Australia: Third party delivery services in franchising

The growing prevalence of third party delivery services, such as UberEats and Foodora, presents both great opportunities and new challenges for retail food franchisors.

There are many key ingredients in creating a successful franchise system, none more important than the need to deliver a compelling customer proposition. If a brand doesn't inspire customers to embrace its offering, success will be elusive. Increasingly, customers are demanding convenience and accessibility. Against this backdrop, it is impossible to ignore the potential of third party delivery services, provided the associated issues are properly worked through.

Franchise systems have historically led the way in home delivery, with sophisticated and well-established delivery services being a cornerstone of many large franchised businesses. However, the recent proliferation of third party delivery platforms has unlocked the home delivery market for smaller players and for food categories previously unseen in the delivery space.

The opportunity for franchise systems

Leveraging a third party delivery service can help franchisors open up a new customer base and access their existing customers in a new environment. It may present a great opportunity for systems to tap into a new revenue stream with minimal (if any) capital expenditure at head office or franchisee level.

While the opportunity will be attractive to many franchise systems, committing to this new channel and executing it effectively will require careful planning and decision making. Franchise systems rely on strict processes, controls and compliance monitoring to deliver a consistent customer experience. Outsourcing a crucial aspect of the business system will present many legal, strategic and operational challenges, some of which are addressed below.

Strategic considerations

There are a myriad of strategic considerations to take into account when deciding whether to embark on a third party delivery program. At the outset, you should consider the following questions, among others:

  • Customer proposition – Is there a compelling reason to offer a third party delivery service? What are the benefits to the customer, franchisees and franchisor?
  • Competitor analysis – Will you be at a competitive disadvantage by not exploiting this trend?
  • Platforms – Should you partner exclusively with one provider or engage with multiple partners? Which partner(s) align best with your brand and offer the best service?
  • Customer experience – How do you deliver a quality customer experience through this channel, given that you have less control over the customer interaction element?
  • Brand positioning – Could the initiative compromise the perception of your brand?
  • Pricing – Will you implement a different pricing structure for delivery orders to recover the commission overheads? If so, how will customers perceive the inconsistency?
  • Allocation of orders – How will orders be allocated between nearby franchisees?
  • Menu – What products are suitable for delivery without compromising quality, and will you develop a tailored menu for the delivery program?

A careful strategic analysis, including the above elements, will help determine whether it is in the best interests of the network to proceed with a delivery partnership, and help define the features of the program.

Legal considerations

Before proceeding with a delivery program, it is important to first consider a number of threshold legal issues, including those set out below.

  • Conducting business online – Consider whether your franchise agreement gives you full control over online activities, so you can dictate which providers are approved and how the service is implemented and operated. Otherwise, it may be necessary to take a collaborative approach with your franchisees.
  • Disclosure document – Review your disclosure document to ensure that it caters for potential use of delivery programs, or at least does not contain any statements that are inconsistent with the use of such a service.
  • Exclusive territories – Consider the impact of any exclusive territories on the allocation of orders and delineation of delivery zones. Unless specifically carved-out from the exclusive territory clause in the franchise agreement, you may be obliged to ensure the delivery zones do not interfere with a franchisee's protected area.
  • Royalty calculations – Where a franchise agreement contemplates a royalty based on a percentage of gross sales, careful attention should be given to the definition of gross sales and whether the royalty is payable on the total amount of the sale, or the net proceeds after deduction of any commissions or fees. If you agree to a variation of the standard royalty mechanism, you must be careful not to undermine the integrity of the royalty formula, by confining the policy to delivery sales only.
  • Food safety – Franchisees will remain primarily liable for compliance with food safety and labelling laws in respect of delivery orders, in largely the same way as on-premises consumption. However, the delivery process adds additional complications to ensuring the safety of the food, so you should determine the acceptable delivery radius, and preparation and packaging rules.
  • Liquor licensing – If you approve the sale of alcohol using the delivery service, you should ensure that each franchisee is authorised to sell take away alcohol under its liquor licence.
  • Customer/data ownership – When analysing whether a particular delivery program is suitable, consideration needs to be given to whether you will own the customer and the underlying data or the delivery program.

Operational considerations

The operational considerations will be extensive, and unique to each individual system. The following questions should be considered early in the process:

  • Food quality – What is the maximum delivery radius? Does the food have a quality window which could be at risk if a delivery driver is delayed?
  • Packaging – Do you need custom packaging to protect the quality of the food? Does your packaging contain any required nutritional information or allergen labelling?
  • Kitchen processes – Do you need to make any changes to kitchen processes to ensure the timely preparation of orders? Can your franchisees handle an increase in volumes at peak times?
  • Technology – Will there be a need to invest in new technology to receive and process orders? Will your point of sale software need to be updated to cater for online orders?
  • In-store collection – Will the collection of orders by riders or drivers cause disruption in your stores? Will this negatively affect the in-store customer experience?
  • Complaints – Do you need to implement additional complaints handling process?
  • Compliance – What additional audit and monitoring programs should be put in place to ensure compliance?

Tips for effective implementation

In summary, the following steps would be prudent in considering any delivery service:

  1. Carefully consider the strategic, legal and operational consequences.
  2. Review your franchise agreement and disclosure document for roadblocks.
  3. Update your template franchise documents (if necessary) to cater for the program.
  4. Prepare specific terms and conditions for franchisee participation.
  5. Obtain a signed acknowledgement of the terms and conditions from each franchisee as a pre-condition to participating in the delivery program.
  6. Add comprehensive policies and procedures to your operations manual.
  7. Implement a robust compliance and monitoring program.

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