The New Recipe for Restaurant Survival? Become the Next Domino’s. – The Wall Street Journal

Amid the ruins of America’s food and beverage industry, there are a handful of green shoots. While many of their peers closed shop as soon as shelter-in-place orders went into effect, some restaurant owners enlisted their staff, their accountants, the tech support at cloud-based restaurant management startups, and the salespeople at delivery platforms like Uber Eats and DoorDash, to figure out how to pivot successfully to delivery and takeout.

It hasn’t been easy, and the challenges just keep coming.

“I’ve never worked harder in the restaurant industry in the past 10 years than I have in the past 12 weeks,” says Andrew Hoffman, co-owner of the Mexican restaurant Comal in Berkeley, Calif., and an attached taqueria called Comal Next Door. “I mean, Jesus, last night we closed the restaurant early because we were worried about a riot.”

Before coronavirus, Comal could seat 150, with room for 150 more in a beer garden out back. Mr. Hoffman had to shut Comal down on March 15, and spent a month pivoting his entire business to delivery and takeout from the much smaller Comal Next Door, which has a more delivery-friendly menu of burritos, bowls and margaritas. A week later, he re-opened Comal for delivery and takeout only, but with a new menu altered for delivery. His staff has shrunk from 109 to 42. And his business went from comfortable margins to trying to just scrape by.

‘I’ve never worked harder in the restaurant industry in the past 10 years than I have in the past 12 weeks,’ said Andrew Hoffman, co-owner of Comal and Comal Next Door in Berkeley, Calif.

Comal, pictured here, could seat 150 with 150 more out back. It had to shut down in March and has since reopened for delivery and takeout only.

That Mr. Hoffman’s restaurant is open at all is due in no small part to the cloud-based software platforms that help manage his business. It’s also helped by a deal he cut with one of the delivery-app companies currently burning venture capital across the U.S. in hopes of becoming middlemen between restaurants and their customers.

In February, 12.3 million people worked in bars and restaurants, and by April, the number of people employed by food service and drinking establishments in the U.S. had declined by 6.1 million, making it the hardest hit category of employment tracked by the Bureau of Labor Statistics. In May, 1.4 million of those workers were back at work, representing the biggest portion of the recovery.

According to a survey conducted by the National Restaurant Association, 3% of its members saw higher sales in April compared to a year earlier. All of them were quick-service and fast-casual restaurants. The keys to their success include ruthless cost cutting, revised or entirely new menus and the creative application of technology.

Among these survivors are restaurants that behave more like direct-to-consumer brands selling cosmetics, mattresses and bidets on the internet. The platforms they’re using to help them succeed—which include Tock, Toast, Your Fare, BentoBox and others—are to their online sales and delivery operations what Shopify is to a half million sellers of consumer goods on the internet. These business-to-business startups charge a monthly flat rate to help restaurants build websites, handle orders and payment, track performance of online advertising on Facebook, Instagram and elsewhere, and plug directly into the systems of delivery platforms, including Postmates, Grubhub, Uber Eats, DoorDash and Caviar.

But just signing up with one of these technology providers and putting your restaurant onto delivery apps can sometimes be a recipe for disaster, say those who have made the leap.

Many restaurants, especially the small ones that represent the majority of all eating establishments in the U.S., dislike delivery apps. They charge up to a 30% commission, which owners say is unsustainable. They also control data that would otherwise enable direct relationships with customers.

Comal’s owner said he believes restaurateurs who can successfully adapt to increased demand for delivery-first and delivery-only options may be able to scoop up talent, equipment and real estate at a discount. Here Comal’s assistant general manager Kelsey Rhoads organizes to-go orders.

Mark Mizer, co-owner of Seattle-based Thai and Hawaiian restaurant Buddha Bruddah, discovered that, for the bulk of his deliveries, using the employees who used to run his food trucks as drivers was cheaper than relying on delivery platforms like Grubhub and Uber Eats. By limiting his employees to a 2.5-mile delivery radius and making as many deliveries per trip as possible, he found he was able, virtually overnight, to shift his entire operation from a mix of take-out, catering and food trucks to take-out and delivery only.

“Initially my plan was to keep a skeleton crew together, but once we started rocking [delivery], I didn’t have to lay off one employee,” says Mr. Mizer.

Mr. Mizer uses BentoBox for his restaurant’s website and for managing delivery. He uses its data to spend strategically on Facebook and Instagram, which he says are much more effective at marketing than delivery apps. (He still uses delivery apps for customers who are beyond the reach of his employees, but doesn’t pay to advertise there.)

Comal’s Mr. Hoffman has adopted a different strategy: He works with delivery services, but only those willing to slash their rates for him. DoorDash and Caviar, which is owned by DoorDash, cut their usual 30% delivery commissions roughly in half for him, but Uber Eats, Grubhub and others won’t budge, so he doesn’t use them.

Despite getting a discount on delivery, he’s often unhappy with the service he gets from these companies. “Some Caviar drivers are so reliable, so professional, they’re incredible,” says Mr. Hoffman. “And some of them should not be employed.”

Comal’s staff shrunk from 109 to 42 as the pandemic spread. Pictured here is sous chef Kathy Buckler.

He says they sometimes appear drunk or stoned, on foot instead of in a car. “They’re 40 minutes late and they don’t care,” he adds. “They have multiple accounts so they can double and triple up on orders.” The only reason he sticks with delivery services is that, according to his calculations, there’s no alternative.

“Creating an unsafe environment for anyone on the [DoorDash] platform is grounds for deactivation,” said a spokeswoman for the company. “This includes the use of alcohol and drugs and abusing our services or engaging in fraud.”

Before the pandemic, delivery apps made sense to drive incremental sales for restaurants that primarily made money on dine-in customers, says Chris Monk, founder and chief executive of Your Fare, an Austin, Texas-based startup that sells a system to restaurants for consolidating orders from delivery services. For most restaurants, though, the math of shifting your entire business to delivery apps just doesn’t work, he adds. Your Fare’s service charge is $49 to $149 a month per location, after a setup fee of $99 to $299.

Restaurants that have the opportunity to completely change their cost structure by radically reducing their fixed costs—large kitchens, wait staff, dining rooms and the like—could successfully make the pivot to delivery.

So-called “ghost kitchens,” which have no storefront and exist only online and in delivery apps, were until recently a novelty, but are now becoming more popular. One of Your Fare’s clients managed to cram 10 different restaurant concepts into a single ghost kitchen, and each served customers on four different delivery platforms.

For the customer, this means you might order from an Indian restaurant on Uber Eats one night, and a vegan place the next, never realizing both “restaurants” are the same chefs working in the same kitchen.

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There’s a very well-known precedent that suggests the ghost-kitchen concept can work on a mass scale: Domino’s Pizza. It is by far the most successful big pizza chain of the digital era, with revenue up 160% over the past five years, and a stock price that’s more than tripled since 2015, thanks to a delivery-and-takeout only model that leverages Domino’s in-house technology, including GPS-tracked orders and its own app. Domino’s has shown that it’s hard to beat smaller, leaner kitchens that are as close to the customer as possible.

But many restaurants don’t have the option of going full ghost, especially if they want to eventually return to dine-in service. And they would be sunk in a matter of months if they had to pay the 30% commission to the delivery-app companies, assuming they can’t negotiate a deal, as Mr. Hoffman did. But there’s another option: meeting those delivery companies halfway.

Comal’s owner works with delivery services on to-go orders, but only those willing to slash their rates.

BentoBox, which launched in 2013 to help restaurants build their own websites, has since expanded to handle online ordering, gift cards, catering orders and ticketing for special events. The service—which starts at $79 a month but can cost significantly more once add-ons are thrown in—could still be a cost saver for restaurants, says CEO Krystle Mobayeni, in part because companies like DoorDash charge a flat fee for orders that originate from restaurants’ own websites, rather than their usual percentage commission.

Ms. Mobayeni anticipates that most of her clients will continue to offer online ordering once they reopen. A survey conducted in mid-May by the company found that 82% of diners said they plan to continue ordering online at the same frequency they are now, even post-pandemic.

As more and more restaurants go belly up—OpenTable’s CEO has said he anticipates one in four will not survive the current crisis—Mr. Hoffman believes restaurateurs who can successfully adapt to increased demand for delivery-first and delivery-only options may be able to scoop up talent, equipment and real estate at a discount. An Oakland, Calif. restaurant he’s been working on for years will open June 15 as planned—but will only offer delivery and takeout. If it’s as successful as his Berkeley location, he might try to expand to other cities in the U.S., despite lower profit margins.

Still, Mr. Hoffman counts himself among the lucky few. “I already know restaurant operators who have left their keys on their front porch and walked away,” he says.

Comal owner Andrew Hoffman counts himself as fortunate for having survived this long. ‘I already know restaurant operators who have left their keys on their front porch and walked away.’

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