We’re in a time when consumers are willing to pay a premium of up to 10% for convenience. In terms of food delivery services, most customers are more loyal to a delivery app on their phone than a restaurant. They open the app and shop based on what’s available.
At one of the recent breakout sessions during the IFA Legal Symposium, on the topic of Food Delivery Service Issues, the CEO of Firehouse Subs asked how many people in the room had used a third-party delivery service. Most of the attendees raised their hands. But when asked if they use them regularly, very few had.
With revenue trends, franchise owners must be mindful of how popularity can shift between providers. While delivery services can create a relative decrease in restaurant visits, delivery is no longer optional.
So how do you decide which delivery model would work best for your franchise?
The Three Models of Delivery
There are currently three business models that enable restaurants to provide delivery:
- Pizza Delivery Model – Direct connection between the restaurant and consumer. Restaurant takes, fulfills, and delivers orders.
- Aggregator Model – Restaurant sells food to aggregator, who then sells food to consumer. The restaurant pays a fee to be featured on an app. The restaurant no longer has a direct link to the consumer. Fees can be as high as 30%.
- Third-Party Logistics Provider Model – Direct connection between the restaurant and consumer, where the provider is a broker who charges more modest fees in line with the service they are providing.
The Aggregator Model is generally considered economically unsustainable. Where a brand’s National Marketing Fund fee is usually between 2-4%, an aggregator’s fee is 10-15%. Is it worth that?
The Pizza Delivery Model
Setting up your own delivery service is expensive and difficult. Without an existing third-party service, it’s tough to build a delivery business. Not many concepts have been able to do it successfully; Panera is the only non-delivery concept that has invested in building out their own infrastructure.
There are the additional concerns of labor and marketing. It is hard to guarantee drivers are consistent on number of deliveries and tips. For marketing, if potential customers aren’t aware of your online or mobile platform, they may not find you.
You need to participate with an aggregator or a third-party logistics provider so you don’t miss out on those potential customers.
Third-Party Logistics Provider Model
Another of the IFA Legal Symposium’s sessions focused entirely on third-party delivery services and aggregators. Third-party options – such as Doordash, Uber Eats, Grubhub, and Postmates – make much more sense for franchise businesses because the restaurant can maintain a relationship with customers. More importantly, when the customer pays for the cost of delivery, the restaurant does not incur that additional cost.
A member of the General Counsel for Houlihan’s Restaurant Group emphasized that restaurants have to get their pricing right with a delivery provider in order to make it work. However, she also noted that the marketing for third-party delivery providers has also improved their traditional carry-out business.
Best Practices for Using a Third-Party Delivery Service
Working with Your Service Provider
- Sign short-term agreements with providers. Be mindful of how things can shift – in terms of the breakdown of revenue and a provider’s popularity amongst consumers. Always give yourself an out to see how things continue to shift.
- Re-negotiate agreements when you can.
- Look at it like a software contract. They use technology and algorithms to determine delivery specs.
- Make sure the drive times are acceptable and that drivers don’t “stack” orders (i.e., deliver orders from other restaurants in the same trip).
- Pay close attention to the following:
- Delivery radius from your restaurant
- Safe environments
- Time of day
- Drive time
- Food quality
- Delivering food to the right place and the right time
- Take control over pricing.
- Define fees for delivery in relation to royalty fees.
- Be clear that drivers are not employees of your concept.
Maintaining Customer Service
Guest experience and safety is paramount when choosing a delivery provider.
- Be involved in customer care resolutions.
- Clearly define the process from when the order leaves the store to when it’s delivered and who is responsible for each step.
- Have an updated crisis management plan and training materials ready for a data breach crisis.
- Build strong relationships with franchisees and make sure they are good operators. Share manuals, training materials, etc., to hold them accountable for achieving the standards for guest experience, but give proven operators latitude on how to achieve it.
- Place language on the cover page and in footers of manuals that employees are not employed by your brand, but an independently owned and operated franchise.
- Include an article in their Franchise Agreement that prohibits franchisees from using unauthorized delivery services.
Problems with This Model
Restaurant owners have seen varied outcomes in using third-party providers. While the Senior Vice President of Wingstop Restaurants estimated a growth in profits of 9-12% after joining Doordash, the CEO of Firehouse Subs said none of the revenue garnered from using third-party delivery services has been incremental.
Wingstop’s SVP also noted that they are investing in upgrading their own mobile app technology, and will continue to explore delivery options moving forward.
Who owns the customer data? How granular does it need to be? How is it linked in the POS (Point of Sale) system? Right now, it’s on an honor system for the franchisee to enter it.
When utilizing a third-party vendor, consider:
- How data is integrated with your POS system
- Guest experience
The CEO of Firehouse Subs noted that off-premise dining is killing P&L (Profit and Loss) because restaurants aren’t selling beverages. He suggested that we need to find a way to sell beverages through delivery services, whether using third-party delivery providers, takeout, mobile ordering, or carry-out.
For these delivery models to be sustainable, the customer will have to pay more for service, whether they’re ordering food alone or drinks in addition. We need to figure out the right fee structure, and with so many options out there, you may need to test different ones before choosing the best service provider partner for your franchise.
Food delivery is not a new concept, and the use of third-party services to enable it is not simply a trend. Doordash reports that the third-party logistics industry is experiencing unprecedented growth: the $43 billion of deliveries in 2018 is expected to rise to $76 billion by 2022.
Delivery is a key revenue opportunity, and with so many third-party options available, there is a lot of competition and possibility for change. Be aware of fluctuations in the industry, so your business is prepared.
But also use opportunities to work with these vendors to your best advantage: Firehouse Subs’ CEO recommended joining as many apps as possible, and as the General Counsel representative from Houlihan’s Restaurant Group said, the marketing provided by these providers could improve your in-house option.