Savvy business owners know that their business needs to evolve with the market. This holds true in most industries, but few can change as frequently as the restaurant business. One of the most recent evolutions is the growth of delivery within almost all types of dining establishments. From fancy restaurants to drive through staples, the use of delivery services like DoorDash, Uber Eats and Grubhub have become an important part of maintaining their customer base.
The use of these third party delivery services boomed during the pandemic and continues to gain momentum. These services can seem like pure upside. More orders, wider reach and stronger brand visibility. For many franchisees, these types of sales also bring a quiet margin squeeze that gets worse over time. The pressure often starts with franchisor fees tied to delivery revenue and can accelerate when franchisees raise delivery pricing to cover those fees.
Where the margin pressure begins
Third party delivery services typically charge the restaurant a commission or service fee. The franchisor may also charge royalties on sales, including through delivery services. The exact amount and structure to these payments depends on the franchise agreement. Some take a percentage of the overall cost, which could include any addition made to the price of items to help compensate for the delivery fee. Each layer reduces the net profits.
Why delivery menu pricing often runs higher
As noted, many franchisees respond by setting a higher delivery menu price than the in store price. The goal is straightforward: recover the platform commission plus any franchisor percentage fees without raising base pricing for dine in guests. The reality can be sobering: a larger cut to the franchisor.
Franchise agreement language can change the math
The biggest surprise tends to come from how the franchise agreement defines “gross sales” or “gross revenue.” Some agreements capture all amounts charged to the customer, including delivery fees, service charges, packaging fees and convenience fees. Others exclude pass through amounts, or define delivery fees as non revenue items.
Depending on the language of the agreement, a franchisee can end up paying royalties on the very markup added to cover delivery costs. That can turn a defensive pricing move into an additional franchisor fee base.
These types of arrangements can result in massive loss for franchisees and are not uncommon. This is one of many issues in a recent case involving Franchisee Gold Coast against Franchisor Jack in the Box.
Key takeaways for franchisees
DoorDash, Uber Eats, Grubhub and other third party delivery service providers can drive volume, yet the economics depend on layered fees plus contract definitions. Franchisees should move forward with such agreements cautiously. A careful read of the franchise agreement can mean the difference between profitable growth and profit leakage.
