Exploring the Viability of Delivery Partnerships for Restaurateurs: Can Margins Be Maintained?
Running a successful restaurant is an intricate balancing act, especially in today’s challenging hospitality landscape. For owners whose establishments were once thriving, recent years have presented unique hurdles. Many are now exploring ancillary revenue streams, such as third-party delivery platforms like Deliveroo and Uber Eats, to bolster their income. However, the question remains: Is participating in these platforms financially viable?
Background and Context
Consider a restaurant in England that enjoyed a decade of prosperity but has faced significant downturns recently. Faced with declining in-house dine-in traffic, the owner contemplates leveraging delivery apps to generate additional income. Recognizing that their core concept isn’t inherently suited to delivery — largely due to logistical constraints — they are planning to launch a ghost kitchen within their existing space, focusing on a niche offering: gourmet grilled cheeses.
While innovative, this approach prompts crucial questions about profitability and sustainable margins, particularly when promotional discounts and platform fees come into play.
Initial Calculations and Challenges
The owner’s preliminary cost analysis of a proposed delivery item — a Korean fried chicken grilled cheese sandwich with fries — totals approximately £4.97 in ingredient and packaging costs. This figure, however, deliberately excludes overheads such as labor, rent, utilities, and other indirect costs, which will impact overall profitability.
To determine a viable retail price, they explored various pricing scenarios, especially considering the platform’s promotional strategies. Deliveroo frequently runs discounts, such as a 20% reduction, which can enhance a restaurant’s visibility but also complicate profit margins.
Breakdown of Potential Pricing and Profitability
Suppose the restaurant lists the meal at £14.99. After applying a 20% discount (£3.00), the customer pays approximately £11.99. Deductions are then considered:
- Customer Discount (20%): £3.00
- VAT and Platform Fees: Assuming approximately £3.00
- Delivery Partner’s Commission: Estimated at around £4.50
- Cost of Goods Sold (COGS): £4.97
This simplified calculation suggests a net loss of about £0.48 per order, meaning they would need to price the meal at roughly £19.99 just to break even at a minimal profit margin.
Questions and Considerations
This analysis raises several important questions:
- **Are platform fees and promotional costs accurately estimated
