The first restaurant company to make a presentation to investors at the ICR Conference in Orlando this week was the big Burger King franchisee Carrols Restaurant Group.
CFO Paul Flanders, when asked about delivery, did not exactly give a ringing endorsement.
“The economics are probably marginal for the operator,” he said. “I wouldn’t say we’re eagerly embracing it. But it’s a service we’re probably going to have in some places, eventually.”
Not long afterward, Andy Wiederhorn, the CEO of Fatburger owner Fat Brands, argued strongly in favor of delivery.
He said that the service generates incremental sales for the restaurant and introduces the brand to a new group of customers that wouldn’t otherwise consider the concept. And he said that third-party delivery services are providing all of the technology, which saves restaurant companies from having to make those investments.
The difference in views between Flanders, a franchisee, and Wiederhorn, a franchisor, is symbolic of the current environment: Franchisors are eagerly embracing third-party delivery. Franchisees are less enthusiastic about the idea out of profitability concerns.
Restaurant brands have been pushing delivery heavily, seeking a potential boost to their topline revenue.
Franchisors generate revenue from the top line, because they collect royalties based on a percentage of restaurant sales—and their profits come from the franchising side, so they are less concerned with profitability of those sales. The potential for incremental sales from a new service is awfully tempting for them.
But franchisees survive off the profits of those sales. Because brands often have to pay a fee to services for delivery orders, that makes delivery less profitable. Not surprisingly, many franchisees have the same view as Flanders: They see delivery as inevitable, especially in certain markets, but they don’t like the service’s financials.
The long-term question for delivery as a major restaurant sales service remains whether operators can earn a profit from offering the service. Over time, more of the cost is going to have to be shifted to customers demanding the service, through higher fees, because if operators can’t make profits they will either be less likely to push the service or they won’t adopt it at all.
And delivery demands by franchisors are coming on top of numerous other investment requirements that many of them make of their franchisees: They demand remodels, push heavy discounts, repeatedly add different products that make operations complex and now want operators to add a less-profitable service.
I do not agree with Wiederhorn that delivery is incremental and, even if it is, over time that incrementality will disappear. But he’s right that it could potentially expose chains to new customers, the services do provide the technology and make things easier on the system. And systems need to keep studying the service as a potential defensive move.
So it’s not as if franchisors are wrong in pushing the service. Customers clearly want it, and that makes it worth pursuing.
But to do this right, franchisors should be mindful of their operators’ profitability.