The Challenge For Restaurants: Digital-Native Consumers

Before the Internet, restaurants were classified by economists as experience goods- services that could only be evaluated after consumption (e.g. haircuts and medicine).

As the Internet empowered consumers to share experiences and write reviews, however, restaurants have become search goods- services that are easy to evaluate prior to purchase (e.g. furniture and clothing).

With this new status, and as more and more eyes have shifted to the digital space, restaurants now face a new challenge: they need to be better and more consistent for everyone, rather than just for a handful of food critics. A restaurant business is now compared to dozens, if not hundreds, of others to choose from.

In order to compete as Search Goods, restaurants need to:

Be seen Give customers what they want Make sure they remain profitable

These needs have led to the rise of businesses such as UberEATS and Grubhub. These platforms improve customer experience service through aggregation and provide restaurants with opportunities to easily showcase their menus. In theory, restaurants should get new customers that bring incremental revenue.

But, in reality:

Most restaurants struggle to be seen on the platforms, which use algorithms that are generally favorable to high volume restaurants. As a result, long-tail restaurants lose business to those that enjoy more exposure on the platforms. Platforms are reluctant to share the data they collect on their customers. As a result of losing the direct relationship with their customers, restaurants find it hard to give customers what they want. Restaurants need to make sure they remain profitable as their dine-in patrons order from home instead, cutting into the restaurant’s margins.

Restaurants are facing quite a dilemma:

If they don’t offer a delivery service, they will die , as the delivery segment is growing at the expense of on-premise consumption.

, as the delivery segment is growing at the expense of on-premise consumption. If they do offer delivery, they will die slowly, as restaurants earn less than half of what they did beforehand from the same customers.

In summary, the long tail of restaurants (your favorite mom and pops) find themselves caught between a rock and a hard place.

Surprisingly, as we’ll see later on, the same platforms that are squeezing these small businesses might also end up being their lifelines…