Read the full interview HERE
We interviewed a Former Director at Subway on the risk in the franchisee network and how franchisors work with delivery vendors.
- Impact of coronavirus and potential franchisee closures
- Franchisee setup costs and requirements
- Royalty, advertising, and system fees for franchisees
- How restaurant franchisors work with online food delivery companies
- Unit economics for franchisees for delivery
Can we talk about delivery. How have you seen delivery impact the store economics?
I’ll talk about prior to Covid-19 and then as we got into Covid-19. Subway has been in what we call third-party delivery – so that’s the Uber Eats, DoorDash, Grubhub, those guys – for a little over a year and so we had national contracts with the top four delivery companies. I think, for most restaurant concepts, and even the delivery companies, they’re trying to figure out how to make this work effectively and efficiently, and profitable for everyone. That’s really the big key, right now. From a restaurant standpoint, pre-Covid, it was really incremental business. You’re getting someone who wasn’t going to come into your store, anyway. They want somebody to deliver, so they go online and go to Uber Eats and say, what do I want to eat today? They’re going to have somebody deliver it to them, so if Subway is on there and you can do an order through Uber Eats, as an example, that’s an incremental visit for you.
The sell-in, for us, to our franchisees was, get on board with this, because these are incremental dollars. You may not understand how it works and whatnot – and that was our job, to show them how it works – and it’s not a fad. This is really the future of business. It was incremental business but it was still maybe not as efficient as we would want it to be. We also saw that with customers and delivery companies, on average, the customer stays with the first delivery company that they ever use. I downloaded the Uber Eats at that’s what I continue to use today; I’m an Uber Eats guy, as an example. It’s the same for DoorDash and Grubhub and Postmates. I’m a DoorDash guy, so I only order from DoorDash. We were trying to encourage all the franchisees to sign up with as many delivery partners as possible. If I only sign up with Uber Eats, I’m not getting the DoorDash customers or the Postmates or Grubhub customers.
We found that it was exponential on sales and traffic. The more delivery companies that you signed up with, the more business that you are going to have, exponentially, because you’re going to grab all of those customers and cast a wider net. Some locations have, maybe, only Uber Eats available, in their geography or trade area; maybe some only have two. But certainly, in the metro areas, we encourage them to get with as many as possible. They were seeing the fruits of that. It was really working well and it was incremental business; an extra $1,500 a week, in sales. For Subway, that’s a good percentage. As we got into Covid-19, it became not just a, hey, this is a good thing to have; now it’s necessary. You’ve got to have that third-party delivery, for both sides. For the restaurant, how do we make it efficient?
I think the delivery companies were a little bit overwhelmed with all of the orders and a lot of new businesses signing up. A lot of the mom-and-pops were like, okay, I’ve got to figure this delivery piece out. I think it’s still not where it needs to be, from a profitability standpoint, for the delivery companies and the franchisees, as well as the efficiency.
Could you just share more about the profitability of the franchisees, in this delivery business?
There are fees with that. Obviously, the delivery company is doing you a service and you’ve got to pay them a fee for that.
Like what? 25% to 30%, isn’t it, for a delivery.
On average, it’s probably 15% to 30%. If you’re a big franchisor and you have a national contract, you’re probably under 20%. But if somebody owns three restaurants, on their own, they’re probably at 25% to 30%. The bigger guys can do that, because they have volume. That’s a big chunk out of the sale, right there. Then you’ve also got to pay royalties on that sale; you’ve got to pay your advertising fees on that sale. You’ve got your labor and your food costs, to make the meal and put it together. It’s a pretty tight margin on that but if it’s seen as incremental, and you’re taking away from somebody else’s business then, yes, at the end of the day, you need the delivery business.
I think, during Covid-19, it became a need; it’s not really incremental anymore, because all those people that would have been coming in are now doing the delivery business, so you’re cannibalizing that. It’s not as profitable. You still have to pay the fee to the delivery company.
What does that look like, then? If you could walk through an average order value, on a delivery for Subway, what is it? $20?
The average total delivery, what we call the total ticket, so the total bill, was around $15. That’s the actual food and drink that you purchased itself, plus the fees and then there’s a delivery fee that’s assessed to the customer; it’s usually around $15. Out of that $15, you’ve got to pay the delivery company their fee, you’ve got to pay for your food and your royalties.
So your 20% delivery fee, your 12% royalty fee?
It’s a smaller margin, but like you said, it’s incremental. The return on the capital employed is still pretty high?
Correct; especially if you start getting multiple orders. Getting that volume is really when it counts. It’s going to be very interesting, as we emerge out of Covid-19, as that delivery business normalizes, because you have so many customers that are getting delivery, that would normally go into the restaurant. Hopefully, those people will come back to the restaurant. It will be interesting to see how it normalizes. It’s really going to benefit the delivery companies because you had so many restaurant companies who, maybe, shied away from the third-party delivery companies. Now they need them and they see the benefit; they are more likely to continue to be signed up to those guys. I think the delivery companies are certainly going to benefit because, over a two-month period, they’ve probably doubled their business.
On the flip side of that is that it puts a strain on those businesses, because they have to have drivers, to pick up and deliver the food. That’s always a challenge because, for the delivery company and the franchisee, it all comes down to the person delivering the food. Most of the time, it’s a good experience but, as with anything, there are going to be some bumps in the road.
What did the franchisees think about the delivery companies, pre-Covid? Why were they skeptical?
Part of it was, in a lot of systems, you’ve got some older franchisees, who may not understand the technology. Why would I pay somebody to deliver food, when I can just get them when they come in the store? We had to tell them, again, certainly for the younger generation, they are paying for convenience. They are not going to come into Subway; they’re going to order online. They’re going to order from Subway, they’re going to order from McDonald’s or Burger King or their favorite local restaurant. But they’re not going to go anywhere, so you still need to capture that business.
One thing we told every franchisee is, go and download Uber Eats or DoorDash or Grubhub, on your phone or on your computer, and make an order. You see how the process works, see what the fees and see how it’s delivered and see how it’s picked up, at your restaurant, just so you can see how it actually works. It was really the unknown, as with any new technology and new business program. There is some fear of the unknown. You’ve got to pay fees, so that’s paying something else, on top of all the other costs that I have. What you do is, you get some franchisees who have had great success with it, take those testimonials, get some more franchisees signed up and it just snowballs from there. At Subway, we got about 11,000 locations signed up, in about a three-month period, which was unheard of, in the industry, pre-Covid. I think Subway is around 15,000 locations now, that are signed up for delivery, if not more, because of Covid.
Do you think the fee of around 20% is too high?
It is high, knowing the restaurant set of the business and all the costs that go into that, already, just to make a meal and have it delivered. I don’t know a lot about the cost structure of the delivery companies and what their margins are, on that. I do know that most of the delivery companies either haven’t turned a profit yet or have turned very little profit. I don’t see those fees lowering. I think they are, right now. Everybody is doing, no delivery fee or reduced rates and those type of things. But they’re going to go back to normal, at some point. I don’t foresee the delivery companies lowering those fees. Even though they’ve had increase in business, they’ve had increase in expenses, as well. They’ve got to pay their drivers and those type of things.
Read the full interview HERE