. During the first few months, customers didn’t realize the window was exclusively for mobile order collection, and would drive to the window to try and order. That required staff telling guests that if they ordered online, they could pick up orders from that window.

Streamlining conversions and remodels 

Before Chipotlanes the company sought out end cap or freestanding locations, but not real estate that could accommodate a drive-thru window. When it shifted that strategy, Chipotle needed to be clearer with developers and landlords about interest in potential sites, including buildings with old drive-thrus like banks or defunct restaurants, Zalotrawala said. Chipotle has already made numerous bank conversions because banks tend to have a pickup window, or at least the ability to add a pickup lane, she said. 

“Between conversions and being clear about what we’re looking for in terms of the development strategy with our landlords and with our developers, we’ve been able to accelerate this pipeline very quickly,” Zalotrawala said. 

The company also continues to do a complete analysis of its portfolio of restaurants to figure out which ones are physically able to add a Chipotlane, Zalotrawala said. 

A lot of that process involves analyzing how long is left on a lease. If a lease is up in less than five years, then it’s not a good candidate, she said. Chipotle will review a restaurant’s sales and comps performance to determine if there is enough room at the site to add that vehicular lane, she said. The company will also consider whether it can get a permit from local authorities and from the unit’s landlord to approve the conversion. It also takes total investment costs into consideration.

The company developed a better way to do remodels to reduce the amount of closure time, as well. For the first two or three projects, the restaurants were closed for three to six days. But the team quickly innovated and partnered with its general contractors and other vendors, operations partners and facility partners to figure out exactly how it could change the construction schedule and modify restaurant hours to avoid a full closure. 

Every remodel that Chipotle did in 2021 had zero closure time, Zalotrawala said. Construction takes longer when the restaurant stays open, but Chipotle is still able to complete the remodels in a week or two, she said. 

Overcoming building delays 

Despite overcoming a lot of initial challenges to develop Chipotlanes, one problem is unlikely to resolve itself anytime soon: permitting. 

“Permitting has become an onerous process, Chipotlane or no Chipotlane. Things that were taking maybe 60 to 90 days are now taking 180 days to permit,” Zalotrawala said. “A development [taking] 12 to 18 months is now easily 18 to 24 months. It’s a rare case when we can approve a piece of real estate and open the store in 12 months.”

Even before the COVID-19 pandemic, permitting took a long time — likely due to the heavy workload for prospective developers in the midst of a bustling development period. During the pandemic, a lot of restaurant companies stopped developing, but have now pushed forward with their projects, adding to the amount of permits cities are processing. 

To get buy-ins for Chipotlanes, the company has numerous conversations with city officials to show them that these pickup lanes don’t end up creating 20- to 30-car stacks like traditional drive-thrus, Zalotrawa said. Chipotlanes don’t have back-and-forth conversations at the speaker boxes or customers making payments at the window, avoiding traditional delays, Zalotrawala said. 

“That’s what differentiates us from QSR, because we have none of that,” she said. 

Chipotle provides videos and images to show city officials how Chipotlanes compares to traditional drive-thrus, what it would look like and illustrate the benefits that come with the channel, such as bringing more people into a shopping center without adding to the general traffic. 

A future filled with Chipotlanes

With Chipotle aiming to reach 7,000 restaurants in North America and growing at a rate of 8% to 10% of units each year, there will be more opportunities to build Chipotlanes. Chipotle is expanding its presence in small towns in the U.S. Small town restaurants tend to have comparable margins and returns to the company average, CEO Brian Niccol said during an October earnings call. Opening day sales for a small town in Texas set a new company record, he said. Compared to urban restaurants where rent is higher, small town restaurants require less investment, CFO Jack Hartung said. 

The company doesn’t have the ability to add Chipotlanes in dense urban areas, Zalotrawala said, adding that the next big question has been how to make Chipotle more accessible, convenient and visible to its guests in these regions. One solution is a digital pickup window for foot traffic. The company originally tested the walkup windows near Wrigleyville in Chicago and saw a high user adoption. 

“That’s been another enabler for the Chipotlane strategy, where if you are in an urban area, we can design a walkup window versus a vehicular window,” she said. 

The company isn’t just innovating with walkup windows, either, but is also testing alternative formats like the Digital Kitchen it opened outside of West Point in Highland Falls, New York, to provide pickup- and delivery-only service. It doesn't include a dining room or full service line. 

Chipotle also opened its first Chipotlane Digital Kitchen at the end of 2021, which has no dining room or front line and allows guests to pick up digital orders through a drive-up or a pickup window. The company chooses to test new formats in some of its established markets where it may have one restaurant for 25,000 people and could benefit by adding a smaller format store that just has a Chipotlane to service more of those customers. 

“My team remains focused on making sure that every new restaurant we add to our pipeline has this convenient channel where guests can Chipotle a different way,” Zalotrawala said.

When drive-thru-only coffee concept Dutch Bros went public in 2021, it had over 470 shops across 11 states. But the development pace has been brisk — the company expects to top off its first full year as a public company with 130 new shops, CEO Joth Ricci said during the company’s November 2022 earnings call. 

During the third quarter, said Ricci, Dutch Bros opened a record 38 shops — nearly the sum of store openings for all of 2019. The chain has opened at least 30 company-owned cafes a quarter since Q3 2021, he said. 

But Dutch Bros has faced development hitches. “The challenge now is probably surprises in the supply chain that can really disrupt the predictability of a project,” Dutch Bros COO Brian Maxwell said. 

Even the smallest delays, like waiting for internet service installation or for small hardware deliveries, can throw off a project. Maxwell said Dutch Bros’ procurement and construction teams have been keeping tight relationships with vendors to ensure it’s viewed as a good partner and stays top of mind. 

Dutch Bros has 61 units under construction across the country, Maxwell said. The chain’s locations are on the smaller side — roughly 865 to 900 square feet —  so it only takes about four months to build a location, he said. This is a quick turnaround, as other restaurant sources told Restaurant Dive drive-thru builds can take over 12 months.

Construction and development timelines are lengthening, spurring many chains to not only adjust their development projections but also create space-saving small prototypes. With customer demand for off-premise meals rising, it’s not necessary — or in some cases, practical — to have large dining rooms. 

Taco Bell franchisee Diversified Restaurant Group opened its first Go Mobile store in July. The company is using this unit as a test to see if it will be able to build restaurants on a smaller footprint, Todd Kelly, co-chief operating officer at Diversified Restaurant Group, said. These units are 40% smaller than a traditional Taco Bell, he said.

“Unfortunately, everything's taking more time and more money to build these days,” Kelly said, referencing labor shortages and supply delays and shortages. “And that's why, across the industry, people are looking at creative ways on how to save construction costs, which are, in general, 40% or 50% more than what they were just a few months ago.”

Operators need to be discerning with site selection

One of the biggest challenges for restaurant chains expanding into drive-thrus is site selection. 

“Drive-thrus are very rare to find because everyone is competing for one. Everyone’s looking for one. Every QSR, every fast casual restaurant out there,” Atomic Wings CEO Zak Omar said. 

Atomic Wings, which has over a dozen locations, is planning to open its first drive-thru in 2022. 

“We’re all competing for that same drive-thru real estate and [it’s] really difficult to find. You’re going to be paying a higher rent,” Omar said. “Construction costs are a lot more. … What our research has shown is drive-thrus perform about 30% higher in sales volumes than traditional stores.” 

But there is still plenty of opportunity out there, especially for chains with discerning appetites. Maxwell said Dutch Bros doesn’t target locations that can create the highest AUVs but strategically penetrates markets where it can build share over time. “That allows us to kind of be on the fringe sometimes compared to the main trade areas of those big players,” he said.

As an emerging brand with a strong sales record, Hawaiian Bros has lost out to bigger brands on deals for locations, and sometimes has to pay higher rents to secure an ideal location if the landlord isn’t familiar with the brand, Cameron McNie, Hawaiian Bros co-founder, said. 

Securing sites has gotten a bit easier for Hawaiian Bros now that it has 35 locations and can show a history of its operations. As a smaller company, the chain also has the ability to get back to landlords quicker and sign leases quicker than larger brands that have more leaders who need to sign off on deal terms. 

Hawaiian Bros will examine the sales of other QSRs operating in a market it’s considering and how those specific sales compare to the national sales average for that chain. McNie said a preferred site will have plenty of parking and be anchored by a large retailer like Home Depot, Walmart or Costco. 

Hawaiian Bros is casting a wider net beyond the company’s current market footprint of the Midwest to ensure that it is finding Class-A real estate. McNie said the chain has found locations in Oklahoma City and San Antonio, Texas, and is considering other markets in Texas, including Austin and Houston. 

For Schlotzsky’s, site selection to test its new off-premise prototype, which features a double drive-thru lane with a pickup window, was straightforward. It chose Oklahoma City since it has several company-owned and operated restaurants in the region, said Shelley Harris, former interim chief brand officer at Schlotzsky's and current Focus Brands restaurant category president. The company has strong brand recognition in the city and consumers are willing to provide feedback on their experiences with the new prototype, she said.

 

Sharp permitting, construction strategies are key

While many municipalities have increased scrutiny over drive-thrus in recent years due to traffic concerns, pandemic-era dining room lockdowns have made many more amenable. But restaurant brands still often need to make their cases for drive-thru proposals with cities. 

To work through the permitting process with local municipalities, Maxwell said Dutch Bros explains how its location will benefit communities and local businesses. It also tries to align with developers and vendors that are like-minded, he said. 

For Hawaiian Bros, the permitting process has been different in every jurisdiction it has locations. In one market, the company heard that the local government was moving away from drive-thrus. 

Once Hawaiian Bros management met with a committee of city officials and made a case for the benefits of the restaurant, they convinced the city to allow the drive-thru because the site had plenty of room in the parking lot to add a drive-thru. McNie said the company also argued that drive-thrus are fast so traffic would move quickly compared to a restaurant without one, and mentioned the restaurant would create 100 local jobs. 

For Smokey Bones, opening its first drive-thru in Bowling Green, Kentucky, went smoothly because the city was amenable to its permitting and construction needs. Smokey Bones also had an experienced management team in that market, which was an important consideration when adding a new channel to an existing business, Smokey Bones CEO James O’Reilly said. 

The construction of the drive-thru had minimal negative impact on the chain’s Bowling Green restaurant because most of the building took place outside the restaurant, O’Reilly said. 

Schlotzsky’s argues that its new double drive-thru design won’t cause more traffic, but improve flow and leave fewer cars waiting in line. 

Harris said cities have responded favorably to this pitch. “There is a bit of education that has to go on with the city to say it’s not doubling necessarily the drive-thru capacity, but it is actually creating efficiency in terms of getting those cars through faster, which should be a better experience for consumers who are not trying to get into our drive-thru lanes,” she said. “They’re not impeded by drive-thru as much as they were perhaps in a single drive-thru.”

As far as reducing construction costs goes, Schlotzsky’s 1,000-square-foot unit uses about 60% to 70% of an acre. The small unit also doesn’t require furniture or fixtures, Harris said. Less labor is needed to clean the restaurant, and these employees can instead be used in the kitchen to help get drive-thru orders out faster. 

“I think it's going to take us some time, but we certainly anticipate that there will be a palatable savings for our franchisees as they go to market in some of these smaller units,” Harris said.

Over the past two years, third-party delivery aggregators made a feast of the pandemic environment that threatened so many restaurant operators with famine. 

Delivery accounted for 8% of restaurant sales at the end of Q3 2021 — a ratio experts predicted would shake out in 2025, NPD Group senior vice president and industry advisor David Portalatin said. Five years before the COVID-19 crisis, that percentage hovered around 3%.

But this elevated growth, which analysts said was driven by an increase in repeat customers, isn't likely to last.

"I don't think you're going to see a restaurant industry that is ever 20% delivered," Portalatin said. 

Sales had already started to slow down at DoorDash and Uber Eats in Q3 2021, Lyle Margolis, CFA and senior director at Fitch Ratings, said. DoorDash's financial guidance also suggests it is going to flatten this year, Margolis said.

"We're not going to see that kind of meteoric growth we saw over the next couple of quarters," Margolis said. 

As the space continues to evolve, aggregators are working to deepen their relationships with restaurants and find ways to make delivery work for them. Since 2020, these companies have added white label online ordering for restaurants, offered more flexible pricing and implemented subscription programs to boost retention among restaurants and diners. 

Restaurants weigh the cost of delivery

As diner traffic returns to pre-pandemic levels, some restaurants are starting to rethink their delivery capabilities, especially since the channel is often less profitable than dine-in and takeout. A handful of operators within Darden, Cheesecake Factory, Dine Brands and First Watch have begun shutting off delivery during high in-store traffic times, for example. 

But from a data standpoint, Marty Hahnfeld, chief customer officer at Olo, said the company has never seen this decision made at the top level of a brand.

"What we've seen are individual locations that are maybe in a bind looking to slow the pace a little bit," Hahnfeld said. "We can count on a couple of hands the number of times that's happened that we're aware of across our 75,000 restaurant locations. I think it's a great headline. I don't think it's really a trend that’s reflective of anything." 

Even if these incidents are rare, they are an example of how operators are trying to balance delivery costs with delivery gains, especially as diners continue to demand the offering.

"There's a lot of tension between independent restaurants and third-party [aggregators]. It's expensive and where's that cost coming from? I'm a big believer that ultimately when the consumer demands something in the marketplace, there will emerge a solution that is palatable to all parties," Portalatin said. 

Delivery companies have extended various incentives, including direct cash and subsidized rates, for independent restaurants over the past two years. But the dark side of aggregators' track records, including lawsuits and complaints over practices like high commission rates, are still top of mind for restaurants, Raj Joshi, vice president and senior credit officer at Moody's, said.

Still, delivery can be very beneficial for certain types of restaurants, such as operators that don't have their own delivery channel or others that have excess capacity and aren't fully utilizing their kitchen resources, Joshi said. But many restaurants may not need third-party delivery in a post-pandemic world, he said.  

A wave of new product and service offerings

While delivery orders increased during the pandemic and the channel remains popular, about 44% of consumers are more likely to order directly for delivery from a restaurant. Comparatively, 17% of diners order from aggregators, according to a PYMNTS and Paytronix Digital Divide report, which surveyed 2,213 U.S. consumers from Sept. 2 to Sept. 9. 

Delivery aggregators have responded to this consumer behavior by offering tools and resources that help restaurants create online ordering capabilities. 

In 2020, Uber Eats added tools that allow restaurants to offer online ordering directly from their websites for pickup or delivery. Uber Eats' manager platform also lets operators view customer analytics and orders in real time. The insights provide suggestions of how to boost customer retention or orders. If a location has a 15% retention rate, which is lower than average, the manager platform might suggest the operator test a loyalty program or reply to reviews, Yadavan Mahendraraj, Uber's head of merchant operations in the U.S. and Canada, said.

"We're not only giving them more data, but also [we're] giving them a better way to parse that data," Mahendraraj said. 

Grubhub added its Grubhub Direct product in May 2021, offering independent restaurants the ability to create customizable ordering websites, manage customer relationships and access diner data.

These online ordering capabilities also give restaurants the opportunity to access delivery customer data, which has been a longtime interest of Grubhub's restaurant partners, Theresa Dold, vice president of agency services and product at Grubhub, said. 

DoorDash launched its turnkey, digital storefronts in 2020 as part of its Main Street Strong Initiative. DoorDash found that a large portion of small and midsize businesses didn't have access to online ordering on their websites, and saw an opportunity to create that tool, which helped expand its offering from a marketplace to a broader platform, Ryan Parietti, DoorDash's senior director of merchant strategy and operations, said. 

"All types of restaurant technology providers are figuring out, if they're not already playing in this branded online ordering space, how to get there," Dold said.

In-house online ordering systems also allow restaurants to avoid the commission fees that come with being on a third-party delivery marketplace. Grubhub Direct, for example, charged a monthly hosting fee for the website of $49 and a one-time set up fee of $99 until October, before it removed the fees entirely. Restaurants aren't charged for marketing commission fees. DoorDash's Storefront offering is also commission-free, and Uber Eats charges 29 cents per order placed through restaurant websites supported by its Webshop feature."

"[Restaurants] are going to want a platform that allows them to run a specific promotion for their branded online ordering site that might be distinct from what they’re running on [the] marketplace because of the profit margins they are trying to maintain," Dold said. 

Grubhub Direct is also part of the company's long-term strategy to become a one-stop shop for restaurant partners.

"As a restaurant has evolving needs in terms of how they want to grow their digital business online, we believe we can plan an even more fundamental role in that journey outside of being just a marketplace for our restaurant partners," Dold said. 

Delivery companies have also implemented different pricing structures to allow restaurants to pick and choose the kinds of services and fees that best suit their business plans. They have also been offering restaurants that do self-delivery ways to outsource the actual delivery fulfillment to aggregators in order to expand their reach and capabilities. 

DoorDash launched its merchant pricing plans in April 2021 to provide more flexibility in different models, while Uber Eats did so in September 2021. Both now offer tiered pricing depending on the types of services restaurants require. 

"What I think you'll see most of all [is] it's not one-size fits all. I think you'll see all the platforms evolve to really give merchants that flexibility to make whatever choice they need that works for them," Mahendraraj said.

Both Grubhub and DoorDash also added self-delivery products in 2021, allowing restaurants to use third-party couriers alongside in-house delivery to complete orders and help expand their delivery reach. 

"[Grubhub has] invested quite a bit in a product offering that will allow those restaurants to expand their delivery radius," Dold said. "That is something that I think will be really, really fundamental to Grubhub's growth and the success of our restaurant partners."

DoorDash also launched a nationwide shipping program last fall to allow customers to order items from local merchants across the country. 

"We're really excited about that type of feature that really shows the deeper partnership … that we can build over time," Parietti said. 

Retaining customers with subscriptions

While aggregators have expanded their products and services for restaurants, they have also boosted diner loyalty through subscription or membership services for a set monthly price, which is helping with customer retention and order volume. 

"[Third-party aggregators] are going to become subscription services to some extent where it's going to make it that much easier for people to get delivery because they've already prepaid, which is going to help bring down some … costs," Matthew Goodman, senior equity research analyst at M Science, said. 

Grubhub's subscription program, Grubhub+, has grown to 2.5 million members since its launch in 2020, and these subscribers now account for about 30% of its current orders, Adam DeWitt, Grubhub CEO, said in October during Just Eat Takeaway's Capital Markets Day.  

"Because of our better supply, and … subscription loyalty program, diners are sticking around longer and ordering more," DeWitt said. "Our new diners are 20% to 30% more productive than [customers acquired in] 2019."

During Q3 2021, DoorDash increased its DashPass membership to 9 million. M Science's data shows that about 25% of all DoorDash users at that time were DashPass subscribers.

In Q3 2021, DashPass subscribers spent $650 to $800 per quarter on average compared to non-DashPass users who spent $200 to $300 per quarter, Goodman said.

Uber Eats members increased their trips per month by over 50%, Uber CEO Dara Khosrowshahi said during the company's Q3 2021 earnings call in November. Basket size for members was 10% higher than for non-members, he said. 

In November 2021, Uber also launched a membership program called Uber One that bundles its rides, grocery and food delivery services for a cost of $9.99 per month or $99.99 per year, and includes 5% off eligible rides and delivery orders, among other incentives. 

"I think the more categories you expand to, the more perks and benefits you can layer into a program like that, the broader the appeal," Tom White, senior research analyst at D.A. Davidson & Co., said. "Just as Amazon over time added more value over time to its Prime membership beyond just free delivery, the industry will see companies like Uber continue to expand into new categories to enrich their membership offerings," White said. 

Deepening restaurant relationships

Delivery aggregators have expanded their account management and sales teams as well to improve their relationships with operators and so they can better provide actionable data to their partners. Grubhub has been aggressively expanding its sales staff to bring on more restaurants in its stronghold cities and surrounding suburbs, and in some areas it has tripled its resources, DeWitt said.

"We want to be a one-stop-shop for all our restaurant partners' needs," Dold said. "As a restaurant has evolving needs, in terms of how they want to grow their digital business online, we believe we can play an even more fundamental role in that journey outside of [Grubhub] being just a marketplace for our restaurant partners."

DoorDash rolled out its Merchant Experience Partner program to provide better account management of its partners. Operators can reach out with questions related to menu updates, account settings and banking and reconciliation issues, for example. 

DoorDash's Restaurant Advisory Council, which is effectively a group of restaurants and small business owners from the U.S. and Canada, also advise the company on key initiatives and give ground-up feedback on what restaurants need, Parietti said. DoorDash also brought on Chef Stephanie Izard as its chief restaurant advisor in May 2021 to bring another voice of the industry to DoorDash. 

"I think keeping a tight feedback loop with our merchant partners allowed us to understand what the need was and then move really quickly into action," Parietti said, adding that its newest programs were piloted with a small group of merchants to make sure they were fully supported before they were launched on a full scale. 

Uber Eats has hired hundreds of sales staff and account managers in local markets. By making staff that also live in these local communities more available to Uber Eats partners, the provider has been able to have longer and broader conversations with its merchants. 

Uber Eats has more than tripled its workforce of account managers working directly with its partners, which gives them more time to learn about the partner's business, including what their goals are, how it can work with these partners and how they can help these partners achieve their goals, Mahendraraj said. That could mean helping them figure out what pricing structure works best for the partner or offering free credits on advertising that can help get the brand off the ground, for example. 

"We've had almost a hundred conversations at this point with different merchants across our platform with our products teams and with our internal teams to just get a good sense of what is working, what is not. And as we look toward what we're going to build in 2022, you'll see that a lot of that comes from the asks they have made," Mahendraraj said. 

These internal aggregator reviews, and subsequent product and service launches, bode well for the restaurant-delivery relationship, especially since analysts predict off-premise demand will hold steady. 

"It's hard to imagine that there are any restaurants coming out of the pandemic that don't view online ordering and delivery as really a mission critical thing that they have to get right," White said

 

Uber Eats reached a significant milestone in 2021. In the third quarter, the company's U.S. restaurant delivery segment reached profitability on an adjusted EBITDA basis for the first time. DoorDash has also kept its adjusted EBITDA margins positive since the quarter ending June 30, 2020. For both aggregators, increased off-premise demand from diners and restaurants played an important role in improving business.

"The pandemic was obviously a terrific opportunity for the food delivery platforms to pull forward years and years of future customer acquisition to the present," Tom White, senior research analyst at D.A. Davidson & Co., said. "[They] were able to do it super efficiently. They didn't have to spend money to acquire these customers. Customers were seeking out these platforms because they were stuck in their homes and they wanted to eat."

Today, aggregators continue to expand into new businesses, like retail and grocery, and boost their courier counts, allowing them to reach more customers and increase order volumes for their core restaurant business. But maintaining profitability could become more difficult when marketing spend returns to pre-pandemic levels — especially as municipalities nationwide roll out laws to regulate the delivery market, such as permanent commission fee caps. 

The hunt for profitability

Over the past two years, a surge in demand meant delivery firms didn't need to spend big on marketing and customer acquisition — factors that played an important role in companies' ability to generate a profit, analysts said. But this could change in 2022. As on-premise dining traffic starts to return to normal, third-party companies and restaurants will likely revert to traditional advertising spending strategies to attract customers to delivery, said Lyle Margolis, CFA and senior director at Fitch Ratings.

"I do think that we'll see some pressure on margins on the restaurant side but also on the third-party delivery side," Margolis said. 

Delivery has been an unstable, competitive environment for some time, said Raj Joshi, vice president and senior credit officer at Moody's.

"I think it's difficult to say that the industry has reached or is close to sort of permanent profitability. I don't think that’s the case yet," he said. 

Further consolidation between restaurant delivery firms will be inevitable as these companies seek to boost profitability, Joshi predicts. But while recent years were marked by major transactions, such as Uber's acquisition of Postmates and DoorDash's purchase of Caviar, increased regulatory scrutiny over M&A makes these types of deals harder to come by, Joshi said. 

"That's why all the major providers are basically looking at foreign acquisitions," Joshi said. 

DoorDash bought European delivery company Wolt in 2021, for example, which opened up 27 new markets for the aggregator. 

Regulations squeeze delivery providers

Delivery companies will also face harsher regulatory oversight over their business practices, especially when it comes to commission caps, experts say. 

While many recent commission fee caps have been tied to pandemic pressure and subsequent dining room restrictions, many have been phased out. But some cities are making these commission caps permanent, including San Francisco and New York City. Cities are also looking to enforce rules that protect delivery workers by creating standardized minimum pay and giving them access to restaurant bathrooms. Some municipalities are supporting restaurants by requiring aggregators to share customer delivery data with corresponding eateries. 

Sharing customer information can be risky for delivery platforms since it could allow restaurants to potentially see that only a small percentage of customers actually use delivery, for example. Restaurants could also take that customer data and try to encourage those diners to order from their business directly, White said. However, DoorDash, Grubhub and Uber Eats have all challenged New York City’s data sharing law, and the city paused enforcement following DoorDash's lawsuit. 

"The pandemic was sort of the catalyst for the restaurant industry to take a harder look at the value provided by these delivery platforms," White said. "Just because the pandemic is going away, I don't expect that [restaurant organizations] will stop pushing for their own self interest."

It may be too soon to see the overall impact these types of regulations will have on delivery segment profitability, since caps are expected to be litigated in court for some time. All three top delivery providers have challenged delivery commission fee caps in court. 

In a post-pandemic world, Uber Eats will focus on engaging with regulators to make sure regulations preserve flexibility for all parts of the marketplace, Yadavan Mahendraraj, Uber's head of merchant operations in the U.S. and Canada, said. This means ensuring merchants have access to different pricing structures, for example. 

"We do believe that those controls set a pretty dangerous precedent and actually can harm the businesses that they're meant to protect. We understand the intent behind the price controls, but believe they're a counterproductive tool," said Ryan Parietti, DoorDash's senior director and head of merchant strategy and operations. 

The company has been focusing on offering restaurants a wide range of options so they can pick the plan that supports their business goals versus having a one-size-fits-all solution, he said.

Grubhub felt the biggest impacts from fee caps in New York City, which is one of its largest markets and has implemented the most aggressive delivery commission restrictions in the U.S. While losses related to fee caps peaked during the first half of 2021 as many caps have since expired, Grubhub continues to see a significant impact on its business in New York, Adam Dewitt said in October during the Just Eat Takeaway Capital Markets Day.

"We believe all fee caps, which are effectively price controls, are illegal," Dewitt said. "We abided by the emergency orders introduced during the pandemic in order to help restaurants that were in the firing line of the pandemic closures. But we will vigorously fight any permanent fee caps, which are essentially arbitrary government interference in the private contracts."

A Grubhub spokesperson said the company will continue to focus on supporting restaurants.

"[Fee caps] have negatively affected how independent restaurants can effectively market themselves to drive demand, which severely impacts how many customers and orders are driven to these restaurants," the spokesperson said. "As a company, we are focusing on markets where we can build upon our existing strength and leadership, and expand to new verticals that will drive growth for the company and our restaurant partners."

Municipalities are also exploring whether to classify delivery drivers and couriers as full-time employees. Such classification would change how these workers are paid, and put delivery aggregators on the hook for employee insurance and other benefits. 

"Until we have autonomous drone deliveries or autonomous vehicles, driver-related costs are likely just going … to go up," White said.

While Prop 22 in California kept drivers classified as independent contractors but gave these workers some benefits typically enjoyed by full-time employees, driver classifications could still evolve and threaten delivery firms' margins. In August, however, Prop 22 was overturned by a California judge. The law will remain in effect while the Protect App-Based Drivers & Services Coalition (backed by DoorDash and Uber) appeal the ruling. 

There has been a lot of discussion in Washington, D.C., about trying to codify the role of independent contract drivers, Joshi said. 

"To the extent that the regulatory environment remains supportive and doesn't become a major headache, I think there is a role for these delivery companies, and they are going to expand into delivery of a lot of things," Joshi said. 

Expanding beyond restaurant delivery

While aggregators try to find ways to work with regulators, they are also expanding into new verticals and revenue streams to diversify and create additional profitable platforms. DoorDash, Uber Eats and Grubhub have all begun exploring or entering segments like convenience stores, alcohol and various areas of retail. DoorDash launched a suite of advertising offerings to help restaurants and CPG brands reach consumers on its platform in October, as well. Uber Eats began offering sponsored restaurant listings in 2020. 

"We expect [aggregators] to continue to pull those levers as the restaurant delivery business starts to mature," Margolis said. 

In addition to helping boost profitability, new verticals also attract new customers. Over the past year, Uber Eats has expanded into retail with the addition of Bed Bath & Beyond to deliver baby essentials and Him & Hers. It also acquired alcohol delivery platform Drizly in 2021 and launched grocery delivery in 2020.

"One of the things that we see is that a customer who orders from a new vertical actually orders two times more on the platform as a whole," Mahendraraj said. "This is not only an additive behavior in terms of extra things they get, but [it] increases overall engagement."

Uber Eats' new verticals team is almost like an incubator for the business, Mahendraraj said. The team will look at how consumer behavior changes when Uber Eats introduces new segments to ensure they aren't distracting or confusing to consumers, though that hasn't been the case so far, he said. Between September and early November, delivery gross booking grew 8% despite global restaurant reopenings, Uber CEO Dara Khosrowshahi said during the company's Q3 earnings call. The company reinvested in its new verticals in Q3 thanks to Uber Eats's profitability that quarter, CFO Nelson Chai said. 

"We've continued to see sustained consumer engagement on delivery, lending further support to our belief that increased demand for all types of fast delivery is structural and will grow for the foreseeable future," Khosrowshahi said. 

DoorDash recently expanded its grocery presence and entered the convenience segment, launching ultra-fast delivery through DashMart in New York City's Chelsea neighborhood in December. It added more grocery partners in 2021, including Albertsons, Schnucks and Farmstead, and expanded alcohol delivery into 20 states. 

"It's an opportunity to serve customers with a variety of occasions and provide the ability to order multiple-use cases," Parietti said, adding that DoorDash can now support different types of merchants, such as flower shops.

These channels also benefit its core restaurant partners by driving more customers to the marketplace, which then helps boost order volume on the platform over time, he said. Uber Eats leaned into that kind of consumer behavior by rolling out its Pickup and Go feature last spring, which allows rides passengers to order and collect meals and groceries while driving to their destination. 

Grubhub has diversified its delivery offering by bringing about 6,000 convenience stores on its platform, and the company is testing its own convenience product in Brooklyn with a limited inventory. He expects the company to ramp up inventory and marketing over time. 

Delivery on college campuses has also become a growth area for Grubhub. The service allows college students to use their meal plans to order from campus dining rooms and kiosks through the Grubhub app, Dewitt said, adding that it’s currently integrated on campuses that cover 3 million students. 

"These students become great marketing targets for Grubhub during school and after they graduate," Dewitt said.

Grubhub has also taken its campus strategy and applied it to hotels and stadiums. In 2021, Grubhub partnered with Las Vegas Resorts World and FedEx Field, and is already seeing some initial traction, Dewitt said. 

"This is a potential great source of new diners for us who order at the hotel or stadium, but then have a Grubhub account set up… that they can use to order Grubhub from their phone," he said. 

New verticals can also attract new drivers.

"The more products you can offer consumers, the more consumers come to that marketplace. … The more consumers and the more volume that comes to the marketplace, the more opportunities there are for drivers. There's more margin and revenue that the delivery platform can invest in attracting more drivers if need be," White said. 

Improving the delivery experience

Boosting courier counts has become an increased focus for aggregators, especially with staffing shortages potentially hurting the overall delivery experience. 

Using Uber's logistics, Uber Eats is able to better calculate how long it will take for a driver to arrive at a restaurant and can figure out when the best time would be to send a courier to pick up the food when it is ready, Mahendraraj said. This requires being strategic about which courier to dispatch to the restaurant and how far in advance. Couriers might be sent out even before the restaurant starts preparing the food, for example, because the restaurant is quick and may take only two to three minutes to complete an order, he said. 

"We can be thoughtful about how the different pieces of that puzzle work so that there's as little wasted time as possible," Mahendraraj said. 

Uber Eats has invested heavily in the courier side of its business to create better delivery outcomes for consumers as well as merchants. That means making sure a courier is there to pick up the order from a restaurant in a timely manner so operations flow smoothly. Uber Eats has seen an 80% increase in couriers on its platform since January. 

DoorDash added a SafeDash feature in November for its drivers to boost security for these couriers while they are on the job. It includes access to ADT staff, who can contact 911 on the drivers' behalf. The company had over 3 million couriers during Q3 2021 and earnings increased 9% compared to the year-ago quarter, according to a shareholder letter. 

"As we've gotten into other categories, this is even offering Dashers even more choice and more flexible opportunities, whether it's doing grocery deliveries, convenience deliveries, etc.," DoorDash CEO Tony Xu said during the company's Q3 2021 earnings call. 

Delivery is only going to expand and become a larger part of the e-commerce economy, analysts said. Delivery will become more than just one vertical and an area where consumers can get anything, Mahendraraj said. 

In Asia, which has a more mature delivery segment, platforms have become super apps offering a wide range of services, White said. A lot of these companies now offer digital wallets and even financial products, which could be a future permutation for U.S. aggregators.

"It will be very interesting to watch whether that kind of concept works in the U.S. or gains traction with users or not," White said.

Applebee’s franchisee Doherty Enterprises is trying something different to reach new customers in Miami. Retail rent prices hit historic highs during the first quarter of 2022 in south Florida, making traditional brick-and-mortar development too costly for the company. Instead, Doherty opened a 200-square-foot ghost kitchen — significantly smaller than a standard 3,800- to 4,700-square-foot Applebee’s restaurant — with CloudKitchens in July 2022. The unit is located in the Wynwood Arts District about three miles north of Downtown Miami, about 40 minutes away from the closest full-service Applebee’s in Hialeah, Florida.

“We’re excited with the way the territory stretches out. It’ll give us a good understanding of what we could potentially do from a brick-and-mortar standpoint in the downtown Miami market,” Kurt Pahlitzsch, VP of operations at Doherty, said. This location also gives Doherty access to Miami tourists.  

Doherty, which operates 90 Applebee’s restaurants, is also developing a delivery-only location in the Deer Park neighborhood of Long Island, New York. Pahlitzsch expects these delivery-only locations to require less staffing since they will likely run about 20% to 30% less volume than a normal Applebee’s.  

Both Applebee’s franchisees and corporate have been experimenting with different tactics to reach off-premise customers over the last few years. A franchisee first tested a drive-thru pickup window in Texarkana, Texas, in 2021. Applebee’s now has four total drive-thrus open, with 15 planned conversions for 2022, John Cywinski, Applebee’s president, said during Dine Brands’ Q1 2022 call. In 2021, the casual dining chain also began testing ghost kitchens and launched virtual brand Cosmic Wings. Applebee’s expects to open at least six ghost kitchens domestically this year, Cywinski said. 

“Applebee's off-premise business is not only a core competency, but in 2021, it became a $1.2 billion convenience-driven business in a genuine consideration within QSR and fast casual occasions,” Cywinski said.

Generating sales without a storefront

While off-premise occasions are becoming a major revenue driver for Applebee’s, Doherty’s CloudKitchens location will still be a test-and-learn scenario. Pahlitzsch will consider the unit’s return on investment, how well CloudKitchens manages the space and how it works with third-party delivery companies, among other factors. Doherty is also interested in the impact CloudKitchens’ app, which allows guests to order from multiple restaurant brands within one order, will have on guest averages at its location, Pahlitzsch said. 

Doherty’s will also gauge the effectiveness of its menu at the ghost kitchen location. One of the company’s most popular items, fiesta lime chicken, was nixed because it requires ingredients that aren’t used across other dishes, for example.  Applebee’s spinach dip was included, however, because it has better ROI even though the chips associated with the dish take up a lot of space, Pahlitzsch said. 

Doherty’s was also careful to include kids’ items on its menu to appeal to a broad consumer base, a lesson learned the hard way by a fellow Applebee’s franchisee operating a CloudKitchens location in Philadelphia. When that unit offered just adult-friendly fare, it failed to engage many families with young children.

The franchisee’s biggest focus going forward will be marketing its ghost kitchen location through social media advertising, third-party partners and using its existing database of customers that might overlap with the nearby full-service location. Doherty has been using geotargeting to capture where it believes guests are, including fencing around certain hotels and hospitals, so a banner advertising the location will appear on their social media pages. 

It’s interesting how it’s different than a brick-and-mortar store,” Pahlitzsch said. “Normally everybody has anticipation of the building [opening] so the minute you unlock the doors, you get the mad flood. Where you get the ghost kitchen, you [have] to teach them you’re there.” 

Pahlitzsch said he expects to have a better understanding of the unit’s viability within three months, barring an unexpected economic downturn. 

Filling in delivery gaps

While Doherty’s ghost kitchen is designed to reach a new market, its delivery-only location aims to bridge a delivery gap. The location in the Deer Park neighborhood of Long Island is just outside the delivery radius of Doherty’s five closest restaurants. This location is also next to a shopping center and office parks, so it can appeal to the lunch crowd.

This unit will use a locker system that creates more accountability for delivery partners. Every part of the fulfillment process is computer time-stamped from cooking to packaging to when the food reaches the locker bays to be picked up. Cameras will also monitor when the food is picked up. 

Lockers, which are being tested in two locations, streamline the pickup process for delivery drivers and has led drivers to service the location more frequently, he said. 

“They know the minute they get the message that the food’s ready, they walk in the building, grab the order and walk out,” Pahlitzsch said. “The throughput for them gives them the ability to generate more personal income because they know they aren’t standing around waiting for Bob or Joe to finish putting the order together. …Their time in the building is less than 30 seconds.”

If the driver doesn’t pick up the food in time, the operator has a way to show the third-party delivery company that it wasn’t the restaurant’s fault that the food went cold or had to be remade to stay fresh for the customer, he said. After 20 minutes, the locker turns from green to red, signaling to a manager that the order is still there and needs to be remade. 

“The biggest thing that concerns me in regards to off-premise guests is customer satisfaction because to acquire new guests, it’s harder and harder,” Pahlitzsch said. “A lot of effort goes into social media advertising to make the customer aware of off-premise options, but if that order is cold or inaccurate, it is more difficult to get repeat visitors.”

Mistie Boulton, CEO of Palo Alto, California-based restaurant Oren’s Hummus, is used to seeing young professionals and students pitch inventions. Her partner, Oren Dobronsky, is known as a Silicon Valley angel investor and has four successful startups. People come into the restaurant to pitch the latest and greatest invention, and Boulton acts like Dobronksy’s guard dog, looking at different concepts and letting him know if they should participate, she said. 

When DoorDash co-founders Tony Xu, Andy Fang and Stanley Tang first reached out to Boulton to pitch their delivery product in 2013, she noticed something a bit different about their approach. 

“Tony [and the co-founders] really listened. [They] authentically were sincere and wanted to hear what [they] can do better,” she said. “That was the biggest thing for me. It’s just this raw passion with purpose and partnership.” 

Oren’s Hummus partnered with DoorDash that same year and continues to work with the platform to this day, along with other top third-party aggregators. But Boulton argues “nobody has the level of partnership that DoorDash has.” 

Boulton, who also is president and founder of restaurant consulting firm EyeSpy, has seen a lot of different companies that have great ideas for operators and are really attentive to their customers for the first year or two, but then just communicate with their clients via bulk email, she said. 

“That’s not the case at all with DoorDash. I have people [from DoorDash] who reach out on a regular basis who care about my business,” Boulton said. 

From backyard to nationwide delivery

When the DoorDash co-founders met at Stanford University in 2012, they all wanted to do something significant to help local businesses, said DoorDash co-founder and Chief Technology Officer Andy Fang. Tony Xu grew up working with his mom in a local restaurant, an experience that gave the co-founders some insight into the industry’s needs. 

While evaluating what type of business to launch, Tang, Fang and Xu considered delivery when they learned a local macaroon shop had to cancel a bunch of delivery orders because they didn’t have enough staff to fulfill them.

“That was kind of a light bulb moment for us,” Fang said. “We realized that there could be something here around helping build logistics for local merchants to help them facilitate delivery.” 

The founders created PaloAltoDelivery.com in 2013 to provide delivery services to local merchants in the Bay Area. Months later, they rebranded the platform as DoorDash. The founders performed the first 100 restaurant deliveries themselves, and learned a lot about the pickup process, parking, and other issues that came up. 

“I think the biggest question that we got and the one we asked ourselves is ‘is this something that customers even want?’” Fang said. “Because if we could figure out the answer to that question, then we knew that we could definitely provide a way to help merchants grow their sales and increase their presence online.” 

The founders got their answer quickly. Upon launching, they received their first delivery order in 45 minutes, which was completely unexpected, Fang said.

But sustaining this early momentum wasn’t easy. To get drivers, the company posted on local job boards at Stanford, recruiting students to help out. The delivery system was very informal, with the founders texting drivers restaurant orders and using Apple’s Find My Friends tool to connect drivers with the closest restaurants, Fang said. 

DoorDash expanded to San Jose in its early years, which was still close enough to the company’s home base in Palo Alto to monitor deliveries. But once the businesses extended to Los Angeles and elsewhere, oversight became a bigger challenge. The founders realized that to be successful, a delivery platform would require a local sales team, merchant partners and customers in each zip code, Fang said. 

That strategy has paid off — the company has been on a growth tear over the past five years. It reached 50 states in 2019, went public in 2020 and has a market capitalization of over $21 billion as of November. DoorDash currently operates in over 7,000 cities in the U.S., Canada, Australia, Japan and Germany.

“I don’t think we thought that it would ever get as big as it did as quickly as it did,” Fang said. “We knew we wanted to be something much grander than just a kind of backyard delivery shop in Palo Alto. Scaling out to the entire country and even to other countries today, and to deliver other types of goods, is something that I think is stepping into the role that we think we can play to help Americans of all types doing business in an increasingly online world.” 

Maintaining communication with restaurants

DoorDash created a structure to ensure that restaurant partners have someone to talk to about concerns and can provide feedback to the company. A lot of that communication is facilitated by local account representatives who reach out to restaurant clients. The company also created its Restaurant Advisory Council in 2020, which provides a forum for restaurant owners and operators to tell DoorDash what’s working and what’s not, said Tom Pickett, DoorDash’s chief revenue officer.

In 2021, the company appointed its first chief restaurant advisor, Stephanie Izard, a move that strengthened DoorDash’s connection with its partners. Izard was interested in the support model DoorDash offers and was helpful in expanding the Merchant Experience Partners, Pickett said. Historically, operators often said they felt a little lost within DoorDash’s system, especially as it got bigger, and didn’t know who to specifically talk to. Merchant Experience Partners are specific contacts for the restaurant, which can ask them questions about financials, menu updates and account settings, according to DoorDash’s website. The Merchant Experience Partners team has helped increase support and engagement, Pickett said. 

“Those interactions happen on a daily basis. … Now we have an account management structure where either you have an account manager or a Merchant Experience Partner or both,” Pickett said. “I think that has been very impactful in terms of getting feedback. [It’s] a two-way dialogue with our restaurants.” 

Boulton DoorDash representative often asks questions about how DoorDash can help, what her restaurant needs and what information the company might be able to provide to help grow a location, she said. The DoorDash rep also shares promotions that could benefit Oren’s Hummus, or ideas to navigate specific challenges.

One of Oren’s Hummus’s challenges was handling a high volume of to-go orders, which make up about 45% of orders at each of its locations, without overburdening the employees who had to input orders into the point-of-sales system. DoorDash worked with the restaurant to integrate with POS companies Aloha and Toast to make order processing easier, Boulton said. 

Monthly or quarterly meetings with DoorDash have been beneficial, as the company can share data on how diners have responded to menu items, as well as data on any timing and food issues that have cropped up, Boulton said. DoorDash also shares marketing campaign ideas with their restaurant partners, and Boulton said the company’s insights have helped advise her on potential new locations. While Oren’s Hummus hasn’t used that insight specifically for opening a new restaurant, the company is always considering expansion opportunities.  

Oren’s Hummus Los Gatos, California, location was struggling, but Boulton spoke with DoorDash to figure out a way to attract more customers. That conversation led Oren’s to create 15,000 mailers that would go out within a six-mile radius of the restaurant to encourage people to come in. That mailer has been implemented and tested throughout November and includes a discount for DoorDash as well as a complimentary item in the restaurant. This promotion will run through the end of the year. 

DoorDash also helped Oren’s Hummus when its liquor license was threatened after a third-party delivery aggregator delivered alcohol to an underaged customer. The California Department of Alcoholic Beverage Control had contacted Boulton in the past to inform her if another third-party company delivered liquor to a minor, she would lose her alcohol license. Boulton turned to DoorDash and the company soon implemented a secret shopper program to ensure that people were being carded appropriately. 

How feedback led to product changes

This ongoing communication is key to DoorDash’s product development, and to meeting merchants’ needs, Pickett said. 

“We’ve become the category leader in restaurant in large part because of the collaborative relationships with our restaurateurs that [have] helped us build the leading selection, which has driven customer demand, which has allowed us to build the largest Dasher fleet, which has allowed us to increase the quality and speed of delivery,” Pickett said. 

DoorDash is always looking at data to help drive company decisions and tries to operate at the most granular level of detail to figure out how to drive growth not only for its business, but also for restaurant partners, Fang said. 

DoorDash focuses on merchant needs and considers itself a “merchant-first company,” Pickett said. 

“We always go back to what do restaurants need to be successful? And usually that comes down to new customers and revenue growth. That’s what we’ve been able to unlock with delivery as the primary use case. But we continue to look for new opportunities with our restaurant partners,” Pickett said.

Historically, DoorDash had a one-size-fits all model with a 30%-per-order commission. But after hearing from account managers and its Restaurant Advisory Council, it created a multi-tier commission structure in 2021 to allow merchants to pick the products they want. This decision also came after several municipalities implemented caps on commissions during the height of the pandemic restrictions. Its 15% commission tier provides a basic delivery service, while the 25% and 30% tiers provide access to high-frequency DashPass customers and tools to drive more demand from consumers, Pickett said. 

DoorDash’s pickup product was also born out of discussions with merchants who were looking for ways to allow customers to order ahead and pick up food themselves, Fang said. 

During the pandemic, DoorDash realized 40% of small and medium businesses lacked an online ordering system. DoorDash rolled out a Storefront product in 2020 allowing restaurants to build turnkey websites with online ordering capabilities for which it charges 0% commissions. Storefront has been a win for Oren’s Hummus, Boulton said.

“Moving to Storefront immediately opened up so many more orders, and orders increased dramatically,” she said, adding that this shrunk costs dramatically for the restaurant. 

Storefront makes it possible for a broader swath of restaurants to afford DoorDash’s delivery system, Boulton said, adding that she doesn’t think a lot of restaurants are aware of the offering.

“I think that’s going to be a big movement with delivery as a whole compared to any other company. I don’t hear [of a] Storefront or a system similar to that in any way from any other delivery company. I think that there is this high advantage in staying above the mark … with DoorDash by having that type of service.”

DoorDash will continue to invest more in its products for restaurants, such as customer insights, so that restaurants can better understand DoorDash customers and then use add-ons like ads and promotions to target a particular subset of customers on the platform, Pickett said. The company started selling ad spaces in October 2021, allowing restaurants to pay for ads that appear above search results. DoorDash expects to have more opportunities to grow in this area, Pickett said.

“There’s still a lot of runway for us and our core restaurant business,” Fang said. “We’ve only scratched the surface in terms of the households we’ve touched in America, which are less than 20% of households on a monthly basis. We also capture less than 6% of the total restaurant spend today.”

While other restaurant technology companies are cutting staff as their capital dries up, Kitchen United secured its largest cash injection to date in July. Now, with $100 million in Series C funding, the ghost kitchen operator will diversify and accelerate its paths to growth through its investors’ business verticals.

“Our plan is to stay with our core ethos of the business, which is methodical, responsible growth and continuing to execute our underlying plan, expanding within grocery, expanding within the mall footprint, expanding our own four-wall centers, and then expanding our technology deployments,” Kitchen United CEO Michael Montagano said. “All of that is a continuation of the existing strategies that you’ve seen over the last couple of years.” 

That growth has been built on partnerships with enterprise national brands, regional brands and local favorites.

“It’s a cap-ex light, labor-lean way to enter a new trade area or maximize their existing footprint within trade areas and offer the consumers [a way] to enjoy their cuisine in whatever way they want it,” Montagano said of Kitchen United’s value proposition for restaurants.  

The company uses a data-centric approach to understand demand for pickup, delivery, walk-up and catering service within specific trade areas. This strategy has allowed Kitchen United to operate successfully across markets and within a variety of formats, Montagano said. 

“By offering consumers more choice, they tend to buy more food, which revolutionizes the economics of delivery [with] larger payloads, larger AUVs and happier consumers with better reordering,” Montagano said. 

Kitchen United’s early strategies also hinged on creating foundational partnerships with commercial real estate businesses that participated in this latest funding round, including RXR Realty, Montagano said. The company partnered with RXR in 2019 to grow within New York City and the tri-state area. It now has a Kitchen United Mix location in Manhattan and seven Mix Market Outposts throughout the city, according to its website. 

Kitchen United focuses on growing in central business districts, often in densely populated urban markets, like Los Angeles, New York, Chicago and Dallas, where the company already operates. But pockets of suburban areas fit within this strategy as well, like Frisco, Texas, and Scottsdale, Arizona, he said. Kitchen United has plans to grow into Plano, Texas, and Miami as well because of their large populations. 

“One of our larger differentiators for the last couple of years has been the viability of our trade areas and that they are centrally located in some of the most robust markets for all of those avenues of consumer demand,” Montagano said. “The grocery and mall partnerships fit squarely within that.” 

The company has focused on building a technology stack, Kitchen United OS, that allows it to operate the same way in a grocery store, shopping center or within its four-wall standalone buildings, Montagano said. 

“Because we are expecting that this business will have legs for many decades to come, we’re fortunate that we’re less susceptible to the tumultuous market conditions,” Kitchen United Chief Business Officer Atul Sood said. “It’s not about what is the hot thing today or tomorrow. It’s about what is the sustainable business model that will succeed over the next few decades.” 

Because the ghost kitchen market is still in the early innings of its life cycle, Sood and Montagano believe there will still be plenty of opportunity for growth going forward.

“What you’ll find is that more and more properties and existing environments ... through which a ghost kitchen can be built and operated out of, are going to expand in their flexibility. … And we’re looking at a lot of them,” Sood said. 

More enterprise restaurants will likely become a part of this trend too, Sood said, adding that Kitchen United is already seeing more multi-unit deals with a large number of major brands across the country. 

“[Ghost kitchens] will be embedded in the culture of restaurants going forward in a way that we have set ourselves up for, but haven’t quite established yet, because there are still few ghost kitchens on the scene so far,” Sood said.

John Meyer is gearing up to solve what he considers a glaring problem within the ghost kitchen segment. The CEO of Ghost Financial — a fintech that provides loans, insurance, payroll and other financial products to ghost kitchen operators — worries restaurants are diving into this business before they’re ready.

The result? A low success rate, leading many ghost kitchen operators to default or break their leases, according to Meyer. 

“[Ghost kitchens are] growing so fast that it’s attracting operators that don’t have inherent industry specific skills for ghost kitchens, such as digital advertising, targeted advertising and how to get your brand to the top of the delivery apps so that your sales are high enough so that you aren’t operating at a loss,” he said. 

To bridge this knowledge gap, Meyer has developed GhostU, an educational program designed to help restaurateurs build, scale and run a profitable ghost kitchen.  

The program’s MasterClass-style videos cost $1,000, but will be available for 75% off at $250 through June 30. GhostU will provide a minimum of 12 videos as well as step-by-step worksheets and three months of access to Ghost Financial’s Ghost Kitchen Community, where ghost kitchen owners can share their experiences and access interactive workshops and Q&A sessions. Meyer envisions the Ghost Kitchen Community as a platform that can function similarly to a social media network, but specifically for ghost kitchen operators. 

“Ghost kitchens are revolutionary in that they have lowered the barrier to entry for foodies with a dream by taking the cost and timeline down to start a restaurant from $500K and an entire year, to $25K and 30 days. Now that it is so easy to start a ghost kitchen, I want to ensure that with proper education, the industry sees failure rates drop to 5% or lower,” Meyer said in a press release. Meyer estimates that current ghost kitchen failure rates are at least seven times that, or roughly 35%.

Many restaurants began experimenting with ghost kitchens at the height of the pandemic, as the off-premise-only models offered one of the few ways to keep businesses alive during dining room lockdowns. Now that restrictions have eased, many restaurateurs are still seeking their own slice of the ghost kitchen business, which Euromonitor predicts will be worth $1 trillion by 2030. 

“We want to see these folks succeed,” Meyer said. 

The right ingredients for a profitable virtual kitchen

After following the space for about five or six years, Meyer opened his own ghost kitchen, Keto Kitchen, in January 2021. He operates out of a CloudKitchen facility in Austin, Texas, and reached profitability within 60 days.

His success was based on two tactics: leveraging targeted ads and building an online community excited for the brand. Targeted ads helped Keto Kitchen reach the right audience and boost its position on third-party marketplaces. Instead of being buried within a long list of restaurants, Keto Kitchen secured a higher position than many virtual brands normally have at launch.

Once it created a strong customer base, Keto Kitchen offered promotions and deals through Instagram and Facebook to stoke further interest in the brand. The concept generates average ticket orders of $33 compared to most ghost kitchens, which are typically in the low to mid $20 range, according to Meyer. 

Meyer hopes Ghost Financial’s GhostU program will help other operators develop similarly profitable brands by reviewing the state of the market and strategies to develop viral menu items that don’t require additional marketing investment. The program will also teach operators how to negotiate with landlords to lower rent rates and create more favorable lease terms, and how to sell a ghost kitchen asset once it becomes a revenue-generating business. Another video will provide an up-to-date look at the ghost kitchen marketplace.

Ghost Financial has already developed trust within the ghost kitchen community, becoming the preferred financial partner for over 300 operators at ghost kitchen provider Maker Kitchens in May. 

“We’re really hoping GhostU will [create] an environment in which it’s no longer really too risky at all for any foodie with a dream to start their own ghost kitchen restaurant,” Meyer said.