Like A Goddamn Vampire
Pay-to-Play in Restaurants is Getting Out of Control
Restaurants are increasingly thrust into pay-to-play ‘partnerships’ that are, to varying degrees, bloodsucking. This is happening across reservations, catering, delivery, and hiring. Opentable, Ubereats, Doordash, EZ Cater, and Indeed are all in this business. The proposition is the same from all of them, VISIBILITY: Give us more money and we’ll make it more likely that people see you and then reserve, order, apply, whatever.
Here’s the thing about vampires, they frequently kill that which feeds them.
Let’s take a look at how these pay-to-play programs work and then get into their impacts on restaurant profitability and viability.
I can’t decide if EZ Cater’s approach should be commended for it’s transparency or vilified for it’s shamelessness. In the example below, a restaurant is willing to give an additional 10% that will bring them to 65th on the ranking. There are 32 listings on a page of EZ Cater on a Mac laptop running Chrome so this would put you at the top of page 3. Double the plasma and you can jump up to 15th and the middle of page one.
As an operator and consumer I get to see both sides of the pay-to-play equation with Ubereats. I can run an add on one side to ‘boost my visibility’ and bleed another restaurant on the other for my 60% off! Doordash claims that 45% of orders from ad campaigns come from new diners in a banner just above a suggested budget of $427 a week in ad spend.
Opentable offers a per cover pay-to-play. Now this can make sense at higher check averages but at much under $50 per person it ceases to work. The problem is that the per cover pricing doesn’t differentiate by price point and all restaurants are vying for visibility in the same listings.
Visibility is a zero sum game; for one restaurant to become more visible another must become less. Eventually everyone has no choice but to pay up. This is where Indeed has become the Count Dracula of the pay-to-play game. Unsponsored jobs, in my experience, are lucky to receive 10% of the applicants of paid posting.
All of these services are an important part of the modern restaurant ecosystem. They all also have to make money because, you know…capitalism. The current scheme sets up a tragedy of the commons. Each company acting in their (or their shareholders) best interest will end up extracting as much as it can. Take this far enough and you bleed the industry dry even though it’s in everyone’s best interest to preserve it.
In an industry with such slim margins, ‘far enough’ isn’t actually that far. I did some math on pay-to-play impacts based on a theoretical $1M restaurant that offers 3rd party delivery and catering, reservations and limited budget behind their hiring needs. I used industry standard operating costs and relatively conservative numbers for the mix of revenue or costs from the various pay-to-play services. These companies sucked over 40% of the income before depreciation. You can look at the income statement impacts here with additional detail and assumptions but here’s the summary.
Couple pay-to-play with rising costs of labor and food and the margin of error to preserve any level of profitability get’s real, real slim. That’s to say nothing of each individual operators calculation of whether it’s worth the blood, sweat, and tears that go into operating a restaurant.
So how might we avoid the tragedy of the commons? Remember, Dracula eventually killed Lucy and she joined the un-dead. She had a stake driven through her heart and her head cut off.
Awareness & Education: Letting guests and other stakeholders in restaurant success know that this is how these companies exist and feed off the greater restaurant ecosystem. On the margins, this could influence how people to choose to interact with 3rd party services.
Regulation & Enforcement: There needs to be some form of regulation for these companies. NYC has a maximum share cap of 23% including delivery, service, and credit card fees. Beyond caps, many services attempt to prevent restaurants from adjusting their prices to account for fees. This should be banned outright.
Cooperation Amongst Stakeholders: Perhaps a more radical idea but many stakeholders benefit from the continued success of restaurants- maybe they can help foot the bill for 3rd party services. Landlords unilaterally removing revenue shares from gross sales calculations would be an example of this.
Disintermediation: This is really difficult given the benefits of scale for the market leaders but all of these companies are able to do what they do because they’re intermediaries between restaurants and guests/employees. Cut out the middlemen, stop the bleeding.
Garlic, lots of garlic...and mirrors.