Why Would A Restaurant Partner With A Third-Party Delivery App If Every Order Loses Money?

by Max Fitzloff

The restaurant market is experiencing a massive shift. With the boom of third-party delivery apps, restaurants are being forced to adapt. Apps like Postmates have taken over, and while some restaurants are playing catch-up, others are taking advantage of the opportunity. 

Imagine being the new restaurant in town. Your target consumer is the younger generation and you are trying to get your name out there. What are your options? Well, since you are targeting the younger generation it is pretty clear you can’t use the local radio station and you probably shouldn’t even spend money on TV ads, because your consumer doesn’t listen to the radio or watch TV. What’s the one place where teenagers go when they’re hungry? Food-delivery apps. So, you choose to put your business on one of the many third-party delivery apps in the area, like Postmates. Now that you are partnered with Postmates, a cut is going to be taken from your profits. This may seem bad, but what you are really paying for is advertisements, views, and customers. The result of this is an increase of instore customers which means you as the new restaurant in town are gonna make more money than if you didn’t partner with Postmates. With such a great connection to captive hungry teens, you might even be incentivized to lose money for a while, especially if you could pay to appear at the very top of the Postmates front page. 

The truth is, not every restaurant that partners with these apps have such a drastic cost to the point where they lose money, the example I gave is an extreme case. But a real one. The apps have a variety of slots and amounts restaurants can pay to be on the site. For example, the incentive could be high for the new company in Portland to pay the extra cash to be on the front page of Postmates to get customers early, then after a few months pay less money and be farther down on the page. That is the power of the third-party app business model: they can negotiate the right deal for each restaurant they do business with, depending on how incentivized each restaurant is to do business with them. In more economic terms the third-party apps are flexible to the incentives of their partner restaurants. 

Jonathan Baldari, Operations Manager of Brunchbox, a local burger joint in downtown Portland explained that the partnership with Postmates has done exactly what he originally hoped it would. When Brunchbox was approached by Postmates two years ago the incentive was the same as it is now, Jonathan described how “Postmates is great in the sense it gives us a broader reach to our customers considering the cost of starting our own delivery service”. Jonathan is saying that allowing postmates to take a very healthy bite out of their profits on delivery customers is, in turn, bringing in a larger amount of instore customers which makes the majority of the money. Another incentive that makes Postmates favored by small businesses is the fact that you can have a ton of deliveries occurring each day without hiring a single driver. Jonathan revealed that without third-party apps like Postmates not only would Brunchbox not be as popular as it is today, but it would also have no delivery because hiring a driver, buying a car, and paying insurance is very expensive. The benefits of only having a few drivers don’t outweigh the costs. 

Ashley Ceraolo, Senior Vice President of Marketing at California Pizza Kitchen further backed up what is so incentivizing about the third-party delivery apps even at a bigger corporation like CPK. Ashley explained to me that California Pizza Kitchen has been partnered with Grubhub for 5-6 years and was actually one of the first casual dining partners on the app. Similar to Brunchbox, CPK was approached by Grubhub and saw the incentive in joining with them even if they were losing money on orders. The influx of customers made it worth it. What makes CPK different from restaurants like Brunchbox is the fact that it was a popular business before any delivery app was launched. CPK doesn’t use these apps to startup, they are outdated, and need them to reach the younger generations. In order to accomplish this further, CPK has reached out to other apps, and can now be found on Postmates, Grubhub, and Doordash. 

The relationship between restaurants and third-party apps is complicated. As an outsider, the incentive doesn’t make sense to lose money or not make as much money as you can on your products. When you look deeper it completely makes sense, the restaurants are paying for modern advertisements. It is no different from a company paying to have a commercial on television or the radio. The ads have the same role as any other ads, they bring in more business to the store. This unique form of advertisement is revolutionary and it is disrupting the restaurant market. Similar to the taxi market with Uber and the hotel market with Airbnb, the digital era is disrupting markets and changing them. In the future, ghost kitchens or restaurants where the only purpose is to make the food for delivery are going to be the norm. I personally still have hope for the restaurant market because there will always be something special about eating a meal out.