Open up DoorDash or Uber Eats these days and you are likely going to see a whole lot of deals.
Buy one sandwich, get one free at Jersey Mike’s. Get a free item when you spend $25 at Taco Bell. $0 delivery fee at Dave’s Hot Chicken. The list goes on. A recent secret shopper study by researcher Intouch Insight found that nearly half (49%) of third-party delivery orders had a discount attached, including 65% for DoorDash and 55% for Uber Eats.
The sea of offers is part of the delivery apps’ fast-growing advertising business—a set of marketing products designed to help restaurants boost sales, give customers more affordable options and provide the delivery companies with another source of revenue.
DoorDash and Uber Eats say discounts have been very effective for restaurants. They cite a return on ad spend as high as $8 for every $1 an operator invests—far better than the typical return of $2 to $4—and a sales lift of up to 20% when promotions are offered. Those sales, they say, are highly incremental, meaning the customers would not have ordered otherwise. That has created strong demand from restaurants for these products.
“When we talk to our restaurant partners, the biggest question we get is how—not whether—to spend on ads and offers,” said Alex DiValerio, head of merchants for Uber Eats, in a statement. “Finding new ways to increase visibility, to reach more customers, and to grow their business is top of mind.”
But the surge of promotional activity has also changed the landscape of third-party delivery. Restaurants are taking on additional costs with those discounts. Some feel that they have to in order to compete.
“The third-party delivery marketplace is now built on discounts,” said one operator, who asked to remain anonymous due to the possible ramifications for speaking out. “It’s not built on the fact that that’s a great restaurant.”
It has become a new source of tension between delivery apps and restaurants, which have long butted heads over commission rates, ownership of customer information, and the algorithms that govern the marketplaces. But as consumers continue to flock to delivery apps, restaurants may have little choice but to adapt.
“When we think about restaurants, where more and more customers are moving to the delivery model, then not being on the platform becomes a risk,” said Steve Tadelis, an ecommerce expert and professor of economics at the University of California, Berkeley. “They’re pretty much stuck in a world where this is the new business model.”
Discounting on third-party delivery apps has of course been amplified by recent inflation. But it began well before prices started to climb.
The year was 2020, and the pandemic had pushed many restaurants and their customers onto online marketplaces. Restaurants were looking for ways to drum up more business on these platforms, which had suddenly become a lifeline.
“It was a constant thread of, ‘I want to grow faster. What are the tools?’” said Toby Espinosa, vice president of ads for DoorDash, in an interview.
In response, DoorDash and Uber Eats began to develop products such as promotions and sponsored listings, which allow restaurants to get a better position on the home page or in search results. Those products became the foundations of their advertising divisions.
It’s a playbook that was established years ago by online shopping sites like Amazon. The Seattle-based retail giant began selling sponsored listings in 2012 to help solve what is known in ecommerce as the cold start problem. The paid listings gave otherwise unknown Amazon sellers a way to quickly get customers’ attention. Though customers may not have been familiar with the companies, the “sponsored” tag acted as a sort of rubber stamp.
“In that sense, the sponsored search becomes something like a signal to the buyer that says, ‘Hey, I’m confident in my product,’” said Tadelis.
Today, ads are a fast-growing, $50 billion annual business for Amazon, and a profitable one at that.
Discounts like these are now common on third-party delivery apps.
For DoorDash and Uber, ads serve a similar purpose, Tadelis said: They’re tools restaurants can use to stand out in a crowded marketplace. And they have become a big business for the delivery apps.
Last quarter, Uber’s ad revenue surged by 80% year over year and is on track to reach $1 billion this year. It has found strong demand for ads, particularly as customers become more price conscious. The number of deals being offered by restaurants and other businesses on Uber Eats is up 70% over the past year.
“It has actually been a very helpful way for them to address their need to attack the affordability question that folks are asking,” said Uber CFO Prashanth Mahendra-Rajah during an earnings call in August.
DoorDash does not report ad revenue, but has said that it is growing very quickly as well.
“We’re super proud of our ad business,” CEO Tony Xu told analysts on an earnings call in August. “I think the size of the business would be impressive as a standalone company.”
Ads have also helped the delivery companies expand their profit margins. In the third quarter, DoorDash’s take rate, or the portion of each transaction that goes to the company, increased to 13.5%, from 12.9% a year ago. DoorDash said it was due to a bigger contribution from advertising as well as improvements to its logistics capabilities.
“You're seeing the impact of ads on both revenue as well as EBITDA (earnings before interest, taxes, depreciation and amortization),” said CFO Ravi Inukonda during the August earnings call.
While advertising has been a success for delivery companies, the story for restaurants has been more complicated.
Discounting does help drive sales, operators say. But it also makes those sales less profitable. And margins on third-party delivery tend to be thin to begin with: Delivery commissions usually wipe out between 15% and 30% of the order total. When the order has a discount attached, restaurants pay an additional fee.
An analysis of third-party delivery margins by Thanx, a restaurant loyalty program provider, found that the average take-home for a restaurant on discounted orders was 52% after promotional fees, commissions and the discount itself were applied.
“That’s a 48% commission on promo-oriented offers that is highly profitable to both the consumer and the marketplace,” said Aaron Newton, chief data officer for Thanx, during a webinar about third-party delivery last month. The restaurant, meanwhile, could actually lose money on the order after its own costs are subtracted from what’s left over.
The issue is most acute for small and medium-sized restaurants that don’t have big marketing budgets and lack the scale to get better rates.
For a while, these restaurants were able to make third-party delivery margins more favorable by raising prices enough to offset the commission. But the apps have discouraged that practice, and DoorDash has even warned that excessive markups can affect a restaurant’s placement on its marketplace. The apps have also pushed promotions, which has raised costs.
“What we started to notice was that our costs of being on those platforms started to get completely out of wack once we started to factor in all of the different marketing and promo fees that they wanted us to be a part of,” said Seth Cohen, president and co-founder of Sweetfin, a 16-unit poke chain based in Los Angeles, during the Thanx webinar.
This has created some unusual situations on delivery apps. Because restaurants are incentivized to keep markups to a minimum and also discount, it is now more affordable, in some cases, to order from a restaurant on a third-party delivery app than from the restaurant itself.
For example, on a recent afternoon, an order of mac and cheese from Noodles & Company cost $11.93 on Uber Eats, thanks to a 70% discount (up to $7). The same order cost $15.82 when placed directly on Noodles’ website.
This would have been almost unheard of just a couple of years ago. And it defies the conventional wisdom that restaurants should always drive customers toward first-party channels, where margins are better and the restaurant gets more data.
“Eroding the bottom line and not getting the guest data is a recipe for disaster for the long term,” said Noah Glass, CEO of online ordering company Olo. “You’re training [customers] to get discounts and to go through a third party and to be anonymous. That’s very bad.”
That’s why some brands are moving away from discounting on the apps, even if it means fewer sales. Bubbakoo’s Burritos has encouraged franchisees to stop investing in third-party ads and instead focus on getting customers to use its first-party ordering channels.
“We need to be more profitable, and if we see a dip in top line sales [on third-party delivery], we’re seeing a growth in bottom line sales,” said Chris Ives, CFO of the 114-unit fast-casual chain.
It’s a bold move for Bubbakoo’s, where half of all sales come from digital channels such as third-party delivery. But there are signs that it is working. Since pumping the brakes on discounting, the company’s third-party sales have gone down, and its first-party sales have gone up.
“We’re looking to close that gap,” Ives said. “At the end of the day, there’s certain people that you’ll never get off the [third-party] platform.”
Beyond the margin concerns, some restaurants worry about the broader impacts of relying so heavily on discounting to generate sales growth.
“Discounts are like heroin,” said the operator who asked to remain anonymous. “If a business discounts regularly, or if they win you over as a first-time user with a discount, you are basically patterned and imprinted to get a discount when you interact with that brand.
“Why would you buy from a brand without a discount? You wouldn’t.”
And yet some restaurants feel compelled to discount on third-party apps, even if they don’t regularly do it outside of them. “I just feel like I have to be doing that to compete,” said Emma Dye, founder and chief salad officer of Crisp Salads, a three-unit chain in Portland, Oregon.
About 45% of Crisp’s sales come from third-party delivery. If the chain were to stop discounting, Dye said, “I think our revenue would drop. I think we wouldn’t be seen in the apps as much.”
But, she added, “I do think the revenue exceeds what I’m paying. So it’s worth it from that standpoint.”
DoorDash and Uber Eats said that advertising is just one of many factors that determine where a restaurant appears on their marketplaces. Other variables include a restaurant’s speed and accuracy, customer preferences, estimated delivery time and popularity.
DoorDash said that most restaurants on its home feed are listed there organically, and that ads are just one way it helps operators grow their sales.
Still, Espinosa, the VP of ads, acknowledged restaurants’ concerns about what they view as the “hamster wheel” of discounting.
“Any business that is spending X percent on marketing and decides to turn that marketing off, at any point in time, will most likely slow down,” he said. “We have consistently seen that our customers who invest in our advertising products find a new normal.”
He emphasized that for the vast majority of restaurants, ads are a surefire way to drive incremental sales. However, he said the company could do a better job of helping restaurants understand how ads work, what types of promotions to invest in and how they will impact margins.
“We’ve put a lot of that burden onto our customer,” Espinosa said. He said that DoorDash is working on something that will make the whole process simpler for restaurants, but did not go into detail.
In the meantime, some are trying to figure it out on their own. And the consensus seems to be that the industry’s approach to third-party delivery may have to change.
“If you built a business today, you would not build a business the way you built it three years ago, four years ago,” said the operator who requested anonymity. “If the game has changed, then all the teams are gonna have to change their playbooks.”