Chow Wars

By Darrell Winfrey

Some of us saw this coming many years ago while, for others, this seems like a relatively new phenomenon.  What I am referring to is the rise of the gig economy and the increase in the number of independent contractors.  This essay is specifically dedicated to the food and package delivery gigs that may soon outnumber conventional W2 jobs.  We are at a stage now where employment is high, but people face stagnant wages and ever-increasing inflation.  The answer for some has been to take on 2 and sometimes 3 additional jobs in order to support themselves and their families.  For others, the answer happens to be a job that you can work any time of day while you are also working a full or part-time job with a stricter schedule.  Another answer is working a single job for many overtime hours, as some have done for years, but this is rare these days, as many companies don’t allow overtime pay.  They want people to work as salaried employees for as many hours as they can legally squeeze out of them.  

Regardless of the individual reason, people are turning to Uber, Lyft, and other companies for extra income.  As one might surmise from the title, my specific focus is on food delivery, which excludes companies like Lyft, for now at least.  Part of my reason for writing about this is the result of my recent participation in one of these services as a driver.  I also have a connection to a similar service that dates back to the year 2000.  I wonder how many people still refer to 2000 as ‘The Year 2000’.  During that year I was working for a small company run by someone who was a visionary, but may have been lacking when it came to other aspects of running a company.  I suppose that is the case with many of the hottest companies in places like Silicon Valley where they either make it big or fail big.

The company owner had the idea of establishing an online mall similar to what a few other companies were starting to do at the time.  There wasn’t a well-established framework for such a build, so most of what we had to do was customized.  One aspect, in particular, differentiated it from any other online mall that we could find at the time.  The visionary owner insisted on a local food delivery component that was shared by multiple mall tenants.  Some of the people working there said that he was crazy for even suggesting something like that.  I thought it was risky but a very interesting concept.  The food court section of the online mall would provide robust advertising as well as a delivery component for all of the businesses that chose to participate.  Once the service was well established locally, it could then be gradually established in other cities throughout the US.  Tally Town Mall was born but never really got off the ground the way it should have because of mismanagement of other aspects of the business not related to the mall itself.  A version of this mall is still in existence today.

Before going into detail about forays by much bigger companies into this world of food delivery, I’d like to point out a few challenges that arose for us 2 decades ago.  These same challenges are still alive and well, even with this more technologically advanced landscape.  One significant challenge that no longer exists was access to, or willingness to access, the internet by potential customers.  Most people still accessed the internet from hardwired PCs at home and work.  Hotspot what?  Wireless data who?  In addition, the idea of someone waiting for their computer to boot and dial-up connection to connect just to place a simple food order was definitely a hard sell.  I do recall the owners talking about being ahead of the game and having this established before a future when the average person would be connected to the internet almost constantly.  We all knew that was coming.  It was just a matter of when.

The remaining challenges were specifically tied to the food delivery part.  All emerging, online malls used couriers such as UPS or the USPS to deliver their packages.  Even establishing one’s own package delivery service locally is not as challenging as delivering hot food.  There is one thing that everyone should clearly understand about a food delivery service for multiple restaurants.  The actual delivery piece will almost never be a profitable venture for the restaurant or the company managing the online marketplace.  We realized this long ago and it is still the case today.

Companies like UberEATS (now Uber Eats), GrubHub, DoorDash, and Bite Squad know this and know it well.  They are the major players in the ‘chow wars’, and the one who emerges the victor will be the one that figures out how to make their service work in a wide variety of markets and pair the service with something else that is actually profitable.  The thing they absolutely can’t do is try to expand by selling restaurants on the idea that they will see a significant increase in revenue as a result of the delivery sales.  This is not realistic, when one considers the actual cost of a delivery compared to the amount charged for most deliveries.

The food delivery industry could suffer the same fate as the industry in which I have been working for the last 23 years.  Although ecommerce is booming for certain major players, some of them aren’t turning a significant profit from the actual sale of goods.  The sale of other services and service plans are what generate the real revenue.  All they need to do is attract and maintain millions of loyal customers.  What went wrong was a manufactured expectation of $0 to ship something a couple thousand miles across country.  Although most people know it is not really free to ship anything, customers still expect to see free shipping because of what the industry dictated for so long.  For a while companies just added the shipping cost to the cost of the item, but then wholesalers and manufacturers started entering the retail market and selling products at impossibly low prices with free shipping.  Many started pushing and promoting loss leaders with the hope of people buying profitable products along with them.  The end results are millions of products priced so low that the companies selling them do not profit much from this aspect of the business.  This is wonderful for the average customer but bad for the service providers.

With food deliveries, this trend doesn’t seem to be headed in that direction just yet.  Since the business models for these services are fairly new, the companies are still trying to figure out how to get the biggest bang for their buck.  The challenges they encounter are as follows:

offering a variety of restaurant choices to customers
charging a reasonable delivery fee balanced with the size of an order and distance
charging restaurants an amount that scales with the value of the services rendered
paying delivery drivers enough to cover their vehicle expenses and still have a living wage
keeping customers happy by ensuring timely deliveries

There are a number of other factors to consider, but these are the primary ones that can make or break the entire setup.  There are 4 main pieces of the puzzle that must coexist in harmony in order for things to run smoothly.

The first piece is an IT company, like Uber, that sells access to its products and services to restaurants and drivers.  That is the case with all of the similar companies that are gradually becoming household names.  The web application is the component that ties everything together.  Thankfully, it is essentially an ecommerce app paired with a mapping app.  The ecommerce part is no different than any other ecommerce store.  The mapping part is still a work-in-progress for all of the companies.  The map tracking needs to evolve into something that is more tailored to food delivery.

The next piece includes the customer base.  Without them, there’s no point to any of this.  What seemed to be the case 20 years ago is the case now.  Most customers want hot, or warm, food sooner rather than later.  They also want to receive the items they order and helpful customer service, should something go wrong.  With the right policies and people in place, this is a lot easier to accomplish than one might expect.

The other piece is the pool of restaurants from which the customers can choose.  The restaurants are basically the manufacturers of the physical product.  They bear the responsibility of ensuring that the customers get food that is prepared the way they want.  In order for this to happen, it is essential for the app’s food menu to be as robust as the in-store menu.

Finally we have the delivery drivers.  Without the delivery drivers, there is no delivery service.  With most of the services, it is the job of the driver to pick up the food, confirm the destination, if needed, and deliver the food to the customer.  That’s it.  Some services require drivers to place orders and handle customer service issues related to the actual contents of the order.  I’ll talk later about pros and cons of certain driver expectations and requirements.

These four component must work together like an intricate, yet awkward, dance.  A certain balance has to be struck between them in a way that benefits all parties involved over time.  I say over time because on any random food order, one or more of these parties will come up short in some way.  The idea is to minimize the frequency of it happening to any one of them.  The list below is in no way exhaustive or extensive, but it does highlight some of the most important aspects of this business and how the parties involved might be truly successful at it.

IT Companies

  1. One of the most important things that an IT company can do when dealing with an operation that lives almost entirely in the physical world, is to be intimately connected with what is happening on the ground and respond accordingly.  So far, the companies for which I have worked have always done this well.  They can’t do it perfectly because everyone is going to find some gripe about a particular software product.  The key is, if there are repeated complaints coming from a majority of drivers or restaurants, then it might be a good idea to make some changes.  No matter how many bugs we fix and contingencies planned for, there will always be flaws that still remain in a product made by people.  We err when we start believing in our own infallibility.
  2. Decrease the frequency of incorrect items in the bag.  This results in lost revenue as well as customer confidence.  The amount of time that a customer service person has to spend correcting something with a customer can run up the bill quite quickly.  The companies must ensure that menus evolve with changes within a particular restaurant or chain (limited time offers, seasonal items, items that are no longer carried, etc).  One key addition would be a touch-screen option that enables the restaurant to tap an item on a customer’s order and mark it as out of stock.  If the customer doesn’t respond within a certain time frame, the item will be automatically removed from the order.
  3. Food that is never delivered to the customer is another problem that can be just as costly.  This problem cannot be completely eliminated, but it can be significantly reduced.  The key is to flag and eventually remove drivers who have an unusually high number of undeliverable orders.  The same goes for customers who falsely complain about food not arriving.
  4. Ensure that the mapping software is selecting drivers based on their proximity to the restaurant, not the customer destination.
  5. Everything should be done to discourage the number of long-distance deliveries.  These are not beneficial to 3 of the 4 parties involved as will be explained in each section.

Customer Base

  1. Some think that customers are extremely demanding, but that only encompasses a small percentage.  A majority of customers want simplicity and convenience.  Unfortunately, there are certain industries that encourage a herd mentality when they engender certain expectations that go too far to the extreme.  An example would be the free shipping expectation mentioned earlier.  With food delivery, customers mainly want food within a reasonable time frame.  This is not too much to ask.  When people order food, they want it as hot as reasonably possible and they don’t want a wait that’s worse than waiting for the cable guy.
  2. A convenient line of communication between the customer and the restaurants should be established via the app.  This would eliminate problems that occur when customers need to make corrections before the order is prepared or when the restaurant runs out of something and needs the customer to specify a substitute.  Using the delivery driver as a middle man is probably not the best solution in such situations.
  3. When problems arise, the customer service process should be smooth and painless as possible.  There’s nothing more to say about this one.
  4. Although some customers request delivery from restaurants 20 or more minutes away, such requests contradict a few of the other attributes customers desire.  The food is more than likely to arrive cold with ice melted in drinks.  There is also the psychological aspect of an extended wait time, even if the customer already knows about it.  I also notice after a few thousand deliveries that customers are less likely to tip on such orders.

The Restaurants

  1. I can only speak on this based on my experience selling non-perishable goods for over 2 decades and speaking to various restaurant owners and managers.  Any service added to the business should either prevent significant loss or increase revenue with minimal associated cost.  If this is accomplished, many of them wouldn’t care, even if the service was from a man in a clown suit.
  2. A number of owners of small restaurant chains have complained about the fees charged by the IT companies.  On a few occasions they inquired about free supplies, like bags, because of what they are being charged per delivery.  There may be something already established of which I am not aware.  Maybe the fee could be occasionally reduced from 30% to about 25% or 20% depending on the number of orders processed for that day.
  3. Long distance deliveries do not always reflect positively on the restaurants.  What is considered distant can vary from city to city when considering mileage, but anything that is over 20 minutes away from the restaurant is probably too far.  Food may have cooled too much or warmed too much if ice cream is a part of the order.  Yes, that has happened.  The customer may not be aware of their own folly, so they will blame the restaurant and the delivery partner for the food that is not warm enough or melted.

Delivery Drivers

  1. They are sometimes called delivery partners.  Ideally, they want to get paid to perform a simple service with as little hassle as possible.  As it will be explained later, drivers do not make huge amount, but their income can be maximized by minimizing the amount of wait time in restaurants, ensuring the delivery locations can be found in a timely manner, having a new trip request available as the previous one is being completed, and a few other factors.  Drivers have very little control over several of these, but they can be built into the system.
  2. Delivery drivers are not in need of additional tasks to earn their keep.  This is in reference to drivers who are contracted as couriers and nothing else.  Some restaurants will hold off on making or completing an order until the driver arrives so that they can ask the driver to call the customer about an out of stock item or some other issue.  It is not the job of the driver to act as a middle man in communications between the customer and restaurant.  There are a few problems with this.  For one, it adds additional wait time for which the driver is not paid.  It also shifts liability from the restaurant to the driver in the event the restaurant ends up mistakenly giving the customer something that causes a serious allergic reaction.  The latter might sound like a rare occurrence, but restaurants have safeguards in place to protect themselves from something like this while contracted drivers don’t.  Looking at it from another perspective, it would be wrong for a driver to ask a restaurant worker to call a customer on their behalf to ask for a gate code or a missing apartment number.
  3. Having food delivered to the door is one of the perks paying for a delivery service.  In some locales, many drivers demand that customers come to the curb to get food.  I think this defeats the purpose.  A customer is placing an order because they do not want to or are not able to leave the house.  Some customers are legally blind or have other issues.  On the other side of the coin, if a customer’s delivery instructions are 2 paragraphs long, it might be a good idea to meet the driver at a location that’s easier to access.
  4. For the sake of safety, it is strongly recommended that drivers make sure they are at the right house when delivering at night.  A few people are more likely shoot first and ask questions later if they see someone walking around in the dark in front of their house.  A more likely scenario is that the police are called.  It is also important for customers to turn on an outside light, provide a description of a vehicle in the driveway, or come outside when they see the driver close to their house on the app.  Customer safety is also important, so that last one is not always advisable.

It is obvious that I spent more time on the perspective of the driver.  This is because that is the area in which I have had the most recent experience.  This business could still exist even without the IT companies.  The drivers and restaurant would just take on a few added responsibilities.  These responsibilities are a bit more than most restaurants and drivers are willing to take on, so both parties gladly cough up a fee for a company like DoorDash to provide the tools and services.  The question is whether or not the parties are being properly compensated after the fees have been collected.  I’ll use Uber Eats as an example since that is the company that facilitates my delivery services.

Since profit per delivery hovers around $4 – $5, it is a reasonable goal to complete 3-4 deliveries per hour.  This results in a gross ranging from $12 – $20 an hour and hopefully one or more of the customers will tip, which is an added bonus.  To get an idea of what is really being made per hour one must calculate what it costs per mile to drive their car in the city.  My car gets about 20.6 miles per gallon in the city.  Based on my average gasoline cost of about $3.25, it costs about $0.16 per mile, in gas, to run my car.  When factoring maintenance and insurance costs over the last 2 years, it costs about $0.24 per mile to operate my vehicle.  This has been pretty consistent for any of the previous years, so if a delivery results in 6 miles of driving, my cost as a driver is $1.44 for that delivery.  So if a driver grosses about $5 per delivery, what they are really making is about $3.56 per delivery.  This number is consistent with actual statements I received from Uber and actual costs of maintenance after doing over 3,500 deliveries in a vehicle used almost exclusively for this purpose.  One might assume that someone could increase revenue by opting for longer distances per delivery, but this is not the case for any of the companies providing similar services.

If there is one thing I would say to any of the delivery companies.  STOP making it easy for customers to place orders at locations far away from their location.  I fully understand that the pregnant customer who wants food from her favorite restaurant 15 miles away needs to eat like everyone else.  I just think there should be significant surcharges that go mostly to the driver in these cases.  Here is why.  Suppose a driver typically does deliveries that are about 5 miles away.  The breakdown in this area is as follows after the Uber fee has been deducted.

Distance:  $2.27
Time:  $1.30
Pickup Fee:  $0.98
Dropoff Fee:  $0.65

Your Earnings:  $5.25
Your Net Earnings ($0.24/mi vehicle cost):  $4.05

This is an ideal scenario where there is a less than 5 minute wait time at the restaurant and the actual transit time closely matches the expected transit time.  The only fields that can change from trip to trip are Distance and Time.  In the example above, the distance is 5 miles and the total time from the arrival at the restaurant to delivery is 20 minutes.  This is close to the expected compensation per delivery, but it doesn’t take into account the amount of time it takes to drive to the restaurant or locate a customer in a large, gated apartment complex.  The total time spent would be more like 30 minutes, so if you did these back to back without any added bonuses or tips, you’re at about $8.10 per hour.

Now let’s consider what it looks like for the same order that’s twice as far away.  This one is going to take 35 minutes to deliver after arrival at the restaurant.  Here is the new breakdown.

Distance:  $4.54
Time:  $2.28
Pickup Fee:  $0.98
Dropoff Fee:  $0.65

Your Earnings:  $8.45
Your Net Earnings ($0.24/mi vehicle cost):  $6.05

This time, the entire trip would likely eat up about 45 minutes, or more, of your time.  This is not effective use of a driver’s time and resources because this could easily creep up to 1 hour, when considering traffic and actual wait time in the restaurant.  The only things that might help are a customer tip and an extra bonus from the service provider.  Uber refers to them as boosts.  A 2.0x boost basically doubles this amount which actually makes it worth the trip, but these are rare.  Tips are rare on long trips too.  Since I don’t have any actual input from customers (imagine asking each one, “Why didn’t you tip me?”) but my guess is the psychological aspect of something taking a long time, whether expected or not, and the food being colder than a closer delivery.

As stated earlier, I truly believe the company that figures out the right formula ensuring 3-4 deliveries per hour for their drivers will win this war.  High volume at a low cost would also enable them to lower the fee charged to restaurants.  Fast deliveries make the IT companies, the restaurants, and the drivers look good.  The distance threshold can vary from city to city depending on whether or not they have a great freeway system.  Just to drop a hint, keeping distances under 3 miles seems to be the trick in small and medium sized cities with no freeways.

Leave a Reply