“Consumers expect to order books, toys, shoes and anything else they want online and have it show up at their doors quickly and inexpensively,” writes The Wall Street Journal (March 9-10, 2019). Now restaurants and grocers are rushing to satisfy the exact same demand. They’re having a hard time. A hungry customer might order a $9.99 Cuban sandwich from Panera which can arrive at her door in about 30 minutes. The problem for Panera is that each delivery costs $5 after accounting for labor, gas and packaging. Yet to avoid turning away customers, it continues to charge a flat delivery fee of $3 per order.
Food delivery is proving to be a thorny, expensive and crucial puzzle for restaurants and grocers. Billions of dollars have been spent in a quest to build services that reliably move fresh food from one place to another, yet many in the business wonder if they will ever get the economics right. Most delivery orders remain unprofitable. It costs supermarkets an average of $10 an order to deliver food, but grocers only recoup around $8 from customers because charging more risks turning off shoppers. And 85% of consumers aren’t willing to pay more than $5 for restaurant delivery. Walmart now offers grocery delivery through a half-dozen third parties, but e-commerce losses are expected to increase this year.
Online grocery sales are expected to grow to $86 billion in 2022 from $17 billion in 2017, while sales of online restaurant delivery will grow to $62 billion from $25 billion in that same span.
Unlike easy-to-ship household items, groceries must be packaged carefully and sent in refrigerated trucks. That makes the last mile of the delivery process—from the warehouse to the consumer’s door—a costly, often perilous journey. Restaurant meals must likewise be packed in special containers and delivered within a short window. Restaurants can’t ignore delivery since 1/3 of restaurant meals are now consumed at home! Yet few chains can afford to do delivery themselves, due to the cost of developing order-taking technology and of employing drivers.
Classroom discussion questions:
- What OM issues do grocery stores face is setting up online delivery systems?
- What percent of your students are using online restaurant delivery? Their comments?