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McDonald’s works to make delivery profitable for franchisees

The company is negotiating lower fees from Uber Eats and might bring in a competing provider.
Photograph courtesy of McDonald's Corp.

McDonald’s is negotiating with its franchisees and its delivery partner Uber Eats to reduce commissions and provide some rent and royalty relief as the company works to make the rapidly growing service more palatable to its owner-operators.

Sources tell Restaurant Business that Uber Eats has agreed to reduce its commissions on delivery charges to as low as 15%. That would make it among the lowest delivery rates in the industry, as third-party providers typically charge commissions equal to 15% to 30% of an order. 

McDonald’s could also bring in another delivery partner to provide the service, effectively ending a nearly 2-year-old exclusive arrangement between the Chicago-based burger giant and Uber Eats.

McDonald’s is willing to give operators some royalty or rent relief on delivery orders in restaurants where the service is especially popular. For instance, restaurants that meet certain delivery thresholds could pay a reduced rent rate on those orders.

Many of the changes are in flux and still being negotiated, sources caution.

The effort is coming as franchisees for a more equitable deal on the rapidly growing service. Operators began pushing back on delivery last year, following two years of shrinking cash flow and growing franchisor demands for remodels and other changes.

While percentages vary, some McDonald’s restaurants get as much as 10% of their sales from delivery, Uber Eats said in parent company Uber’s IPO documents.

“As McDelivery continues to evolve, we’re committed to partnering with our franchisees to give them the support they need to continue to grow the experience and business priority that’s important to our customers and our brand,” McDonald’s said in a statement to Restaurant Business.

The company would not comment on the possibility of a new delivery partner, but Bloomberg reported earlier this week that McDonald’s was negotiating a more favorable deal that included an end to its exclusive relationship with Uber Eats.

The lower commissions come as Uber Eats’ parent company gets ready for an initial public offering that could value the company at more than $80 billion. That offering, however, comes amid concerns that the company is struggling to generate profits off of its delivery program.

In a statement, an Uber Eats representative said the company’s contracts with restaurant chains are “confidential.”

“It would also be speculative to share anything regarding ongoing discussions we’re having with Uber Eats restaurant partners,” the company said.

Franchisees in the McDonald’s system began pushing back against delivery last year as they formed the National Owners Association (NOA), the first independent franchisee association in the brand’s long history.

Operators have grown concerned about shrinking cash flow. McDonald’s CFO Kevin Ozan said earlier this year that operators’ average cash flow has shrunk by about $30,000 per store over the past two years.

In an NOA survey earlier this year, the vast majority of operators said McDonald’s should renegotiate its deal with Uber Eats—while also overwhelmingly agreeing that they should offer the service.

The message was that delivery is important to have, but that the economics at the moment do not work because of the commissions charged by deliver partners. One presentation to operators suggested that they would have to charge 41% higher on delivery charges to make up for the lost profits.

Operators also bristle at the franchisor’s charges on delivery orders.

Thus, if a customer orders $50 worth of McDonald’s food for delivery, Uber Eats, at a 20% commission, would charge $10—netting the restaurant $40. But McDonald’s would charge both rent and royalties on the full $50 order.

McDonald’s charges both fees as a percent of revenue. Royalties are 4%, and rent varies but can be as high as 15%. Thus, that $50 order generates just $30.50 for the operator. At a time when labor costs are rising, that is not profitable for the franchisee.

Reducing the fees would net operators another $2.50 on that order.

Many restaurant chains are likely to watch McDonald’s strategies closely, given the chain’s size and the rapid growth in delivery’s popularity.

Yet concerns about the profitability of the service have many looking for solutions to save profits as more sales shift to delivery. Operators could push back on some of their charges, while also convincing providers to let them charge higher prices on such orders.

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