Are online booking and delivery services offering restaurants a poisoned chalice?

time-out-australia-discounting
Third party disruptors are trying to transform how we eat out and order in. Time Out’s CEO Michael Rodrigues spells out the risks to Australia’s dining scene, and how restaurateurs can learn from hoteliers’ mistakes.

Just about every business comes with fixed costs. And with fixed costs, there’s always the same problem: the costs may be constant, but everything else is in flux. The promise that this flux can be solved, that demand can brought into perfect alignment with supply, is a macro-economist’s dream and a small business’s fantasy.

It’s also a promise made by many of the world’s fastest growing companies, whether it’s share-economy behemoths like AirBnB and Uber or (in a very different way) dating giants like Match.com.

In the hotel industry, it was booking engines like Expedia and Booking.com that promised to solve the problem of excess capacity. They offered to fill up unsold bed space with throngs of willing heads, and, for a while it worked. But, as these third party businesses – selling the promise of ‘seamlessness’ – grew in ubiquity amongst users, it became easy for them to squeeze extra profits from the existing businesses they’d promised to help.

Customers’ purchase habits shifted from hotel brand to booking engine (between them, Booking.com and Expedia control 80% of the Australian online booking market). That change allowed the booking engines to insist on aggressive commissions and for the last few years their activities have been on the radar of competition watchdogs globally.

Hotels are now in a tricky position. They are in part dependent on the “partner” relationship they’ve established with the booking engines. If they pull out, their bottom lines are affected, but if they stay, they’re squeezed. Hotel groups like Hilton are now reinvesting in their own loyalty programs and direct customer relationships in order to reestablish yield.

Now, similar third-party disruptors are coming for the dining business. On two wheels or four, on-demand delivery services are promising the same: the utilisation of excess capacity. The weapons are similar too: ‘seamlessness’, market reach, and digital savvy.

Already, that excess capacity is coming at a discount. Deliveroo, UberEats and Foodora all propose similar models. First, in exchange for marketing value and audience reach, participants are asked to provide food at 70 per cent of RRP. Meanwhile, the delivery services acquire consumers in the first instance through the credibility of their partner restaurants, supported by discounted trials, for instance “$20 off your first order”.

Restaurant booking engine Dimmi (now TripAdvisor owned) has pushed aggressively into discounting too, regularly promoting 50 per cent discounts at restaurants that have opted in (although of course, they still take their cut). We saw this five years ago when collective buying entered the market. It’s Groupon by stealth.

Both these models come with problems. If the restaurant experience is a core part of a hospitality business’s offering, then putting a product on the back of a bike, no matter how well it’s packaged, isn’t really utilising excess supply; it’s creating a cheaper, inferior product (and customer experience) that maintains the same hard cost.

Meanwhile, offering steep discounts on an in-restaurant experience may attract a new audience, but it will be an audience of bargain hunters whose loyalty lies with discounts, not with the businesses they are visiting. And with declining alcohol consumption rates it’s unrealistic to expect a restaurant to make up the difference on booze sales, especially early in the week.

Booking engines and delivery apps also capture something fundamental to recurring business: customer data. Once the third party has sufficient supply on board, and an adequate user base, audience behaviour tips from the existing business to the third party supplier. This middle man has been acquiring audience and end user data, and then doubles back to the existing businesses offering additional services like marketing and audience behavioural insights – for an extra fee.

The cycle is modern, but the solution to this issue is very old school. It’s offering a quality product, and a depth of relationship with your customers. There’s no quick-fix for business loyalty. It takes hard work and a personal touch. We are entering an era of unprecedented restaurant supply and competition is fierce. Ask businesses with any longevity what the secret of their success is and they will say loyal customers – not apps.

Instead of giving your potential profit margin away to build someone else’s business, why not reinvest it in your own? Deepen your relationship with your customers, improve your product or reward the staff that maintain your customer base. It may not solve the problem of flux, but it goes a long way towards keeping your fundamentals fixed, not just your costs.

For those in experience-led hospitality, let’s learn from the hotel sector. As the saying goes – fool us once, shame on them. Fool us twice, shame on us.

Michael Rodrigues
CEO, Time Out Australia