Fast food needs speedy delivery, but this can be a financial burden on a franchise already working to tight margins.
Delivery is now a fundamental element of Australia’s retail scene, particularly in the food arena. Almost two million Australians use meal-delivery services such as Foodora, Deliveroo, Menulog and Uber Eats, according to research by Roy Morgan.
Younger Australians are leading the charge and embracing these meal-delivery services within the so-called gig economy: in fact 16.1 per cent of millennials/Gen Y, between 28 and 42 years old, have eaten a meal delivered by such a service in an average three months.
In comparison, the older population is significantly less engaged with meal-delivery services with a take-up of just 4.5 per cent by baby boomers and 3.6 per cent by pre-boomers, aged 58 and older.
The report points to the importance of location with, unsurprisingly, urbanites three times more likely than their regional counterparts to use a delivery service.
The Metrotech community of single, young, well-educated, innercity professionals is the major group using meal delivery, accounting for nearly a quarter of the business (22.5 per cent). High-income families (11 per cent) and young, average Australians (10 per cent) follow.
But delivery services are a challenge for food franchises, says Roy Morgan CEO Michele Levine. On the one hand, businesses that provide an in-house delivery option face economic disadvantages. Fast-food billionaire Jack Cowin, chairman of Domino’s Pizza and owner of Hungry Jacks, has hit out at delivery businesses in the gig economy and called for standardised pay and conditions across the industry.
Cowin cites the disparity of Deliveroo, Foodora and Uber Eats paying contractor wages without benefits while fast-food chains such as Domino’s pay award wages.
In an interview with ABC’s The Business he described the “gig society” as where people contract to do deliveries. “They don't get employee benefits, they don't get penalty rates, they work on a contract rate that is a lot lower than wages.”
Cowin acknowledged that some franchisees within Domino’s do use contracted delivery firms as part of their business, but rejected suggestions these franchisees should stop third-party deliveries.
“What I’m saying is it should be a level playing field in which everyone, whether you’re a part-time contractor or a part-time employee in a store, has the same benefits.
Cowin believes there should be a government investigation into the wage disparity.
According to Internet Retailing, food-delivery platforms are emphasising the flexibility contract work offers their riders, as parliament considers a
Bill to extend workplace protections and benefits to workers in the “gig economy”.
Deliveroo country manager Levi
Aron says people choose to work in the gig economy because of the flexibility it allows. “Across Australia, people are choosing work that allows them to earn well while providing the freedom to choose when, where and whether to work,” he told Internet Retailing.
Analysts at IbisWorld last year estimated that food-delivery platforms drove a 2 per cent revenue increase in Australia’s restaurant industry in 2017-18, playing a critical role in bringing e-commerce functionality to a still mostly bricks-and-mortar business.
In fact the online food delivery industry currently worth $600 million could reach a $2.4 billion turnover by 2025, according to Morgan Stanley.
“Uber deliveries may seem fantastic for the customer, but what is the business and social reality?” asked MD Peter Buckingham of geologistics firm Spectrum Analysis.
He points to Antony Crowther, New York Minute Burgers MD and a 20-year QSR-industry veteran, who has argued that the massive uptake of Uber Eats represents the single biggest industry shake-up of the past 50 years.
“Running an expanding gourmet burger franchise, Crowther knows the Uber economy means businesses must change their models or perish,” says Buckingham.
John Saadie, from Order Up agrees that delivery apps are putting businesses under pressure. In Internet Retailing, Saadie said “It has been noted by several restaurants that the commissions taken by food delivery apps are simply not sustainable.
“While the four major apps – UberEats, Menulog, Foodora and Deliveroo – are reluctant to disclose the official commission or surcharge amount, Menulog put up their hand and declared a 12 per cent commission rate plus a 2 per cent processing fee,” he said.
“The other problem lies in the fact that food retailers are often informed of the exact terms of agreement only once they’ve started the sign-up process.”
Some restaurants using Uber Eats claim delivery commission can ramp up to about 30 per cent of an order, however the company denies this.
A statement from Uber Eats reads: “Restaurant service fees give restaurant partners access to a large network of delivery partners and contribute to 24/7 customer and operational support, as well as app development, marketing campaigns and business insights. Uber Eats can be a cost-effective channel for reaching an entirely new customer base.”
Buckingham points out that delivery payments can be a growing expense whittling away at the net profit, and there is also a drop in the net profit to sales ratio.
“In the meantime, you are continually under pressure for rental increases, as your lease has set annual increases well above CPI. Labour costs are rising, but if you don’t offer delivery, will your sales drop?”
The incremental business gained by food franchises may be lost as the spread of food-delivery services extends, he suggests, diminishing a franchisee’s market share. That is effectively wiping out any competitive advantage.
But can a franchisee afford not to offer such a service?
Saadie believes that while food delivery services may work for some, they may not be right for everyone. “For many restaurants, fear is driving their decision to sign-up to food delivery services. If you’re not online, do you really exist? As food delivery services grow, will restaurants be left behind?
“What restaurants should be doing is working directly with consumers to eliminate the middleman. Ultimately, it’s up to the industry to set the pace of change,” he suggests.
So what are the options? Buckingham raises two possibilities:
1. Franchised outlets that occupy a smaller footprint with fewer in-store seating options, a smaller rent, and a business re-aligned to focus on delivery orders; 2. The introduction of so-called dark kitchens, non-retail spaces in lower-cost industrial areas from where services can pick up and deliver orders.
“The black kitchen would need to work on a set of economics knowing all the business will be paying the Uber delivery charges, but a low-rent, tailormade environment may be able to handle the Uber sales for about a 5km radius area quite easily.”
There is no doubt food delivery is a game changer. It is an issue that needs to be addressed, and potential food-industry franchisees need to quiz their prospective franchisor and other franchisees in the network over the real costs and advantages.
They don't get employee benefits, they don't get penalty rates, they work on a contract rate that is a lot lower than wages.