A: In the restaurant industry, delivery of food to customers is not a new idea. Pizzerias, Chinese restaurants and other establishments have been using delivery as a way to increase sales for years. However, the emergence of third-party delivery services, such as food delivery aggregators and mobile delivery service apps are changing the playing field. The relationship between third-party delivery services and the restaurants adds a layer of complexity to the operation of a restaurant and poses unique opportunities and challenges to franchisees.
These days customers all but expect to find their favourite restaurants on UberEats, Foodora or DoorDash. Every person considering buying a restaurant franchise should pay attention to the impact of food delivery services on the operation of the business, particularly in the areas of franchisor’s restrictions on joining a particular delivery system, royalties, and delivery area considerations.
Subscribing to the food delivery service
Keeping in mind that all rights in trademarks, trade names, logos and menus of the franchise system belong to the franchisor, most franchise agreements are drafted in a way that prohibits the franchisee from sublicensing those marks, names and logos to a third party. This means that franchisees cannot actually join a food delivery system without the franchisor’s approval, as the delivery website or mobile app needs access to the franchisor’s intellectual property to list the restaurant on its platform.
Potential franchisees should always inquire about the franchisor’s policy on third-party food delivery services. Some of the questions to ask include:
- Does the franchisor have a list of approved delivery platforms?
- Does the franchisor require the franchisee to sign up to a particular platform, or can the franchisee shop around?
- How long does it take to get the franchisor’s approval?
- Does the franchisee have flexibility to limit or expand menu offerings specifically for delivery?
Many established restaurant franchises prefer a centralized approach, where the franchisor signs a system-wide agreement with the platform governing all aspects of the business relationship, including fees, service standards, customer complaints procedures, data ownership, limitation of liability etc. In this scenario, the franchisee has less to worry about because the terms of the restaurant’s cooperation with the platform will be prescribed by the franchisor. The downside, however, is that the franchisee will not be able to subscribe to a competing platform or opt out of the delivery program, even if the franchisee’s restaurant is losing money on the delivery orders.
Royalty and service fees
Before signing the franchise agreement, the franchisee should be very clear on how the platform charges its fees and processes payments for orders, and how the platform’s fees may affect the royalties payable to the franchisor.
Not all platforms process fees and payments similarly. Typically, the customer places an order with the platform and the platform collects the payment, including service and delivery charges. The order is fulfilled by the restaurant and is logged into the restaurant’s POS system as a full-price menu order. The restaurant then receives the payment from the delivery service provider, minus applicable service charges. At the end of the day, the franchisee receives between 10-40% less for the delivery order than dine-in order, even though the restaurant’s POS system may record delivery orders as full-price sales.
Royalties in restaurant franchises are typically calculated as a percentage of gross sales of the restaurant for a particular period. Franchisees should ensure that the definition of the gross sales in their franchise agreement excludes service fees and other charges paid to food delivery service providers, otherwise the franchisor would charge royalties on the full price of the delivery orders, even though the franchisee receives only a portion of the full order price.
Delivery area considerations
Another issue to consider is how the food delivery system will allocate orders between neighbouring franchisees. If the franchisee is granted a protected territory under the franchise agreement, that territory may not necessarily correlate with the delivery platform’s algorithm which allocates the orders. For example, the platform may assign the order to a franchisee who is located in the territory where the driver accepts the transaction, for delivery in the territory of another franchisee.
If the franchisor has an approved delivery service provider, the franchisee should inquire whether the provider’s algorithm for allocation of orders takes into consideration the franchisee’s protected territory.
Where the franchisee has flexibility to choose a delivery service, they should work closely with the service provider and the franchisor to mitigate the risk of encroaching on other franchisee’s territories.
These are other issues to consider when engaging a third-party delivery service in your restaurant business. To reap the benefits and avoid disappointment, it is important to understand exactly what engaging a food delivery aggregator brings to your business.
International Franchise Lawyer
Jones & Co.