If fast food restaurants cannot get customers to come in to buy their food, maybe delivering it to their door will help.
Restaurant traffic growth is expected to remain relatively stagnant for the foreseeable future as millennials are spending less money dining out, even as the marketplace becomes saturated with places to eat. The competition is not just other restaurants but less traditional dining locations, including grocery and convenience stores.
Standing out from the crowd is not easy anymore, which may be why fast food chains (already suffering as consumers switch to healthier eating habits) are now willing to bring their fare to your home.
Ding dong! Your restaurant is at the door
Yum! Brands (NYSE:YUM) told analysts last week that both its Taco Bell and KFC businesses would test at-home delivery to drive sales. Its Pizza Hut division already operates a delivery business, but pizza delivery is almost a requirement in the industry.
The question then becomes: Can delivery save fast food?
Burger King was one of the earliest chains to experiment with delivery in limited markets, but recently, McDonald's (NYSE:MCD) said it would also test the concept, and Starbucks said its customers could have coffee orders brought to them in certain areas. The fast food at-home delivery bandwagon is getting bigger, but it will not solve the industry's problems.
A smorgasbord of risk
Some of the problems the chains will encounter include:
- Using employees to do the driving or partnering with a service?
- Deploying delivery only in densely populated areas
- Liability due to accidents
- Food quality control
Many companies are choosing to partner with services such as Postmates, which calls itself the nation's largest on-demand delivery service. But many similar services are popping up, including Caviar, Peachd, and even ride-sharing app Uber, clamoring to deliver restaurant orders. It might be a growth opportunity for them, but it is really just another cost for the restaurant.
First, this service requires relatively densely populated areas to work, so it is not something the chains can roll out nationwide. For example, Peachd and Bite Squad started off in Seattle and Minneapolis, respectively, while Uber is making its service available only in New York and Chicago.
Delivery also quickly ratchets up the competition between chains, as any local pizza shop can tell you. Once your rival starts offering delivery, you need to as well to keep your customers, meaning it is not a service you can easily stop offering. The liability it attaches to your business is also risky -- everyone remembers Domino's 30-minutes-or-less guarantee that had to be discarded due to multi-million dollar lawsuits that arose from car accidents.
Then there is the logistics. For example, Yum! Brands said it will likely only offer delivery on Thursdays, Fridays, and Saturdays, its busiest days, so hungry customers will still need to trek out to the restaurant during the rest of the week. Taco Bell has the additional challenge of often having a mix of hot and cold items in an order, which could make quality control a problem (things could be better for KFC, though, as the chicken chain said its buckets hold up better in delivery).
Delivery can also raise costs for consumers, who have to pay a fee to have their food delivered. McDonald's, for example, adds 9% of the order total to the bill -- customers must also pay Postmates delivery fees, which begin at $5 and can easily double the cost of a meal.
McDonald's already lays some of the blame for falling sales on its move away from giving customers good value. As CEO Steve Easterbrook said, "We moved away from the Dollar Menu. We didn't replace it with significant enough value in the eyes of consumers." Increasing prices will not endear it to anyone.
The biggest problem, though, might be changing consumer tastes. Fast food is losing out as the fresher, more wholesome ingredients served at Chipotle Mexican Grill, Panera Bread, and other fast casual chains resonate better with the more health-conscious diners of today.
A fast-changing industry
Same-store sales at fast casual restaurants are growing faster than that of the industry as a whole. This is an important retail metric that strips out growth from newly opened restaurants. Fast casual now accounts for 16% of the limited-service restaurant market, and the segment is expected to reach 21% by 2019.
And fast casual chains are also offering delivery options. Chipotle and Panera have realized they also might boost sales through at-home deliveries, meaning the challenges fast food chains are facing in their physical restaurants will be compounded on the road, too.
A fundamental and systemic change is under way in the restaurant industry, and fast food brands are scrambling to respond. Despite trying fresh tactics to overcome the hurdles, home delivery will not turn the tide in their favor.
Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends Apple, Chipotle Mexican Grill, Panera Bread, and Starbucks. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.