By Heather Haddon and Julie Wernau
The coronavirus pandemic handed food-delivery companies an unprecedented business opportunity: millions of Americans stuck at home, missing their favorite restaurants.
Yet they are struggling to profit from one of the greatest food delivery markets in decades. Companies including Grubhub Inc. and Uber Technologies Inc.'s Uber Eats division, are losing money on delivery orders or barely breaking even. And they say they aren't sure how many diners will stick with delivery after stay-at-home orders are relaxed.
Sales for Grubhub, Uber Eats, DoorDash Inc. and Postmates Inc. are growing, according to the companies and credit-card data.
But increased costs to fund promotions and safety equipment on one hand, and pressure to reduce commissions for strapped restaurants on the other, have created an even worse financial proposition for food delivery companies.
In a sign of potential consolidation ahead, Uber is seeking to acquire Grubhub, according to people familiar with the matter, a deal that would create the country's biggest food delivery service.
Pierre-Dimitri Gore-Coty, vice president of Uber Eats, said in a recent interview that improving profitability is the company's main goal. For example, last week Uber stopped delivering food in eight international markets where it said it wasn't a dominant player.
Huseyin Yasar, deputy head of equities at Carmignac, a French asset management firm that recently shaved its position in Grubhub, said the competition was unsustainable.
"Highly loss making, cash burning, basically handing out food for free," he said, of delivery companies in the U.S.
Some restaurants say they are losing patience with the fees delivery companies charge to pay drivers and spend on marketing to reach customers, among other costs.
Jason Dicken, owner of two Spudz-N-Stuff restaurants in Evansville, Indiana, said he has asked customers to order from him, not delivery apps. His April Grubhub statement showed $10,788.02 worth of orders for which he received $5,918.06 after fees, commissions and "order adjustments" from customers with complaints. He says if all those customers had placed their orders directly at his restaurants and used his delivery drivers, he would have made at least $3,000 more. And he would have gotten that critical cash flow immediately.
"My rent didn't get paid. It is hard for a restaurant to float that much, " he said.
Delivery executives acknowledge that the crisis has exacerbated tensions with restaurants.
"We are doing everything we can imagine to help restaurants because, at the end of the day, the restaurants' business is our business," Grubhub Chief Executive Matt Maloney told investors last week.
Grubhub said it is barely breaking even as it funnels most of its profit into safety equipment for drivers and incentives to keep customers ordering. The Chicago-based company said it expects earnings after expenses of $5 million during its current quarter, down 90% from the same period last year.
Grubhub spent $27 million in advertising in the U.S. between Feb. 2 and April 27, up 40% from the previous year's period, according to industry tracking firm Kantar. DoorDash boosted advertising spending by 35%, while Postmates increased ad spending by 82%.
Some restaurants say delivery companies have helped them make sales while their dining rooms are closed. Darden Restaurants Inc., owner of Olive Garden and other chains, and Waffle House Inc. both joined with delivery companies during the crisis for the first time.
Waffle House plans to keep offering delivery through Postmates even as it reopens restaurants, a spokeswoman said.
Sol Yamini, president of California convenience store chain Pink Dot, said Postmates saved his business despite the commission the delivery company takes. "You can pay your employees, you can pay your rent. You can still function," he said.
But the pandemic has created additional challenges delivery companies hadn't faced before. There is more competition for to-go business, with restaurants desperate for more sales signing deals with more delivery companies. That is putting an end to exclusive deals some food delivery companies had with chains such as Shake Shack Inc. and MOD Super-Fast Pizza Holdings, LLC.
Delivery was the least-preferred way of obtaining to-go restaurant food in March, according to industry-research firm NPD Group Inc. Drivethrough's share of transactions at restaurants gained the most during the period, while carryout also rose.
Chris Kyne, from Sterling, Mass., tried ordering Chinese food on a delivery app for nine people during the pandemic. The app canceled his order, leading him to call the restaurant for pickup. It turned out to be cheaper and easier, he said. "If I can't rely on it, I have to go in another direction."
Restaurant chains including Cheesecake Factory Inc., Chipotle Mexican Grill Inc. and Applebee's parent-company Dine Brands Global Inc. are investing in carryout operations that are more profitable for them than delivery partnerships.
"It is a direct connect between us and the guest," Dine Brands CEO Steve Joyce said in an interview. "Clearly that's our preference."
Sit-down booking services such as Tock are also trying to get into the to-go business by brokering delivery services for restaurants that they say charge lower commissions than the established companies.
And at least a half a dozen cities are imposing or debating caps on the fees delivery companies can charge restaurants during the pandemic, eating into profits in some of their biggest markets.
Michael Androw, owner of E & D Pizza Company in Avon, Conn., said he prefers when customers pick up their food because he can better control costs and presentation, but delivery is essential during a crisis.
"There are people who think third-party delivery service is the greatest thing since sliced bread. And there are people who think it is the devil. They're both right," he said.
Write to Heather Haddon at email@example.com and Julie Wernau at Julie.Wernau@wsj.com
(END) Dow Jones Newswires
May 13, 2020 09:14 ET (13:14 GMT)Copyright (c) 2020 Dow Jones & Company, Inc.