A new alliance between Amazon and Olo was announced Friday signaling the online retail giant’s steadfast pursuit to revolutionize restaurant delivery. Olo, a software maker for restaurant ordering will provide Amazon with its database that has thousands of customers. This will give Amazon Restaurants, Amazon’s food delivery arm, an opportunity to tap into a massive market.
The news of the partnership saw GrubHub’s shares drop by 7 percent. GrubHub, with more than 55,000 restaurant partners and over 9 million diners is the leading restaurant delivery service provider.
The main obstacle that Amazon Restaurants faces as it strives to make inroads into the sector is price. Amazon is currently charging restaurants 30 percent of the money made from each food delivery. A number of investors have expressed unease over the high rate and its sustainability according to Thomas Champion, an analyst at Cowen & Co. a financial services firm.
Market leaders in the food delivery sector such as GrubHub and other players such as Postmates and DoorDash charge between 12 and 24 percent, making Amazon’s take rate expensive.
This was evident when Ruby CEO James Hyatt alluded to the cost factor in a recent earnings call. Hyatt indicated that every restaurant will need to assess these services before a decision is made to launch their own delivery network. Ruby is currently operating a pilot program with Amazon Restaurants.
Hyatt added that looking at delivery partnerships offered by Amazon, Uber and Lyft, they remain “a little expensive” and every restaurant will have to critically consider whether to use third parties.
The deal with Olo is a significant step for Amazon Restaurants with its current rank as the fifth-most-used delivery service. If more partnerships like this one can be created, it will be able to utilize economies of scale and eventually lower its take rate and compete favorably with the likes of GrubHub.
The U.S. food delivery market estimated to be worth more than $40 billion has strong growth prospects according to Champion. He emphasized that it’s a competitive space that can accommodate many players.