Dear restaurant and grocery store owners, you most likely have a big problem. Third-party delivery companies are eating your lunch. No, not literally (we hope) but figuratively in more ways than one. But you probably already know this.
For those on the sidelines, allow me to set the stage for the drama that’s unfolding. In a haphazard attempt to remain relevant in a culture that more and more craves convenience and immediate gratification, retailers have ‘partnered’ with outside couriers and logistics companies to provide a variety of services.
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Specifically, grocery retailers and restaurants give their groceries and prepared food to gig workers who then deliver the groceries and food to the customer. This practice is commonly called third-party delivery. Grubhub, DoorDash, Instacart, Shipt, Postmates and Uber Eats are the leaders in the third-party delivery space, but there are many, many smaller regional delivery companies.
At What Cost?
With the growth of third-party delivery has come increased alarm and complaints from the companies they serve. For instance, restaurants complain that fees charged for delivery services often eliminate all profit in the transaction (commonly up to 30 percent of the gross sale). The gig economy workers who typically carry out the deliveries on behalf of third-party companies are striking and suing, claiming unfair wages and practices. Gig workers have also raised the alarm about the fact that many of the gig workers contracted by delivery companies steal, take drugs, eat the food they deliver and, in some cases, exhibit violent tendencies. And consumers regularly comment on the poor quality and service of the delivered goods on social media.
Given all the gripes about third-party delivery, perhaps most shocking is that it is rarely, if ever, profitable for anyone. This was apparent in Uber’s first quarterly filing as a public company, which showed the company lost over a billion dollars in the first three months of 2019 alone. Although Uber does not disclose its food delivery losses specifically, it’s common knowledge in the industry that these services do not typically generate any profits whatsoever.
But let’s put finances and service quality aside for a minute. There’s a bigger issue lurking in the shadows. One that is generally only grumbled about behind the scenes. Two words: customer data. Most third-party service agreements require that retailers not only expose but also relinquish rights to all customer and transactional information. In the digital age, customer data is the true lifeblood for any brand, but what happens when the parties get a divorce? Once the data has been harvested and the knowledge has been transferred, there’s nothing to give back, the fox now resides in the henhouse.
More and more examples of retailers and restaurant chains officially parting ways with delivery companies that keep customer data are occurring. Armed with millions of customer transaction histories and direct contact information, delivery companies can communicate with past customers to actively suggest retail competitors that offer groceries or restaurant meals at a cheaper price. Here’s the catch: the groceries and food will still be delivered by the company making the suggestions to those prior customers.
This should be very, very scary for retailers. Basically, third-party delivery resembles somewhat of a digital shakedown of restaurants and grocery chains. Retailers typically do not have the resources to build their own off-premise fulfillment programs, so third parties swoop in with a promise to provide relevancy in the on-demand economy, with a slight twist of the arm. In actuality, the result over the long-term could be detrimental to the retailers and restaurant chains in the form of lost revenue and reputational risk due to poor service. (The Wall Street Journal recently wrote an article outlining how restaurants are pushing back against delivery companies).
I do not blame delivery companies for the way they operate. Instead, I blame executives at restaurants and grocery retailers for being foolish enough to sign agreements with third-party delivery companies, even though the terms of the agreement are so unfavorable. In discussions with executives from grocery chains, for example, most of them dismiss the whole affair as online grocery ordering and delivery are only one to three percent of their business. As one CEO told me, “I only hired a third-party delivery company so my customers wouldn’t run to Amazon for their groceries. Online grocery is less than five percent of my business, so my focus is on the 95 percent of customers that come into my stores.”
Note to CEOs of grocery retailers: Your online business in 2019 may only be one to five percent of your total sales, but by 2025, it could be 20 percent or more. You need to figure this out. I strongly advise you to explore bringing all of your online grocery fulfillment in-house using a company like Self Point; GrocerKey, Jyve and Mercatus also offer platforms grocery retailers can utilize. The bottom line is this—take charge of your destiny and dump all third-party delivery companies that put their interests above your success.
My recommendation to all restaurants and grocery retailers is to answer this question: At what cost is your agreement with third-party delivery companies? Do you know?
An Ice Cream Truck for Adults
Despite the current darkness, there does appear to be new technologies on the horizon that could provide retailers alternative solutions to help fulfill off-premise demand. A prime example is a recently launched startup called Fleat Network. The company provides a platform that allows retailers to manage their own delivery programs at a lower cost and without giving up control of their customer data. (This video provides an overview of how the program works.)
I reviewed documents provided to me by Fleat Network which outline the concept of the technology and the purpose of the company. According to the documents:
Using a patented method, merchants using Fleat’s ‘intelligent mobile storefronts’ remain in a delivery zone for entire shifts. A delivery zone is completely determined by Fleat’s business customers and can be sized and located by various methods such as geofencing boundaries on a digital map or determined by radius, zip code, etc. This gives vendors complete control of the size, range and location of their operating zones. For instance, perhaps a designated delivery zone is a distance away from a vendor’s usual operational area. Instead of trying to expand by opening more stores, the vendor can leverage Fleat to identify a marketing strategy and the optimal number of delivery vehicles to cover and serve the area. Or perhaps a vendor wants to provide on-demand service to different parts of the community on different days of the week or for special occasions like holidays; this amount of specificity is especially valuable for vendors that may be part of a franchise who can only operate in limited areas.
Based on my research, I believe Fleat Network has exceptional potential. However, what I recommend is that grocery retailers and drug stores utilize Fleat to create an entirely new form of retail: multi-use, low value scheduled deliveries. Leveraging Fleat, retailers can create a service whereby Fleat vehicles travel routes and make deliveries of shampoo, toothpaste, soap, detergent and other low-value products that are used multiple times but that consumers run out of frequently. Single-use low-value items like soda, milk, baby food, over-the-counter medicine and other products can easily be curated on the vehicles. Consumers can schedule a delivery using the vendor’s app. The best way for me to describe the concept is bringing the convenience store to the customer.
What I find interesting is that Fleat has two operational modes:
- On-demand delivery allows consumers to place an order and a mobile storefront will complete the transaction by arriving at the customer’s location (home, business, city park, just about anywhere). I can’t stress this point enough—any retailer, especially grocery retailers, that believe using a third-party delivery company with an unmotivated gig worker to deliver groceries makes more sense than a mobile storefront concept should fire the CEO. Delivery by third parties was Last Mile Delivery 1.0 and Fleat Network is 2.0 on steroids.
- Stationary mode allows a retailer to dispatch multiple trucks to strategic locations to operate as pop-up stores. For restaurants, launching “intelligent food trucks” means the vendor could now operate temporary pop-ups or establish pre-determined customer pick-up points in high traffic areas, all while using Fleat Network’s intelligence and automation to communicate with customers, send digital promotions and manage orders.
Retailers and restaurants can easily delist from their current third-party delivery company and painlessly switch to the Fleat platform. Fleat’s executive team has created an easy methodology whereby they work with new customers to migrate to the Fleat platform, while leveraging AI and other methods to determine what inventory makes the most sense for the vendor to mobilize. In turn, Fleat will custom design a vehicle platform to support that inventory (whether cold hold, hot hold, assembly, bin storage, etc.). Fleat will then upload initial inventory items onto the Fleat digital ordering platform, train the new vendor on how to use the Fleat vendor dashboard, and help determine a rollout strategy and implementation timeline.
Retailers using the Fleat platform not only keep their profits and customer data intact, but also maintain control of the brand experience and product quality, as deliveries are made using the retailer’s own staff. No more gig workers making deliveries only to provide poor service. It seems obvious to me that if merchants see value in off-premise programs, using self-empowering technologies will be the key to success.
The value of the Fleat Network is that it provides retailers and restaurants with an alternative to established third-party delivery companies. In the coming months, I anticipate that additional companies will announce solutions that will disrupt third-party delivery even more. Executives must understand that the current model of using third parties to make deliveries isn’t the best option for their business or their customers. As I stated earlier in the article, retailers and restaurants should not hesitate to dump third-party delivery companies. All it takes is having the courage to seek out better solutions and ignoring the fear tactics and propaganda utilized by third-party delivery companies to scare their customers into maintaining the relationship.
Fleat Network is a viable alternative, and there are more alternatives on the way.
The Future of Food Delivery
The future of delivery is one of the fastest changing segments of the consumer experience. I can’t predict the winners, but what I can state is this: Delivering food from grocery retailers and restaurants will be completely disrupted within the next five years to the point where few, if any, consumers order food from restaurants. Here’s why.
The next big thing in food and delivery is the growth of companies that will utilize industrial kitchens, specialized farming and food processing techniques for fresh food, and vans capable of baking meals on the way to the customer. I wrote about these and other trends in articles located here and here. In addition, this video by UBS does an excellent job of outlining how dramatic consumer behavior will shift as new technology and processes are introduced.
Grocery retailers, and especially restaurants, are focused on all the wrong things. Instead of wasting time, money and effort on trying to find the most economical delivery strategy, these companies should be focused on how to take advantage of the coming trends. Fleat Network didn’t set out to become a last-mile delivery company; Fleat Network created a new model for commerce.
Large restaurant companies should be evaluating how they can open industrial kitchens and commissaries to provide high-quality, direct-to-consumer meals at much a much lower price than meals ordered from restaurants. I can’t stress this point enough: Many restaurants will go out of business in the coming years as consumers realize they can order better tasting food at a cheaper price directly from a company that operates industrial kitchens and specially designed commissaries.
Grocery retailers better wake up to the fact that once consumers make the choice to have the majority of the food they eat delivered to their home, they will make a conscious decision to stop buying fresh food in grocery stores and, instead, will primarily purchase center store items like toilet paper, paper towels and other items. Grocery retailers would be wise to invest in their own industrial kitchens or leverage their stores to prepare and deliver cooked meals to their customers. Note to the grocery industry: Everything that I have written in this section is going to become a reality. Fail to act at your own peril.
The amount of change that will take place in the food and grocery industries over the next five to 10 years will dwarf all of the changes that have been made in the last 100 years.