Delivery Sales Brighten Restaurant Picture

Growth for delivery seen pacing industry

Author: Andria Cheng

July 12, 2017

American consumers’ appetite to eat in at restaurants is waning these days, contributing to the industry’s sluggish sales and traffic, but there is a bright spot on the market: Delivery sales.

US restaurant delivery sales will rise an average of 12% a year to $76 billion in 2022, up 77% from $43 billion currently, according to a 70-page report published by Cowen & Co. Wednesday. With the rise of restaurants offering food delivery on their websites or onboarding such third-party platforms as GrubHub/Seamless, online is both a key disrupter and driver of growth: Cowen analysts forecast online order’s share of the restaurant food delivery market will jump to 73% by 2022 from 46%, citing NPD Group data.

That’s encouraging news in the mature restaurant industry, where Cowen estimates total industry sales will rise at a slower annual average of 3.5% over the next five years to $539 billion. In fact, the brokerage and equity research firm forecast about 30% of that industry sales growth itself will come from delivery, up from nearly 20% in 2016, it said.

On a same-store sales basis, the industry is struggling. Through May of this year, the industry hasn’t seen one month of positive same-store sales since February 2016 while monthly visits also declined during that time, according to restaurant industry market research firm TDn2K, which tracks weekly results from 28,500 restaurant units totaling over $67 billion in annual sales.   

“We believe the supply of restaurants offering delivery is poised to grow, along with consumer demand for the convenience of the offering,” the Cowen report said.

Responding to that demand, restaurants from fast-food giant McDonald’s to casual dining chain Buffalo Wild Wings have all called out delivery as a key part of their companies’ respective growth strategy going forward.

“Consumer behavior is shifting rapidly,” Buffalo Wild Wings CEO Sally Smith said on the company’s Q1 earnings call in April. “Delivery is an addressable opportunity for Buffalo Wild Wings as more consumers are eating at home. We are rapidly deploying third-party delivery in company-owned restaurants.”

Initiatives including delivery that the restaurant chain introduced last year have helped the company outpace “both the negative restaurant industry and casual dining segment,” Smith said.

Buffalo Wild Wing’s research showed that customers would prefer to order delivery from the company’s local app or website, COO James Schmidt said in April, so the company is also exploring adding that feature.

More than half of the 2,800 consumers surveyed in the Cowen report said they ordered food directly from restaurants’ own apps or websites, followed by more than a third who use GrubHub or its Seamless platform.

Delivery ranks as one of McDonald’s three “velocity accelerators” to drive growth, CEO Steve Easterbrook said in the company’s earnings call in April. The fast-food restaurant chain has begun offering meal delivery through partnership with UberEATS.

“Through delivery, we'll bring the McDonald's experience to more customers, whether it's in their homes, their dorm rooms, to their workplace and beyond,” Easterbrook said, adding at the time that McDonald’s is expanding its UberEATS offering to a number of US cities after pilot results in Florida. “We're encouraged about the start we've had. It would be fair to say we are not in test mode. We're expanding.”

In another example, the CEO of chicken wing chain Wingstop, Charles Morrison, also said in May that the company is testing delivery in Las Vegas as it’s seen “a growing demand” for delivery from customers.

The increased restaurant offerings have played a key part in the market growth. When it comes to what drives them to order food for delivery more frequently, the percentage of consumers citing “more readily available options,” “digital ordering has made it easier,” or “delivery times and service have improved” outweighs factors such as busier schedule, the Cowen study showed.

The increased options also have led to another trend: chicken wings/fried wings and hamburgers have seen the greatest year-over-year delivery growth outside of the traditional staples of pizza and Asian food, according to the Cowen report.

“The responsiveness of the market to increase supply is a major positive,” Cowen analysts wrote in the report. “More restaurants will choose to offer delivery, and we see a synergistic feedback loop emerging: as more restaurants embrace the incremental nature of delivery, consumer demand should follow.”

However, while online orders could be a game changer when it comes to sales, Cowen cautioned the profit math may not work for all types of restaurants when factoring in any third-party commission and delivery charges. For instance, a key to a successful model using third-party platforms is a minimum average check of about $15 to $20, Cowen said.

Given the low average check and low digital sales presence, Cowen said it was less optimistic about quick service hamburger restaurants' delivery prospects.