Winning the Delivery Decision: Restaurants in the Digital Age – A Q&A with Analyst Jeremy Scott

Jim Gorman
Jim Gorman Director, Mizuho Americas
February 1, 2018

Jeremy Scott, Restaurants and Proteins Analyst for Mizuho Americas, says friction-less delivery will determine future winners in the restaurant industry as more people opt to order-in than go out. He also gives his take on the uptick in clean, but not necessarily lean, protein consumption, the awareness bump his industry gets on the day of pro football's Big Game, and the effect of critical food documentaries.

Q: You recently became the only restaurant analyst to initiate coverage on GrubHub. Normally, such coverage falls into the purview of internet-focused analysts. Why did you crossover industries?

A: The restaurants and online delivery service providers have a close relationship will only get closer in the years to come, triggered by a flurry of new chain partnerships and blistering growth in demand. As chain restaurants begin to pile in and VC capital for start-ups thins, we anticipate accelerated consolidation and leaps in scale. The supply of doorstep convenience is primed to ramp at decreasing marginal costs, and consumers aren’t likely to move backwards from here.

So, I believe that the best way to value GrubHub is in the larger narrative unfolding in the restaurant industry. In that light, the coverage seemed natural and it really differentiates our research.

Q: So essentially, online delivery service providers are in the restaurant business?

A: Essentially. And as they expand beyond their urban roots – New York, Chicago, LA – to the suburbs they will be more so. 

Q: Right now though, it seems that if you live in the suburbs you are limited to pizza and Chinese food delivery.

A: In a short period of time, we expect choice in the suburbs will improve greatly. Online food delivery is making headway outside cities and building scale quickly. In the near term, we see the future of online delivery service providers, across the country, as follows: 

This year and next will be the novelty phase when new customers will be less sensitive to high convenience premiums. Then, between 2019 and 2020, a price discovery phase will have customers gravitating towards more value-oriented platforms. This will be followed by a period of consolidation, as delivery services reliant on high delivery costs and service charges will likely cede market share to value-oriented platforms. And then, by 2021 and beyond, the winners in delivery will emerge.

Q: What will be the driver of all of this?

A: Once you have decided you don’t want to cook, you have three simple questions to answer:

1) Do we eat out or order in? The answer is increasingly, order in.

2) What are we getting? 

3) Where are we getting it?

The short period of time between “what are we getting” and “where are we getting it” comes down to which delivery option has the least friction. It’s the difference of the fewest clicks on an app; a presence on several online delivery aggregators that can be summoned up with a shout to your Alexa or smart home device; the option to track delivery drivers as you would an Uber car, and other innovations like that.

Every restaurant looking to dominate the order-in market has got to win that delivery decision consistently. And often the window of time is seconds. If the experience of ordering from certain restaurants is efficient and easy, they will win the delivery decision more frequently, creating a flywheel effect. 

Q: Shifting gears a bit, football’s Big Game is coming up. It is a day dominated by social gatherings around delivered/catered food. Does that kind of spike have any lasting effect?

A: It’s a time when friends get together and share things they've done over the last couple months during the height of the winter, a time when people are ordering a lot of delivery. Let's say you’re hosting and you order a bunch of Taco Bell as a side dish from DoorDash. It’s a novelty where everyone is like “wow, you got Taco Bell delivered?” It almost becomes a shared awareness of the delivery potential. It creates a new reverberation to consumers, allowing them to realize, “hey this is possible.” 

Beyond the delivery awareness there is also the increased chance of a catering spread introducing people to a new restaurant. You might not try Chipotle, for example, but if it is catered, free food at a friend’s party, you will try it and probably like it. As a bit of an aside, that is one of the main reasons a lot of brands do catering. It’s the best way to introduce new customers to a restaurant. 

So the Championship Game has some intangible value from an awareness point of view for restaurants and delivery options, but in terms of overall profits, it’s one and done.

Q: You also cover protein, what are you seeing there?

A: When we look at the protein industry, it is important to note that the consumption patterns have all shifted in the last decade. Ten years ago we were eating a lot of protein, but were very concerned about limiting the fat content. Today, Americans don’t care as much about fat or excess butter, they just want to know that the food is raised responsibly without GMOs and antibiotics. So people are eating more red meat, protein and processed products, but they are demanding higher purity standards.

Q: Finally, do you foresee any negative impact as a result of documentaries such as Netflix’s Rotten being released?

A: It is part of an ongoing narrative on cleaner eating. These documentaries tap into the emotion of eating something that feels like it’s not real. I think that's a narrative the food industry needs to figure out a way to credibly push back on.

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