Is Consolidation the Future of Restaurant Technology?

    The industry can find clues in the history of travel marketplaces.

    Chipotle food being delivered

    Chipotle Mexican Grill

    Third-party delivery companies continue to jostle for market share.

    At the same time online business is becoming an increasingly important source of restaurants’ revenue, there is jockeying for dominance of the marketplaces and technology that serve them. As the dust settles, restaurants can look to travel marketplaces for clues on how that evolution will play out.

    Consider that Uber CEO Dara Khosrowshahi, before leading Uber Eats to purchase Postmates, was a veteran of marketplace M&A from his time as CEO of Expedia Group and its predecessors.

    Khosrowshahi led a consolidation of travel marketplaces, first merging Hotels.com into the predecessor to Expedia, IAC, then reaching an apex in early 2015 with acquisitions of Orbitz and Travelocity. Uber benefits from having this playbook in hand, and we should not assume there may not be more big deals in the near future.

    With this history in mind, here is what we might expect to see happen in the restaurant industry:

    Continued consolidation among marketplaces and brands

    With U.S. consumers having been given a once-in-a-lifetime education on online ordering, we can expect this ordering method to stay at elevated levels.

    For restaurant brands this means that those that have invested in their online platform can better grow profitability and drive unit growth compared to those that are becoming dependent on revenue from the major marketplaces, now Uber Eats-Postmates, GrubHub and DoorDash.

    Because of this, we can expect to see major chains with strong online ordering technology and industry-leading deal terms with marketplaces looking to acquire strong brands that face headwinds in driving unit growth if their online business profitability sags.

    While Yum! Brands had not acquired a new concept in years, its recent acquisition of Habit Burger is an example to watch, and is reminiscent of lodging tie-ups such as Kimpton and IHG or Marriott and Starwood.

    While Uber has said it will stand pat for now in the U.S., we cannot count on further consolidation globally among the marketplaces. Studies have shown consumers are not loyal to a single marketplace and heavily driven by promotions.

    Marketplaces will gain share and clout

    In travel, marketplaces gained share immediately after a big wave of consolidation in 2015.

    Lodging industry analyst Kalibri Labs found a 28 percent rise in share of bookings, with 9.7 percent of booking in 2014 going to marketplaces, rising to 12.5 percent by 2016. Overlapping with the Expedia merger peak.

    As hotel brands invested in their own digital channels, they were able to stanch further loss of online share, and restaurants are now making similar investments.

    However, with less competition among online restaurant marketplaces, restaurant brands will have less leverage to negotiate fee reductions and other terms. A combined Uber-Postmates is likely to have more restaurants that are dependent on the combined revenue from both channels. Even GrubHub now being part of a global business will make it less likely that a single chain will represent a large share of the company's overall business.

    This does not mean that brands will have no leverage at all, especially on a regional level, and as they invest more in their online platforms. Brands with highly differentiated products, strong owned online channels and unit saturation in key markets should still be able to hold firm.

    However, restaurants can expect marketplaces to continue pressing for menu pricing parity with restaurants own sites, despite legal challenges. In most industries, marketplaces are built on the promise of variety and competitive pricing, with the echo of Wal-Mart's pre-internet and Amazon era slogan of "Always low prices" still ringing.

    Marketplaces as they consolidate also have the ability to spend less on driver and customer acquisition promotions and more on initiatives from paid search ad campaigns to grab traffic, and to improve their technology platform.

    Better quality delivery service

    The major U.S. marketplaces earn fees from ordering and delivery, but tech delivery service in particular is the component that is rife with complaints from restaurants. A widely-publicized 2019 US Foods Survey revealed harrowing insights including that more than 1 in 4 drivers admitted to sampling customers' food before delivering it.

    With fewer delivery platforms, drivers are less likely to need to participate on multiple platforms that do not coordinate with each other, and the larger platforms will get better at dispatching efficiently. This means fewer stories as described by the RideShareGuy, where the driver received two orders from the same location and "made an executive decision to wait for both to be finished," a reasonable decision, but one unlikely to earn good reviews from both customers.

    The increased concentration of orders on fewer platforms allows the marketplace teams to weed out bad drivers, and for them to pull back on new driver incentives that may attract less committed contractors.

    If marketplaces gain online share from restaurants and are able to hold firm on fees due to their consolidation, they will certainly pocket some revenue to finally reach profitability, but once there, it’s reasonable to expect more investment in innovation as the pressure to deploy expensive customer and driver incentives also decreases.

    Kevin Ziegler is principal of kaz strategy, a consulting firm helping restaurant brands build winning online strategies that grow profits.