7 reasons why McDonald's, Chipotle, and Shake Shack are embracing meal delivery - and Olive Garden isn't

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  • McDonald's, Shake Shack, Chipotle, and other restaurant chains are embracing delivery as a way to reach more customers, gather more data, and make more money.
  • However, Darden Restaurants - owner of Olive Garden - argues the higher costs can eat into profit margins.
  • Watch McDonald's, Shake Shack, Chipotle, and Darden Restaurants trade live.

McDonald's, Shake Shack, Chipotle, and other restaurant chains are embracing delivery as a way to reach more customers, gather more data, and make more money.

However, implementing delivery can be expensive and disruptive. Darden Restaurants- owner of Olive Garden - also argues higher costs can eat into profits.

We've outlined five reasons why restaurants are pumping cash into meal delivery, and two reasons why others have reservations, below.

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Delivery can boost sales and profits.

Delivery can boost sales and profits.

Restaurant chains' main reason for embracing delivery is the potential for higher revenues and profits.

A key question is whether delivery leads to their customers ordering in rather than eating out, cannibalizing their existing business.

McDonald's has found more than 70% of its delivery revenues are incremental to existing sales, CEO Stephen Easterbrook said at a forum in March. The dollar value of its average delivery order was twice as large as a standard order, he said on an earnings call in April.

Sandwich chain Potbelly's has found delivery orders to be additive too, while the average delivery check at Jack in the Box is "consistently higher" than those for other orders, CEO Leonard Comma said on the chain's earnings call in May.

Denny's, which has rolled out delivery to around 90% of its restaurants, has found delivery orders boast healthy profit margins as well. Meanwhile, Popeye's — owned by Restaurant Brands, which also owns Burger King — has found its restaurants offering delivery outperform those that don't.

It can attract new customers.

It can attract new customers.

Introducing delivery can help restaurants to reach new customers.

"Two years ago, we could not imagine that we would have a customer that had never ever gone to a Burger King restaurant, although a huge fan and a frequent consumer," Burger King's Brazil CEO luri Miranda said at Restaurant Brands' investor day in May. "How? A delivery guest."

Delivery can also address changes in consumer behavior.

"People are not eating out as often as they were," McDonald's CFO Kevin Ozan said at the forum in March. He pointed to ageing populations, wider availability of delivery, and more people working from home. "That's why delivery has exploded as quickly as it has recently."

McDonald's has found delivery customers tend to be younger and a large proportion make repeat orders. Its restaurants close to college campuses tend to do especially well at night. "I won't surmise why that is or what they're doing prior to ordering McDonald's," Ozan said.

Similarly, Popeye's views delivery as a way to introduce young people to its food and convert them into regular customers. Bloomin' Brands, owner of Outback Steakhouse, has found delivery helps it reach new customers who are loyal to third-party delivery platforms such as Uber Eats rather than its brands.

The typical timing of delivery orders is also enticing. McDonald's receives 60% of them in the evenings, which is "really helpful for us from a capacity standpoint" as there's less drive-thru and in-store traffic and workers have time to fill orders, Ozan said at a conference last year.

Popeye's, Burger King, and Jack in the Box have also reported most orders arriving during non-peak periods, such as after 4pm on weekdays.

It's a mushrooming market.

It's a mushrooming market.

Restaurant chains are eager to grab a slice of the burgeoning meal-delivery market.

The segment is growing 20% annually and could be worth nearly $50 billion by 2022, Burger King's Americas president Christopher Finazzo said at an investor day in May. The maker of the Whopper plans to offer delivery in more than 5,000 restaurants by the end of this year, he added.

Similarly, McDonald's earns as much as 10% of its revenue from delivery in markets such as the UK, Australia, and France, Easterbrook said on an earnings call last year. Delivery has generated between 20% and 40% of sales at some of its restaurants in China too.

It can capture customer data.

It can capture customer data.

Restaurant chains can gather personal information such as names, addresses, phone numbers, and social media details from delivery orders, allowing them to track customers' orders and garner insights into them.

For example, McDonald's can combine delivery-order data with drive-thru and in-store transactions to build profiles with customers' favorite menu items, average spend, usual order times, and so on. Armed with that information, it can craft individualized promotions and use them to drive bigger, more frequent orders.

Delivery data is "incredibly valuable for us to make ourselves more relevant and more interesting to those customers and, from a customer perspective, just make the experience smoother and more enjoyable," Easterbrook said on an earnings call earlier this year.

Similarly, Popeye's plans to collect more data to "better interact with our guests," brand president Felipe Athayde said at an investor day in May.

Meanwhile, Wendy's wants to allow customers to order delivery via its mobile app, improving their experience and generating "more insights to enhance our relationship with our customers as well as improve our overall delivery times," CEO Todd Penegor said on the fast-food chain's earnings call in May.

Delivery partnerships can pay off.

Delivery partnerships can pay off.

Restaurant chains often partner with Uber Eats, DoorDash, and other third-party delivery companies to avoid the cost and hassle of hiring drivers and leasing vehicles.

Partners can also share advertising costs and promote restaurants on their websites and apps. Bloomin' Brands expects "pretty good marketing and advertising support" from its new delivery partner, CEO David Deno said on the company's earnings call in July.

Similarly, Shake Shack expects to do "some really great marketing" through its recent partnership with Grubhub, CEO Randall Garutti said on the burger chain's earnings call this month.

In fact, McDonald's and Burger King have found multiple delivery partners can generate additional sales as there's limited overlap in their user bases. Chipotle has also found "very little guest overlap" between its app and partners' apps, CEO Brian Niccol said on the fast-casual Mexican chain's earnings call in July.

However, delivery can be expensive.

However, delivery can be expensive.

Some restaurant chains have balked at the risks and costs of delivery.

Last year, Shake Shack said its burgers and fries were "not intended to be eaten half an hour after they were cooked" and delivery didn't "necessarily fit really well" with its brand, according to Bloomberg.

The chain recently struck a nationwide delivery deal with Grubhub, but Garutti cautioned that "delivery is a hard business" and Shake Shack's food is "hard to deliver and we need to do it really, really well" on its last earnings call. He added that delivery orders are more expensive to fill due to the commissions it pays to delivery partners and higher paper costs.

Launching a high-quality delivery service isn't simple either. One challenge is "working out all the operational kinks" including "when to fire off the order," a Dunkin' Brands executive said at a conference in June. "Obviously a cold coffee, if it's meant to be hot, it's not a very satisfying experience."

Shake Shack is going as far as designing restaurants with separate pick-up areas for digital and in-house orders to "honor our guests who continue to come to Shake Shack," Garutti said on the call.

Meanwhile, Yum Brands — owner of Pizza Hut, KFC, and Taco Bell — is closing stores and reopening them in more appropriate locations for delivery. It expects the repositioning to boost sales, reduce costs for its franchisees, and improve its customer experience.

Launching delivery can also mean higher packaging costs. The Cheesecake Factory recently rolled out containers that ensure its food can "travel at the appropriate temperature" and "retain the integrity and the look and feel of the food" customers receive in its restaurants, company president David Gordon said on its latest earnings call.

Luckily for Chipotle, it has largely avoided those costs thanks to its foil-wrapped burritos. "Our food travels really well off-premise," Niccol said at a conference in June.

Meal delivery may not be the best option either.

Meal delivery may not be the best option either.

Some restaurant chains question whether meal delivery is right for them.

Darden Restaurants, owner of Olive Garden, dislikes passing delivery costs onto customers. Dunkin' Brands admitted "the fee is actually all on the consumer," at a conference in June.

Darden is also skeptical of the delivery market's growth prospects, wary of its costs, and unsure whether it complements its brands. "We continue to offer great value without having to have any destruction to our overall margins," CEO Eugene Lee said on its earnings call in June.

Instead of delivery, Olive Garden is expanding its catering business. The minimum order is $75, and the average order comfortably exceeds $300. "We want to focus on that more so than trying to move a $15 entree," Lee said.

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