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Can McDonald's Win in $100 Billion Food Delivery Market?
Business Journal

Can McDonald's Win in $100 Billion Food Delivery Market?

by David Leonard and Matt Hoover
Can McDonald's Win in $100 Billion Food Delivery Market?

Story Highlights

  • On-demand delivery could be a $100 billion market for quick-service restaurants
  • Converting and attracting customers poses a major challenge
  • Rapid delivery and restaurant-like experiences are key

McDonald's is making a major bet on the $100 billion food delivery market. It will have to overcome a host of hurdles if it wants to succeed.

The company's stock jumped significantly when it announced it will focus on food delivery in the U.S. McDonald's is embracing a growing trend in the quick-service restaurant (QSR) industry: on-demand food delivery. The company and others are hoping the delivery market will be a major source of growth and revenue.

Gallup's recent work indicates $100 billion is realistic, if not conservative. Gallup estimates 9% of U.S. QSR customers used on-demand delivery in 2016, producing a QSR delivery market of about $26 billion -- despite many delivery services, such as GrubHub, Postmates and UberEATS, covering only a fraction of U.S. markets.

The QSR and overall market for delivery might be significantly larger than McDonald's projects, given broadening geographic coverage and consumer familiarity. Gallup forecasts the QSR on-demand delivery market alone to reach nearly $38 billion by 2020. Considering the entire on-demand food delivery market -- QSR, full-service restaurants, home meal kits and others -- that figure could be at least three times as large.

While the potential is sizeable, McDonald's and others must overcome major challenges before they can capitalize on the market strategy. Here are four hurdles that QSRs face:

  1. Effectively converting users to on-demand delivery: Using the Gallup Panel, Gallup studied more than 9,500 consumers in 31 U.S. metropolitan areas serviced by multiple delivery services. Data show that while 64% of people are knowledgeable about at least one on-demand delivery service, only 17% have used one.

    This gap represents almost 14 million people and $7.5 billion in lost annual revenue.

    Gallup finds that being younger and having greater disposable income are key drivers of conversion, representing an ideal segment for monetization.

    QSRs have two major issues: enticing people to use delivery services and retaining delivery customers long term. In-store visits yield inexpensive advertising for delivery, complementing efforts among delivery service providers.

    While Postmates said its loyal customers use its application seven or more times a month, ensuring customers stay on board remains a challenge. Therefore, QSRs need to emphasize engaging customers.

    Fully engaged customers are more loyal and lucrative; Gallup finds that fully engaged customers make 28% more visits per month than do actively disengaged customers in the fast food industry.

  2. Keeping costs low enough to attract delivery customers: Over 80% of people interested in QSR delivery say delivery cost is a chief concern, so QSRs need to identify ways to offer delivery without cutting into margins. This is particularly challenging on low product price points. Delivery fees or price increases may be palatable for more expensive fare, but will these changes work when ordering a burger and fries?

    Probably not. Unlike with delivery from pizza and sit-down restaurants, consumers are more concerned about prices with QSR deliveries. In fact, QSR customers are 1.6 times as likely to cite cost as a concern, indicating heightened price sensitivity for QSR food delivery.

    Strategies such as a limited delivery menu or "membership club" model may be profitable options for QSR delivery.

  3. Ensuring food is delivered rapidly: QSRs are familiar with fulfilling orders in a timely manner; 63% of people interested in QSR delivery report speed of delivery as a key concern. Ensuring fast delivery is uniquely challenging and different from providing rapid drive-thru or dine-in service.

    Pizza delivery is the longstanding benchmark. However, QSRs grapple with different delivery concerns than do pizza providers. Most pizza providers employ their own delivery staff, providing control over process and quality; they can ensure the delivery staff adheres to company mandates, knows its way around an area and delivers the speed and quality expected.

    QSRs using delivery services lack this kind of control. QSRs are dependent on a third party, though QSR customers are still likely to blame the restaurant, not the delivery service, for negative experiences.

    One way for QSRs to gain control is building strong relationships with select delivery services. Ensuring the delivery service understands the customers' expectations could be a powerful differentiator for QSRs. Even with strong relationships, there are two significant potential roadblocks:

    The divided delivery provider market: There are more than seven major delivery providers -- each with a unique business model and competitive advantages -- and new providers are entering select marketplaces. Therefore, QSRs must decide to push their standard expectations on disparate providers or adapt to each provider.

    Limited control over delivery personnel: Food delivery is significantly more complex than the transportation of people. To make the food delivery model work, deliverers stack multiple food orders for sequential delivery. This increases complexity and requires effective delivery personnel -- factors over which QSRs have limited control.

  4. Providing consumers with restaurant-like experiences: Gallup research shows that a restaurant-like experience, which includes ensuring delivered food compares with eating in a restaurant, is extremely important to 36% of those interested in QSR delivery. This means, among other things, QSRs must provide customers with well-assembled sandwiches and hot, crispy fries. Given tradeoffs among cost, speed and this measure of quality, QSRs need to proactively strike a balance to provide differentiated, satisfactory service.

    Gallup finds that in markets with lower on-demand delivery usage, customers' concerns over quality are significantly higher, indicating that expansion to second- and third-tier city markets must focus on quality. Customers possessing little experience with on-demand services are more uncertain about delivery. Delivering a subpar quality experience could jeopardize QSRs' ability to win low-usage areas, determining whether QSRs successfully capture market share in new, growing markets.

    Partnering with packaging suppliers to develop delivery packaging or working with delivery providers to pack food can ensure restaurant-level quality upon delivery. However, these innovations bring additional costs -- expenses that will be difficult to pass to price-sensitive consumers. It is essential that QSRs and delivery providers expand their strategic thinking to include critical suppliers -- such as packaging manufacturers -- to determine an effective business model that captures the full market potential.

Bailey Nelson contributed to writing this article.

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