Maximizing ROI: The Financial Viability of Delivery Services

As we shared in Part 1, delivery services, once a luxury, have now become a staple in the convenience store industry. This continued surge in popularity can no longer be considered a short term trend but rather a robust shift in consumer behavior, reflecting the increasing value consumers place on convenience and efficiency. As our lives get busier, reliance on delivery services for everything from groceries to prepared meals continues to grow, representing an opportunity to expand sales channels and grow revenue. It’s certainly worthwhile serving your customers, but is it worth it financially?

Mixx Markets from Tooley Oil, launched delivery from 14 of its convenience stores last month. For the Sacramento, CA based company, this is the second go-around with delivery, and according to area manager Kyle Tooley it’s going much better this time. Just one month in, sales are higher at the stores that offer delivery, and they’re gradually ticking upwards. Previously known as Tooley Oil (former Circle K franchisees), the brand is a multi-generational, family-owned chain.

Par Mar Oil Company, ranked in the top 40 largest convenience chains in the US, has offered delivery since March 2023. John Brammer, the director of marketing, feels it’s an important service to provide to their customers. “The ROI is something that will pay off in the years to come,” he explains. “It’s more of an investment with the way things are going. Delivery continues to grow and as younger people gain more spending power so you have to adapt to it and be in it.”

Before a convenience store company decides to offer delivery, it must assess the economics of the potential operation. How much does delivery cost and how soon can an operator expect to make that money back?

Operators often consider this from various angles. “Building your own digital commerce P&L and running it diligently involves thinking about the cost of customer acquisition for your own delivery channel and the total blended profit of third-party delivery channels together,” says Adit Gupta, co-founder and CEO of Lula Convenience.

Most brands, he pointed out, don’t initially factor in the operational time needed to make delivery work, and the expertise needed to turn a profit. For instance, when asking whether the return is really worth the effort, it can be beneficial for operators to conduct some location-based analysis of their area first to determine whether delivery is actually a good fit. It might turn out that, due to immutable factors such as area density, some of the stores may not be suitable.

Lula offers a consultative approach towards understanding where digital commerce is right for brands— which both Mixx Markets & Par Mar took advantage of as they took their first steps towards digital commerce transformation.

As operators consider the viability of a new sales channel for their location, it’s important to consider existing fixed assets and how well they are being utilized. Often we find the extra capacity in these existing assets is the key to early profits. For example, in the hours where there is typically less foot traffic, we commonly see an increase in delivery orders — meaning the fixed hourly rates already committed for store coverage can now be utilized for the pick and pack activities needed for delivery.

“One common mis-step we see in the economic evaluation of delivery is the direct comparison to existing retail margins,” a caution shared by Justin Jackson, a veteran in the delivery space who previously led the restaurant teams in the US and Canada for UberEats. “With significant order volume considered truly incremental, it's a question of capturing a smaller percentage of the sale — versus none at all.” While it’s important to seek constant improvement in the delivery P&L, an area Lula’s account teams focus on with existing stores, benchmarking purely against existing retail channels can lead to missed opportunities.

It's also crucial, Gupta points out, to understand how variables such as marketing costs—for instance, promotions like DoorDash’s 'Double Dash'—actually affect the profitability of each order. “It’s important for your P&L to have a breakdown of what the profit to the business is at the end of the day after the cost of goods sold (COGS) of the CPG items.” Getting to this level of analysis has proven difficult for many owners. Lula’s Analytics platform makes the process much easier, connecting the dots across platforms and delivering custom reports for better decision making.

To get started with delivery, Tooley signed up for the revenue-sharing plan with Lula, which means he pays a smaller fee but pays a percentage of delivery-specific sales to the company “so now they have a vested interest in how we do, so they run promotions for us,” which is one other thing he doesn’t need to think of, he says. He pays a monthly fee, which he considers a “no-brainer,” and beyond these, there are no additional costs — no employee (formerly himself) needed to manage the delivery program, no marketing, no time spent updating prices.

Despite these very minimal costs, Tooley feels it’s important to offer delivery to stay ahead of — or at least on a par with — the competition. “We want to make sure delivery is a big part of what we offer.”

Par Mar is doing more delivery than expected and is trending up monthly. “It’s so easy through Lula,” Brammer says, because Lula’s managed services handle the implementation and continuous growth of all efforts, making the process seamless for retailers. “This means you don’t have to have a lot of employees working on it, which keeps costs down.”  Without Lula, he says, we’d need a tablet for each platform, along with three separate accounts and three inventories. “So this really cuts down on the investment.”

Leading retail brands have chosen digital channels to augment their overall business revenue, as shared in the previous report of this series. Recommended steps to ensure a profitable digital program entail: (1) creating a separate digital P&L and calculating profitability in revenue growth vs comparing to retail margins, (2) estimating the cost of the multi-department effort (operations, accounting, marketing, etc.) needed to grow revenue through digital programs, and finally, (3) carefully analyzing which stores it may make sense to augment sales with a digital presence.

Even in cases where internal bandwidth is currently available, offloading these tasks to Lula’s team of specialists can free up precious resources for focus on other areas in your digital commerce transformation.