Coalitions in business are fascinating.
They are fascinating because, often, while each player adds some needed value in each end-to-end transaction, there is inherent and constant tension in terms of who captures what percentage of value, one player becoming more powerful than the others, etc. (Google + Android + Samsung + Cell Phone Carriers, is a terrific example of one such coalition.)
The latest example comes via Joshua Brustein’s article on Seamless and online ordering, in a recent issue of Businessweek.
For customers, there is little not to like about Seamless. You pull up a website or an app, find a restaurant nearby, and pick out a few dishes to have delivered. Your credit card gets charged and you don’t have to speak a single word into the phone.
Pedro Muñoz sees things different. The founder and owner of Luz, a trendy Latin American restaurant serving lobster guacamole, pupusas, and Peruvian-style chicken in Brooklyn, decided to cut ties with Seamless starting on Aug. 10. He’s been including a letter in all delivery orders explaining the decision and directing customers to the restaurant’s website for online orders. For Luz, Muñoz says, the extra business brought in by inclusion in online-ordering services wasn’t worth the high fees and other expensive strings that came with it. “It’s awesome if you’re a customer. It’s great,” he says. “But in all aspects it’s killing the restaurants. It’s a model that cannot be sustained.”
Seamless takes a 14 percent commission from every order at Luz, according to Munoz, and requires his restaurant to pay additional fees for advertising and credit-card transactions. Those rates rose along with the restaurant’s volume of orders. Seamless also holds funds for 40 days before distributing them, the restaurateur explains, meaning an increase in business through Seamless led to Luz having less cash on hand to keep running. At times, Muñoz says, he has been waiting for up to $20,000 from Seamless, an untenable situation for a business making its living on the thin margins of the restaurant industry. (A representative for Seamless says fees vary depending on the restaurant and payments are made every 30 days, but doesn’t otherwise dispute Muñoz’s claims.)
So will other restaurants ape Luz and opt out of the system?
Even if many restaurants will continue paying the fees, that doesn’t mean there isn’t widespread ambivalence about online-delivery services, according to James Versocki, counsel to the New York State Restaurant Association’s chapter in the city. Customers, especially in office-heavy neighborhoods, simply won’t order food that doesn’t come through Seamless. “You’re pushed out of the market for delivery if you don’t use them,” he says.
The merger with GrubHub will leave restaurants with even less leverage. Muñoz, for his part, knows that Luz will be taking fewer orders starting next week. But he hopes the tradeoff will benefit his business: “We are going to lose some,” he says, “but I’d rather have a positive cash-flow business with less volume than more volume with less earnings.”
Unfortunately for them, Seamless’ recent merger with GrubHub means that restaurants with large under 30 or under 40 clienteles in dense urban settings have little choice but to trade margin for volume.
Or, they have to create compelling differentiation (food quality / taste / variety / something else?) that can ensure their survival and profitability outside of the Seamless/GrubHub ecosystem.
But what if a bunch of restaurants in places like New York, where their density is pretty high, got together to create an ordering + delivery service they owned that didn’t threaten their margins?