While ordering food online through apps such as Grubhub or Uber Eats has only been around for a few years, it has made a huge impact. That impact will only continue to grow, especially for franchisors. According to a survey from orderTalk, 79% of Millennials ordered food last year via an app or a website. As this group of consumers continues to mature, total ordering through apps and websites will only increase. Already, consumers looking for convenient meals ordered $10.2 billion from delivery aggregators in 2018, which would make the third-party delivery market the size of the fifth-largest U.S. restaurant chain, according to Technomic.
On the surface, this seems like good business. According to Business Insider, restaurants that utilize an online-ordering system are able to grow their delivery revenue 30% more than those who do not. Online ordering is growing 300% faster than in-dining spending.
However, just this week alone I talked with two QSR concepts that had not rolled out any sort of online ordering strategy to their franchisees. They left it up to their franchisees to figure out individually how to implement a strategy around online ordering. Both franchisors had commented that they had rolled out online ordering in their corporate locations but had not yet taken the time to implement a strategy to do this system-wide.
Having worked with a couple of different concepts that have had different experiences, I wanted to quickly run through a few considerations for small franchisors that are working through how to take advantage of online ordering in their concept.
Outsourced or In-House?
Services like Postmates, Uber Eats, and Grubhub have prebuilt platforms that concepts and brands can plug directly into. Theoretically, these services can have a restaurant up and running very quickly. These services also tout huge user database that can be plugged right into. These outsourced delivery platforms make a lot of sense for those just entering the space. They also have an abundance of features such as real-time driver tracking, flexible usage-based payment plans, and the ability to pre-plan and optimize delivery routes.
By leveraging an existing on-demand infrastructure, upfront recruiting and training costs can be deferred while a concept concentrates on its core business. This strategy allows for increased flexibility and rapid market expansion, but does it make financial sense for the majority of QSRs?
Upfront, for an initial franchisor that is looking to roll out a program, I would argue that it does. However, as I’ll point out in a second, the math needs to be understood about just how much a concept is paying for this flexibility.
The Cost of Outsourced Delivery
Many restaurants are finding that utilizing a service such as Uber Eats over the long-term is significantly eating into their profits (no pun intended). Most of these services charge a combined commission and marketing fee that ranges between 20%-35%. Realistically, unless a brand has a huge amount of volume, the fee is closer to 35%.
Most concepts have labor costs that average about 30% of revenue. Their food costs (including packaging) averages between 27%-30%. Without taking into account other expenses such as rent, uniforms, or supplies, the margin is close to 40%. If you add on a 35% delivery fee, that leaves only 5% of revenue for rent and other expenses not yet considered.
Many restaurants raise prices on sales through third-party apps to soften the blow. Recently I ordered from a national hamburger chain and noticed that their prices online were about 15% higher than in-store. That was before the delivery fee was tacked on to my order. This practice will obviously help out in finding more wiggle room with the margins. Uber Eats, however, discourages the practice as the goal is for the consumer to have a great, consistent experience.
Restaurants also report decreases in labor. In a recent interview with Franchise Times, Dunkin’ Brands CFO Kate Jaspon said that online ordering takes about 30% less labor out of each transaction. However, this labor savings won’t be realized until a unit gets to s certain amount of volume since it mainly relates to taking the order.
What is the Alternative?
If a brand is interested in taking advantage of online ordering but is turned off by the fees and commissions of these third-party services, the alternative is to bring delivery in house. While this alternative will pay off over the long-term, brands that choose to go this route should be aware of the upfront costs (which can be significant).
For starters, there is the technology. Not utilizing a third party app means that a platform must be independently developed. However, many would be surprised to learn there are several online ordering platforms that can integrate with POS systems so that orders can be received. While this does take some time and expertise in setting up, the technology piece is less of a hassle than one would initially think.
The next consideration will be the change in labor costs. Once a restaurant starts to process a certain amount of orders a day, they most likely need to dedicate a fulltime resource. This employee can take care of receiving orders, expediting food, preparing to-go bags, and check the orders before handing off the food to the courier.
The other piece of labor is the actual driver or couriers to deliver these orders. No longer using a third-party service means that a restaurant now needs to figure out how the order will be delivered. Luckily, there is a model for how this is done profitability (see Dominoes, Pizza Hut, etc.).
There are additional costs to get the right packaging and equipment so that food is delivered to certain quality and standards.
The good news for restaurants is that a 2019 survey found that more people are actually ordering from a restaurant’s website than from third party ordering sites. In fact, 43% of consumers say that third-party apps intentionally interfere with relationships between restaurants and their customers. So, restaurants that fear to leave these third-party apps will zap their sales should actually get comfort in knowing that consumers would prefer to engage directly with them.
How Franchisors Should Plan
Franchisors that don’t have a plan are missing out on huge revenue opportunities. There are many alternatives that will have different impacts on both the franchisor and franchisees. While what is presented above heavily favors going with an in-house strategy, all alternatives should be considered. There are still reasons these third-party apps make sense in certain scenarios.
A well-defined strategy rolled out by a franchisor will address upfront many of the issues outlined above. It will contemplate both pricing and costs as well as define a process that can be executed by franchises. Not only will this improve revenue and profitability system-wide, but it will also be a major selling point to prospective franchisees.
Perhaps the biggest take away is that franchisees are looking at the franchisor for leadership. If leadership is not provided, then a hodgepodge of solutions will be seen throughout one system. This will only confuse customers and lead to bigger issues the more individual solutions that are introduced.
For those that would like to read much more about the math behind the decision of whether to outsource their food delivery to third party apps or to bring the process in house, here is a much more in-depth article. Having a strong financial resource to help you make this decision is key. Sit down with whoever your resource is to starting determining your plan today. If you already have a plan, now is a good time to review whether it is the correct solution.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, an accounting and advisory partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from bookkeeping and taxes to CFO advisory services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at [email protected]