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Why restaurants missed their chance to get better delivery deals

Chains should have negotiated better rates with third-party providers, says RB’s The Bottom Line. It may be too late.
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Delivery has become a point of contention between McDonald’s and its franchisees, as operators say that the delivery costs hurt their profits, thanks to the fee they have to pay to Uber Eats for those orders.

In a survey by the National Owners Association, McDonald’s franchisees overwhelmingly support having the service. But the vast majority of them are unsatisfied with the economics and believe the company and the delivery provider should negotiate a better commission.

The dispute brings to mind one of the industry’s potential failures as the delivery trend has taken hold: In their rush to offer the service, chains might not have done enough to demand better rates from the providers while they had the opportunity.

And that opportunity might have passed.

Let’s go back to 2017. Delivery was growing rapidly, and it was clear that consumers loved the idea of having more options for food brought to their home. While a few chains opted to jump in with both feet, for the most part, companies were cautious in their approach to the service. But then Panera Bread opted to start its own delivery service, and McDonald’s partnered with Uber Eats to add delivery. “The consumer said, ‘Hey, if they can do it, why not you?’” said Melissa Wilson, a principal with Restaurant Business sister company Technomic. 

Restaurant chains rushed to add the service, which is increasingly mainstream. Last year, according to Technomic, the five largest delivery providers generated $10 billion in sales, up 55% from the prior year. 

If they maintain that level of growth this year, the combined delivery providers would generate roughly the same sales as Starbucks.

Third-party providers charge restaurants a commission of about 15% to 30% on sales. Obviously, these providers have to make money to pay for drivers, and it’s a cost the restaurants don’t have to pay themselves.

Yet as these providers emerged in 2015, they needed chains to get more critical mass so they could grow. At the time, the chains had more negotiating power with third-party providers. It doesn’t appear as if they took advantage of that.

“We have said early on in our first study in 2015 that brands have strong negotiating power,” Wilson said. “Players needed brands to get critical mass. The commissions still seem to be pretty steep.”

The question now is whether brands should rethink their deals with delivery providers—or whether they can.

Third-party players have evolved quickly from mostly regional entities into big, nationwide providers. 

“They no longer need the big brands to grow,” Wilson said.

As such, that could increasingly give them the upper hand when it comes to those commissions. They’ve largely established themselves. 

And indeed, the most popular food and drink mobile apps right now are all third-party providers and not actual restaurant chains. There’s a certain level of demand for the aggregators now that they’ve reached critical mass.

The providers also have to start earning profits, which could keep them from renegotiating any commissions. The tight labor market certainly isn’t helping matters.

But, Wilson said, the large delivery providers are increasingly competing with one another for market share, and that could give them some incentive to keep chains happy. 

“They are in a more competitive space with one another,” Wilson said. What happens if a chain or two decides to roll out its own delivery service, something Wilson believes is more likely now that demand has proven out. “What strategic approaches could they use to combat that and maintain their stickiness?”

But it’s easier for consumers to have a single app with multiple restaurants on their phones rather than numerous restaurant-specific apps. In other countries where delivery is more mature, the aggregators have the market power to demand certain commissions from restaurants.

The same thing could be happening in the U.S. 

“The danger is, this is how consumers want to order,” Wilson said. “Consumers have gotten used to these apps.”

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