THE RESTAURANT INDUSTRY’S ADAPTATION
Online menus, email marketing, mobile ordering and third-party ordering and delivery options have fundamentally changed the restaurant industry over the past several years. They have enabled restaurants to attract new customers and retain existing customers by expanding their off-premise dining revenue which includes both delivery and takeout. The National Restaurant Association reports in their 2017 Restaurant Industry Pocket Factbook:
- 42% = Consumers who say the ability to order online would make them choose one restaurant over another
- 30% = Consumers who say technology makes them dine out or order takeout or delivery more often
- 20% = Consumers who say they would rather use technology than interact with restaurant staff
According to a 2016 Morgan Stanley report, Pizza Paradigm for Online Food Delivery, aggregate off-premise restaurant dining accounted for $210 billion or 42% of the industry’s revenues with $30 billion accounting for the delivery market. Of that $30 billion delivery market, $11 billion was online of which $7 billion (64%) were attributed to pizza orders. This compares to $9.6 billion worth of all pizza delivery orders or 32% of the $30 billion.
According to Pizza Today, “nearly 80 percent of U.S. pizzerias offer delivery.” PMQ Pizza Magazine claims the popularity of online ordering can be attributed as follows:
“The growing importance of online and mobile ordering cannot be overemphasized. Despite carrying their phones everywhere they go, many customers don’t want to actually talk on them—at least not to a harried pizzeria staffer who may put them on hold or botch the order. Online ordering will likely overtake phone orders by the end of the decade, and it fits hand-in-glove with delivery service.”
THE IMPACT OF THIRD-PARTY ORDERING AND DELIVERY ON FRANCHISOR ROYALTIES
The growing popularity of third-party ordering and delivery services create new challenges for franchisors as they can no longer rely on POS polling alone to capture franchisee revenue and, therefore, royalties. In fact, Grubhub, the leader in third-party restaurant ordering and delivery services currently only partners with Upserve Breadcrumb POS, Oracle Hospitality and Toast. Yet, franchisors must rely on franchisees to record these transactions in their POS systems, for example as department sales, if POS polling is uniquely relied upon to calculate and validate royalties.
How large is this challenge? According to 1010data.com, Grubhub and Seamless, who merged in 2013, accounted for 50% of third-party restaurant ordering and delivery sales for the fourth quarter of 2016. If you delve a bit into Grubhub’s financial statements, you’ll find a story of double-digit growth in transactions and revenue. The percent of revenue earned also reflects the company’s greater focus on providing an ordering platform versus a stronger mix of ordering and delivery services. They reported:
- 55 thousand connected restaurants at the end of June 2017
- Over 9 million active diners at the end of June 2017
- Gross food sales for the first two quarters of 2017 of almost $1.8 billion
- An average of 319 thousand daily orders for the first six months of 2017
- An average of 275 thousand daily orders for 2016
- Earned an average of approximately 1.77% on each gross food sales $ for the first six months of 2017
- Earned an average of approximately 1.65% on each gross food sales $ for 2016
The industry continues to see new providers of the third-party restaurant ordering and delivery services. Amazon Restaurants was launched in November 2015 and recently announced its partnership with the third-party ordering service provider Olo, In 2014, Uber launched its UberFresh service and in 2016 relaunched the service under its own app, UberEATS. Although these services eliminate the need for restaurants to operate their own delivery services, they also come at what some are called a steep price to both the restauranteur and consumer. But the demand seems clear both domestically and internationally which is highlighted in Amazon’s recent need to hire Uber drivers in Singapore to meet that region’s demand.
The industry is also consolidating. Grubhub is leading the way with its Seamless merger in 2013 and recent acquisitions of competitors such as Eat24, LABite, Foodler and OrderUp.
HOW CAN FRANCHISORS BRIDGE THE GAP?
- Proactively search leading third-party delivery sites to discover franchisee partnerships.
- If a material number of franchisees participate in these partnerships, initiate conversations about integrating with third-party delivery services.
- Sync this information with your franchisee scorecards to track the impact of sales on top-line revenue growth while also considering the commissions and other costs of third-party delivery partners.
- Add supplier purchase data to benchmark profitability. A decrease in profitability may indicate the omission of this additional revenue.
By recognizing the impact of changes in the industry and the growing impact of third-party delivery services, franchisors should re-evaluate how they collect revenue data to ensure they are receiving the appropriate royalties. This may require collecting information from third-party sources and aggregating it into scorecards, dashboards and other monitoring tools. Taking these steps also ensures the franchisee’s performance is being measured and scored correctly to provide the coaching and training that drive unit-level economics and the growth of franchise systems.