Is Delivery A Necessary Survival Strategy for Franchisees?

June 3, 2022 First Franchise Capital

The never-ending tension between restaurant brands and the franchisees who serve the brands’ customers has gained another sore point in recent months as chains enthusiastically embrace third-party delivery services. While operators recognize that offering delivery allows them to boost sales, the cost of the third-party services may wipe out any extra margin those sales create.

For example, McDonald’s® has made delivery a priority, building a strong partnership with Uber Eats®. Globally, delivered food has accounted for $3 billion in revenue for the chain over the past two years, with 19,000-plus locations offering delivery. Because the franchisor receives a straight percentage of all sales, the franchisor sees delivery as a great revenue enhancement. However, franchisees only profit from those added deliveries if the revenues they take in exceed the cost of sales, and some franchisees have revealed that Uber Eats captures a 20 percent fee on every delivery order. The franchisees worry that delivery business will cannibalize higher-margin in-store sales.

That disagreement between brands and franchisees is mirrored throughout the industry as delivery’s share of business continues to grow. Franchisors like delivery because it boosts sales and may gain business from customers who might not otherwise choose their brand. McDonald’s has reported that delivery orders are typically twice as large as in-store purchases. And, with the third-party delivery providers responsible for funding the technology and other costs, the franchisors don’t have to invest capital to get those extra sales.

There’s no argument that delivery provides a significant boost for sales. Chipotle® recently reported that an agreement with DoorDash® led to a 667% jump in delivery sales. The delivery services themselves are also growing – both expanding the availability of their services as well as partnering with additional brands to satisfy their consumers.

Experts say there’s plenty of room for additional growth. Investment banking firm UBS® recently produced a report examining the global delivery market, estimating that delivery sales could grow to $365 billion by 2030. The study included an interesting comment: “There could be a scenario where by 2030 most meals currently cooked at home are instead ordered online and delivered from either restaurants or central kitchens.”

The audience for food delivery services averages 36% of the population, reports Market Force Information, but younger consumers are far more likely to opt for a delivery service. Among 18-to-24-year-olds, it’s 55%, and among the over-65 crowd, it’s just 17%.

What leads diners to opt for delivery? A Grubhub® analysis of customers using its platform found that 43% of respondents just didn’t feel like cooking. The other most-cited reasons were wanting to satisfy a craving and not wanting to spend the time to cook and clean.

As more customers demand delivery orders and more brands respond to their wishes, franchisees who refuse to play along are likely to be left behind. If the move to delivery is inevitable, operators need to protect their profitability. One likely outcome is that franchisees will seek ways to shift the cost of delivery to the customers who request it. Charging delivery fees or raising menu prices to absorb the extra cost may be needed to keep those extra sales. Otherwise, the added costs associated with delivery could mean the sales may be unprofitable.

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