Obstacles To Food Service Delivery

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Fox Rothschild LLPThe Franchise and Distribution Section of the Georgia Bar met for business and pleasure last December. We heard from two exceptional presenters – Lindsay Morgan of Greenberg Traurig LLP and Tad Low of Moe’s Southwest Grill –  on the growing market in off-premises (take-out, delivery, and catering) restaurant sales, who presented us with a wealth of data and advice.

First, the lay of the land. Delivery as a share of restaurant sales (excluding catering and bars) was slightly above 6% in 2016, but is estimated to comprise over 10% of sales in 2022. While consumers are ordering more food each year online, they are projected to use third-party restaurant platforms far more than they will use restaurants’ own apps or websites. These two trends (more delivery, but ordered through third parties) should concern restaurateurs because delivery and packaging take a nasty bite out of profits. Consider, for example, that deliveries rarely include beverages, which offer high margins, but do require additional costs in packaging and delivery. Restaurants, but especially franchisors, also have legitimate concerns about brand damage when third party deliveries make mistakes get attributed to the point of origin.

Nonetheless, off-premises programs can be profitable for franchisors. The franchise systems that will adapt and capitalize on growing off-premises trends are those that develop a thoughtful, deliberate, and tailored approach to their aggregator agreements, program design and implementation, and manual and franchise agreements. As Ms. Morgan and Mr. Low explained, franchisors can conceptualize a five-pillar approach consisting of: 1) profitability, 2) provider selection, 3) participation and enforcement, 4) provisions, and 5) perception.

The first pillar, profitability, can be approached in many ways. Aside from the obvious, negotiating for lower fees, restaurants can limit delivery menu options, increase pricing in delivery menus, outsource food production to ghost kitchens, or internalize or privateer delivery to reach the desired profit margin.

When it comes to choosing a provider, the big players are Uber Eats, Doordash, Grubhub, and Postmates. Getting these third-parties to negotiate terms and conditions may be difficult for smaller to mid-size franchisors, but software compatibility is another, separate issue that should not be overlooked. And as is always the case in our modern world, access to data is incredibly valuable.

Each franchisor must determine for itself whether to mandate or incentivize participation in an off-premises program. Many might find a carrot and stick approach works best. While enforcement is not difficult to comprehend, incentives require more creativity, and should be unique to each system. A franchisor could provide a royalty grace period to offset delivery commission, offer rebates on required packaging or point of sale products, or defer the timeline for other capital expenditures for franchise units that remodel to accommodate off-premises sales.

As for provisions, franchise agreements must grant the franchisor the right to require 1) provision of off-premises services or 2) general system-wide changes. An Off-Premises Program is best implemented through a franchise’s manual because it can be revised to apply to all units at once and can allow for detail and flexibility in implementation. Still, a franchisor should not implement a Program without reviewing its franchise agreement, especially provisions on territory, data and confidential information, and definitions of royalties and gross sales.

The fifth pillar, perception, addresses the integrity of brand. How can the system’s off-premises program ensure the brand won’t suffer? For example, tamper-resistant packaging and time-stamps are possible solutions, but franchisors should anticipate such problems when negotiating with the provider.

In summary, food-service franchisors must adapt to the growing trend in off-premises consumption, but they should not jump in without a thorough plan.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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