Restaurant vs Hotel Distribution & FDM Group

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Restaurant vs Hotel Direct Distribution

Last week we published a live interview we hosted with the Former CEO of Domino’s UK master franchise and the Current CEO of Burger King UK where we discussed how restaurants are looking at digital channels.

During the last quarter, we have spoken to many restaurant chain executives and there was one core takeaway: they all deeply appreciate the relationship with food delivery platforms.

This seems to be overlooked by investors. But it’s worth reiterating that this year there would’ve been far more restaurant closures without the delivery platforms. This is a quote from the CEO of BK UK:

“Over time, we’re going to be pushing across all these digital ways but yes, when we get to a critical mass, we’re going to be spending more marketing dollars on click and collect; we’re going to be spending more marketing dollars through our white-label, as well. Are we going to walk away from the aggregators? Absolutely not because, ultimately, they are bringing in the volume and they are going to carry on doing that for the foreseeable future. We need them and they need us.”

However, there is another important section of the quote above:

“when we get to a critical mass, we’re going to be spending more marketing dollars on click and collect; we’re going to be spending more marketing dollars through our white-label, as well”

The restaurants might appreciate the food delivery platforms today but they are committing to higher-margin white label solutions where they take back ownership of the customer.

Converting customers to direct channels is nothing new online. For example, hotel chains have been actively trying to convert customers from OTA’s to their own loyalty schemes. For the last 8 years, Hilton Honors, the hotelier’s loyalty programme, has grown 15% per year from 36m to 112m members. Loyalty members now account for over 60% of Hilton’s total room nights which is growing at 1.5% per year. Large restaurant chains will be following the same strategy which could pose a risk to Deliveroo, Uber, and DoorDash given their higher restaurant chain mix.

It’s interesting to compare hotel and restaurant distribution. A hotel can acquire traffic in three major indirect channels:

  1. OTA directly
  2. OTA through Google
  3. Hotel directly from Google

The big challenge for smaller hotels is bidding and converting traffic to their own website. This is what Booking was built to do. OTA’s are SEO and paid-marketing machines that are optimised to bid and convert traffic to hotel bookings. Booking has optimised every page of their website that it converts at ~7x the average hotel. This means Booking can bid far higher than other suppliers on Google. Our interview last year with a Former Google Travel executive, who now runs a hotel chain, shared insight to the difficulties competing for direct traffic with Booking:

Booking measure absolutely everything. They have, allegedly, 150 to 280 tests; this is something l read in the press. I’m not disclosing anything private here. They are constantly AB testing, to understand what their user likes most. How do the eyeballs in front of the booking site interact with them? They change, based on that behavior. They do that very well. The website is pretty ugly, in my opinion. But again, that’s just me. It’s one of the best performing, if not the best performing on earth. So it’s not a matter of ugly or beautiful, it’s a matter of performance, when you come down to marketing. But the comments and the way it’s set up and so forth, to me, it’s not beautiful, but it works. They know this, so they are not optimizing for beauty. They are optimizing for ROI and conversion, which is the way to do this, in marketing.

Hotels need optimised websites that offer lower ADR’s to compete with Booking. The difference in the cost per channel is the CPC paid to Google plus the discounted ADR compared to the 15% commission paid to Booking. It’s pretty tough to make the direct channel work unless you’re a large, sophisticated chain. In the US, ~70% of room supply is branded hotel chains compared to <50% in Europe. Booking’s high independent hotel inventory mix plus the paid marketing expertise explains why their moat is far wider than Expedia.

It could be even harder for restaurants to drive direct traffic compared to hotels. The marginal cost of selling a hotel room is near-zero whereas you need to pay a delivery driver for every order when shipping food to be eaten within 45-minutes. The higher marginal cost for food delivery limits the ability of restaurants to discount the menu on direct channels compared to delivery platforms. Chipotle and Shake Shack are offering discounted items on their own app to drive direct traffic but, unlike the hoteliers, they still need to pay Uber 10-15% per order to ship the food. This strategy could work for those restaurants with the highest brand equity but it could also cause a huge drop in volume on the aggregators if diners are price elastic.

There are some advantages restaurants have over hotels when converting customers to direct channels. Whereas, leisure travellers value more selection given they are more likely to visit new places, diners typically eat at the same 3-4 restaurants. There are also over 1,000 meals per year compared to 1-3 leisure holidays for most travellers. So the potential LTV of a Chipotle customer could be higher than a leisure customer for Marriott. If the larger chains can convert a significant portion of customers, this could put Deliveroo, Uber, or DoorDash at risk. The platforms know this and is why they are rolling out more convenience delivery.

Software could also be a problem for the chain-heavy platforms. If Olo onboards most US restaurant chains, this could make it very easy for Lyft or any other vendor to offer white-label delivery for chains. As quick as network effects spin up the delivery platforms, they could quickly unwind if McDonald’s or Chipotle leave. Overall, converting customers to direct channels in any business is difficult and requires scale, sophistication, and product excellence. The Burger King UK CEO believes 20-30% of the delivery mix for large chains could eventually be direct.

In the travel industry, we have slowly seen physical agencies, wholesalers, and tour operators decline. The airlines clawed back distribution in the 90’s, hotel chains are focused on growing loyalty schemes, and now restaurants are next. Suppliers need to own the customer but selling a plane seat or hotel room that has a fixed cost which expires at midnight every night is very different to shipping perishable items within 45 mins. The restaurants have meaningful incentives to drive direct traffic but the aggregators are probably here to stay.

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