Financing a franchise with a 401K
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By Christina D. McAmis, Esq.
For the past five plus years, third party companies have been developing apps that have begun to erode franchisees’ revenue and customers’ brand loyalty. With the creation and adoption of Uber Eats, DoorDash, Grubhub and other delivery apps, Quick Service Restaurant (QSR) franchisees have lost revenue as clientele began ordering for delivery instead of coming in to pick up their orders. Delivery services charge not only the consumer but also the restaurant a fee for their services, these fees paid by the restaurant are typically between 20% and 40% of the menu price. This is a significant reduction in profit in an industry with already tight margins. As technology continues to develop and more private third party companies offer services the franchise industry will face continued stress as profit is lost to these companies.
Customer brand loyalty is eroded as customers can pop on an app that gives them a smorgasbord of restaurant choices, and the restaurant has virtually no contact or chance to interact with the customer. QSRs have little opportunity to wow a customer with top notch customer service when the customer orders through a delivery app. Nor can the QSR guarantee the quality of the product at the time it reaches the customer. There is also the question of which company has the rights to the customers’ information, information about how often they order, what the average ticket price is, or where the customer is located. If the delivery company owns that data, the QSR doesn’t have access to the data that allows them to tailor and refine their marketing efforts. If the third party delivery company gains ownership of the customer list and information, QSRs are giving up a lot more than profits to the gig economy.
You may be saying “I’m not a QSR franchisee/or how is all this affecting me?” The truth is that the app market is growing with more and more new apps every day. Users are more and more frequently looking to research the purchase of a franchises through cell phone apps. Just search the app market for “franchise” and see the many options available, even Franchise Gator has gotten on board with an app of their own. Whether you are in the restaurant industry or not, technology is coming, and many times from third party providers, who will offer your customers/clients services that you aren’t. You will either be contracting with them or developing against them. Which choice is right for you? Read on, for options and tips.
It seems, truly as though tech is attacking. Now that we know a bit about what is being attacked, let’s discuss what can be done about it.
If you are a franchisor:
As a franchisor you have several opportunities to assist your franchisees. Here are a few options for you.
1. If you are going to use a third party company to offer delivery or other service:
a. Negotiate and negotiate fiercely. You have the advantage of negotiating a deal with the delivery company that will give them the potential of a nation-wide account. You have a much larger volume of services you are negotiating for and therefore are in the best possible position to negotiate. To get the service fees even lower, offer the chosen third party company an exclusive contract to be your system’s approved supplier for delivery or the service they offer.
b. Help your franchisees. You as the franchisor can choose the definition of Gross Sales in which your royalty percentage is based upon. You can choose to base the percentage off of the money received by your franchisee and not the menu prices of the items sold when using a third party delivery/service company. This will help the franchisees realize as much of the profits as possible on the sales made through the third party provider.
2. If you are open to investing in the creation of an app for your system:
a. Find an app development firm that can craft an app for your system. When developing an app consider ways of making the app more appealing than ordering through the delivery company’s app. Reward/Loyalty programs, features, coupons, and even mini games are a great way to garner users. Extra utility is another great option, because no one really wants to have a million apps installed.
b. Monetize the app, once developed you can use cross advertising to help defray the cost of creation.
c. Use the app for more than just a delivery/takeout ordering app. You can have a franchisee portal where they can send messages to the franchisor’s support team, you can have the app offer franchisees an area where there are trainings for their employees, and even gamify those trainings to offer employees trophies, unlocks, and bragging rights!
d. Think of times your customers/clients are most likely to use the app, how about a mini game trying to do foam art while they wait in line for their cappuccino? Be creative, be true to the culture of your company. If you are silly and light hearted, your app should be too. If you are out to make a difference in the world, I bet you can create an app for that! If a portion of your profit goes to a non-profit wouldn’t it be great to get updates from that non-profit right in your app? You bet it would.
If you are a franchisee:
Reach out to your franchisor and let them know about your experience with the delivery/third party companies, the good, the bad, and anything in between. Let them know in numbers, what the profits are from those companies. Your willinggness to share this information allows the franchisor to realistically see, plan, and develop their own app or strategy for negotiating a better deal with those suppliers. Remember you spent a good chunk of money to buy into their system because they proved to you it worked, help them with the info they need to ensure they can continue to make it work!
In Conclusion:
Ask yourself, is there an app for that? If the answer is yes, ask how that app will impact the system/franchised business, and could you develop something better. Can you build off of what you have seen and develop something that can garner brand loyalty or something that is interesting enough that people will show their friends the app? Growing brand awareness is arguably more than half the battle. Is there a mini game app that you can create to help keep customers happy in line or when waiting for their order? Fantastic – go – create – and build your brand!
About:
Ms. McAmis is a franchise Attorney and CFE Candidate. She is proud to be part of the Shelton Law & Associates Franchise Team. As part of the team she works alongside clients, offering guidance and support as they achieve their franchise goals.
Shelton Law & Associates (“SLA”) Attorneys have 50+ years of business consulting, franchise and trademark experience. Their knowledge facilitates an understanding of a large variety of businesses, services and technologies. They help businesses protect their Brands through Trademark, Copyright, and Business contractual transactions. These services allow SLA clients to “Expand their Brand®” through Franchising. For Franchisors, SLA provides full outsourced in-house counsel.
Shelton Law & Associates additionally works with entrepreneurs buying franchises by assisting with Business Creation, Industry Evaluations, Franchise Disclosure Document Review, Fairness Factors, Opinion Letters and Negotiations.
For more information or to schedule a customized consultation for your business you can write to franchising@SLA.law or call (866) 99-FRANCHISE.
