McDonald's Delivery Service Could Be A Huge Opportunity

By Markets Fool.com

For years, many McDonald's fans in the U.S. have clamored for a McDonald's delivery service. While the fast food giant offers delivery in numerous international markets -- and even allows delivery in New York City through GrubHub Seamless-- the Big Mac maker has yet to offer delivery in a meaningful way across the country.

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Many McDonald's customers have been longing for delivery service. Photo: The Motley Fool

Perhaps the burger chain is changing its mind. Earlier this month, McDonald's officially announced a partnership with delivery start-up Postmates to offer delivery service from 88 restaurants in the New York City boroughs of Manhattan, Brooklyn, and Queens.

Obviously, this represents a tiny fraction of McDonald's domestic footprint and it overlaps with the existing Seamless delivery area. However, if this test goes well, McDonald's could expand its partnership with Postmates to other markets. And in the long run, McDonald's delivery could be a big driver of the company's turnaround.

How it works
Hungry McDonald's fans in New York City can go to Postmates' website to place an order for almost anything on the McDonald's menu. (Ice cream cones are not included, for obvious reasons!) Postmates charges a 9% service fee on the order, plus a delivery fee that tends to be around $5 but can vary based on distance and time of day.

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McDonald's prepares the food but it is picked up and delivered by Postmates staff. The Postmates app allows customers to track the status of their orders.

Postmates is making McDonald's even more convenient in New York City. Photo: The Motley Fool

Entrepreneur tested the service twice on the same day recently. Both McDonald's delivery orders were filled correctly and the food still tasted good when it arrived. One order came in just 18 minutes -- the other took 39 minutes to arrive.

Price is a problem
The biggest drawback by far of the new McDonald's delivery service through Postmates is the high delivery fee. Most people go to McDonald's because they're looking for a cheap meal -- ideally under $5.

Yet between Postmates' delivery charge and the 9% service charge, a lunch that would cost $5 to pick up could easily come to $12 when delivered. McDonald's customers are likely too price-sensitive for find that price tag appealing.

That said, the delivery charge doesn't appear to vary based on order size. So if you are ordering for a larger number of people, Postmates delivery might seem like a more reasonable expense. Paying $7-$8 to have $40 worth of food delivered is a lot more palatable than paying more in fees than the cost of your food.

Why McDonald's delivery could still be a game-changer
As currently constituted, McDonald's delivery through Postmates isn't going to be a huge sales driver, but delivery still holds a lot of promise for the fast-food giant.

First, the speed of service issues that have dogged McDonald's in recent years wouldn't be problems in a delivery context. If you're standing in line in a McDonald's restaurant or sitting in your car at the drive-thru for 10-15 minutes during your lunch break, you might get frustrated. But you might be delighted to have food delivered to you in half an hour or less.

Second, convenience is probably the second most important part of the McDonald's value proposition, after price. Offering delivery more widely would allow McDonald's to better meet its customers' desire for convenience.

Third, offering delivery would quite simply expand McDonald's addressable market. The restaurant delivery market is large, and McDonald's desperately needs growth opportunities. As long as it can manage the additional complexity of delivery, exploiting this incremental opportunity is a no-brainer.

Solving the price problem
For McDonald's delivery to become a hit, delivery costs will need to come down. But that's exactly the plan. Postmates hopes that after partners like McDonald's see how popular the service is, they will be willing to subsidize the cost in part -- or even in full.

Lower delivery costs would likely drive a "virtuous circle" of growth. As the delivery charge comes down, more people will use the service. That will make it easier to consolidate trips by having one Postmates worker pick up multiple orders and deliver them to several nearby locations. This system should reduce costs for Postmates, potentially allowing a further reduction in the delivery charge.

Obviously, there's no guarantee that the Postmates-McDonald's delivery partnership will be a success. But Postmates is rapidly becoming extremely popular, and testing delivery is a low-risk and potentially high-reward move. To move the needle for McDonald's, though, the partnership will need to go national and delivery costs will need to drop significantly.

The article McDonald's Delivery Service Could Be A Huge Opportunity originally appeared on Fool.com.

Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.