Why Restaurants Must Insist On Marketplace Noncompetes – Forbes

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Restaurant operators have been wary of restaurant delivery marketplace commissions (typically 20% to 30% of the sale) and the resulting hit to profitability for years. While squabbling over commissions is an important component of the contracts that restaurant brands and marketplaces execute, restaurant executives tend to put maximum emphasis on commissions and let other key terms fall by the wayside.

When we compare the restaurant delivery marketplaces to e-commerce marketplaces like Amazon, we can see a far more existential threat looming. Amazon gained control of the consumer path to purchase as well as full visibility into customer buying patterns through its “Fulfillment by Amazon” offering. With this position and insight, Amazon propelled its own direct-to-consumer strategy, directly competing with the very retailers that utilized its platform for fulfillment.

The equivalent threat for restaurant operators is utilizing “ghost kitchens” — noncommercial retail kitchens with pickup windows — and delivery fulfillment from marketplaces to meet the needs of on-demand consumers. Like “Fulfillment by Amazon,” these services give restaurant delivery marketplaces control of the consumer path to purchase and full visibility into customer buying patterns.

The result is arming restaurant delivery marketplaces with the perfect position and insight to directly compete with restaurants. The implication is doomsday for the shareholders of the $853 billion restaurant industry (expected to reach $1.2 trillion by 2030, per the National Restaurant Association), along with its 15 million workers and 1 million commercial real estate sites. We will see lost capital, disappearing jobs, shuttered locations and failed brands.

Ghost kitchens not only represent a lower cost of production for restaurant operators, but they also enable a new form of competition: virtual restaurants with no retail presence whatsoever. Marketplaces can glean the data from all of the transaction volume that flows through their platforms to select the perfect locations for ghost kitchens.

They can prepare food for their own virtual restaurants, using selection and pricing data to offer the ideal menu for the local on-demand consumers at the perfect price — just below the traditional restaurant brands that do business on the marketplace. Amazon does this with its private-label offerings.

Although restaurants don’t offer products that aren’t commodities, I still see potential risks where market dominance shifts to the entities in control of the digital path to purchase. As production capacity shifts to ghost kitchens and consumers shift to digital ordering, restaurants lose meaningful brand-building advantages.

The discipline of restaurant marketing will shift to local store marketing, mass media advertising and the many forms of digital customer acquisition and retention that are foreign to restaurant brand marketing departments. Restaurant delivery marketplaces are digital-native brands with well-honed skills in customer acquisition cost versus lifetime value calculation, cohort analysis and look-alike audience cultivation. Restaurants will lose their existing marketing advantages and find themselves competing on unfamiliar terrain.

Nick Scarpino, the senior vice president of marketing and off-premise dining of Portillo’s Hot Dogs, has shared terms of its negotiations with marketplace partners, one of them being “not competing on branded search terms like ‘Portillo’s Delivery’ to ensure that the restaurant floated to the top over third-party networks” in Google searches.

Marketplaces use brand trademarks in their advertising by default. From a restaurant operator’s perspective, any orders that resulted from such searches cannibalize an order that would have come directly to the restaurant. Instead, a restaurant can make marketplaces commit to not using brand keywords in their online advertising, staying true to their pledge to drive incremental orders to the business.

In its 2030 Restaurant Industry Report, the National Restaurant Association projects that the physical model of the restaurant will change to give consumers what they want, when they want it and where. The report states ghost kitchens will only become more prevalent over the next 10 years, powered by the expansion of centralized kitchens and the growth of online, delivery-only brands.

It is no longer enough for brands to demand that marketplaces not compete in bidding for trademarked keywords on Google. The new frontier is the physical world. Restaurant brands must now demand that marketplaces agree to noncompete clauses that prevent them from launching virtual brands and selling directly to consumers.

Restaurant brands should consider the following in regard to third-party partnership engagement:

• Require that marketplace partners not compete directly with your brand in buying online search keywords. It is no longer against Google’s policy for third parties to bid against trademark owners for trademarked keywords. This is one of the easiest ways marketplaces can usurp ownership of your online brand presence.

• Ensure marketplace partners promise to prioritize delivery orders from brand-direct channels to be delivered at the same time as marketplace orders and not throttled to later times.

• Evaluate pricing strategies for different marketplaces. Many of our customers have opted to place markups on third-party channels to ensure a best-price guarantee, the restaurant equivalent of booking-direct incentives for hotel rooms.

For marketplaces willing to negotiate with brands, they not only start off a relationship on the right foot, but they will likely have a fruitful relationship for the long term when the restaurant operator feels their needs are met and that an entity with powerful technology and data capabilities isn’t threatening their business. Restaurant operators will only stand to succeed when they negotiate noncompetitive measures into contracts with marketplaces.

A single restaurant asking for such a contractual concession will have little impact. However, enterprise brands banding together to demand marketplace noncompetes can stem the emerging disruption that threatens to damage nearly all restaurant industry stakeholders. This is a call to arms. I believe the very future of the restaurant industry depends upon it.

Source: Thanks https://www.forbes.com/sites/forbestechcouncil/2019/12/20/why-restaurants-must-insist-on-marketplace-noncompetes/