Current Restaurant Challenges Closely Resemble the Hotel Industry After 9/11
In September, 2001, I had just arrived in Ithaca, NY to commence my 2-year Masters program at the Cornell School of Hotel Administration. During the first week, class was interrupted to inform us that a plane had just hit one of the towers of the World Trade Center. We all headed to the dining center and watched in horror as the events unfolded. The travel industry would never be the same, and hotels would face one of the most difficult challenges in recent history, until the Covid-19 pandemic would strike 18 years later.
I was fortunate enough to obtain a series of internships with Meliá Hotels and Resorts (known as Sol Meliá back then), which led to a full time job as Director of E-commerce in June, 2003. I worked with Meliá for the next 5 years eventually as Global VP of Distribution and E-Commerce. Although my goal was to grow revenue from all electronic channels, my primary objective was to maximize direct online revenue.
It was a turbulent time for the hotel industry which, after 9/11, was forced to quickly learn how to adopt digital distribution channels. Today, these channels are relatively seamlessly integrated into hotel Property Management Systems (PMSs), or at least through a "Channel Manager". In 2003, however, this was not the case. OTAs (Online Travel Agencies) like Expedia, Travelocity, Hotels.com, Cheaptickets, and others that would follow like Orbitz and Booking.com, each had their own external system called extranets through which hotels would manage rates and availability via a password-protected website. Some even had paper contracts with fixed rates and allocations of rooms per day, and would fax reservations to the hotels.
When I hear stories today about restaurants that now have a "wall of tablets" in the kitchen through which they have to manage menu pricing and orders for 3rd parties like Uber Eats, Doordash and Grubhub, it sounds a lot like hotels back in 2003. Back then, it wasn't in the OTA's interest to improve the connectivity and usability of their extranets. The more difficult for the hotel to update rates and availability, the more leverage the OTA had to continue booking while the hotel filled up, and to increase prices and margins. Another similarity was the strain that the management of these systems caused on hotel staff, or in this case, restaurant staff.
After joining Meliá, I participated on industry roundtables with other hotel company leaders and was outspoken at conferences about the unjustly high commissions that we were paying to the OTAs. Hotels were accustomed to paying 25% to 30% margins to wholesalers and tour operators because those rooms would then be distributed onward through travel agents, who were then paid 10% to 15% from the margin. But the OTAs were selling online, directly to the consumer, and thus were retaining the full margin. Yes, they did have 'affiliates' who would earn commissions on reservations booked on their websites, but this was a small piece of the OTAs' business at the outset. Hotels were essentially funding the mega branding and digital marketing campaigns of the OTA who were much more technologically savvy and adept at outsmarting the hotels at attracting customers online. The OTAs would bid on the hotel's name in Google. Some even set up websites that pretended to be the hotel's official site in an attempt to poach the hotels' direct business.
The Expedia of the hotel industry comes in the form of 3rd party delivery for restaurants. It's no coincidence that the current CEO of Uber at the time of writing was the CEO of Expedia for many years. It can certainly be argued that Uber, DoorDash, Grubhub and Postmates (for the US market - each geography has its own set of players) helped restaurants survive the pandemic over the last few years. Unfortunately for the restaurant industry, they were not already paying 25% to 30% commissions to anyone prior to the pandemic the way hotels were prior to 9/11. The volume of 3rd party delivery was so minimal for restaurants prior to the pandemic that the high commissions didn't have a material impact on the profitability of the restaurant. That all changed dramatically when billions of people all over the world were trapped in their homes for months. The industry has been forced to morph into a more profitable model and we are seeing the rise of virtual brands and ghost kitchens as a result.
It's not all bad news for the restaurant industry though. With the sudden shift from brochures to digital channels 20 years ago, the hotel industry now had the ability to adjust prices up and down more easily. Seasonal pricing (in leisure hotels), or weekday versus weekend pricing (in city hotels) existed long before the internet arrived, but now hotels could start implementing more sophisticated forms of revenue management. The OTAs enjoyed a period of time when hotels would use static rates, leaving the opportunity for arbitrage to the distribution channels that were charging them 25% to 30% margins already. Eventually, the hotels caught on and seized on a clear opportunity to improve profitability.
Restaurants are now in the same exact position. 3rd party delivery companies are already increasing delivery fees during times of peak demand. The delivery fee may normally be $3, but on Saturday night you may be waiting 2 hours for your delivery, that is of course, unless you're willing to pay... say $7 instead of $3. This is great for restaurants, because the consumer is now being trained that the cost of a hamburger is not always the same. If you want it delivered by a 3rd party on Saturday night, you're going to pay more. There is even better news: the consumer is paying it! Convenience is winning over price, and this is the first step to gaining widespread acceptance of full dynamic pricing in the restaurant industry.
Will it be easy? No. Is this going to happen? You better believe it. It may start with delivery fees but it will inevitably become standard in the industry. Try suggesting to any airline or hotel chain that they unplug their revenue management systems and watch the look of horror on their faces. This is going to happen in restaurants, and JUICER will be at the forefront.