New York Minute

 

New York Minute: Delivering profits with Uber Eats

As a small business owner with over 20 years’ experience in the quick-service restaurant (QSR) industry, I know how daunting starting your own business can be. Betting the farm (or in most cases the family home) on the success of a retail food outlet can be terrifying, and with the current upheaval being experienced by the food and beverage industry, it should be. I say that because the QSR industry and the franchises that operate in that space are scrambling to survive the single biggest shake up the industry has ever experienced.

The rise of the mobile delivery app

Until very recently, QSR operators needed to keep a close eye on expenses such as wages, cost of goods, and overheads, but these factors have largely remained stable and predictable. Therefore, the main job of any franchisee was to ensure that they were generating enough sales which, if they were, would yield an industry-standard profit margin of between 10 per cent to 20 per cent. That’s why successful franchise brands have traditionally invested heavily in large restaurants located within high profile but expensive locations such as shopping centres. In the past, this model has increased brand exposure and, by extension, profit margins. Beyond that, the main thing that kept people like me and other small business owners awake at night was monitoring the overall health of the economy and hoping that consumers remained motivated to spend some of their hard-earned cash on a burger or two every week.

However, all that has now changed, and what was good practice and a profitable business model two years ago is now a roadmap to bankruptcy. In a nutshell, this is because of the customers’ preference and the advent of Uber Eats, and other mobile app-based delivery services. To put the scale of Uber’s influence into perspective, I will use a real-world example. Six months after introducing Uber Eats over 50 per cent of our total company sales were being generated via the App, and in some store cases, this figure is now closer to 90 per cent. This is a pretty standard experience for businesses that have taken up the delivery platform, and for those that haven’t their overall sales have unsurprisingly plummeted. While it is not immediately obvious why switching from in-store sales to Uber Eats based sales is a bad thing, this industry transition has left operators with two dangerous and distinct problems. Firstly, empty high profile stores that are costing them a fortune in now wasted rent and overheads, and secondly a massive chunk of their sales revenue being taken via the Uber Eats commission. These two factors combined mean that, while sales have never been higher, restaurants have never been emptier, and profits have never been lower.

Let’s quickly dissect why industry experts have suggested a decades-long business model has been knee-capped when sales are at an all-time high. Firstly, because the traditional business model has emphasised a heavy investment on high rent high profile and large locations, restaurants are now carrying a massive dead weight in the form of huge rents for restaurants that are essentially empty. Empty restaurants and high rent in itself is not the killer; you don’t need an economics degree to know that it’s bad business practice to put 15 per cent to 20 per cent of your sales revenue into paying the rent for a brand-spanking high profile location that customers are no longer interested in visiting.

The biggest issue for current and prospective restaurant operators is the Uber Eats commission. While it is universally understood that customers who order through Uber Eats pay a five-dollar delivery fee in addition to their order value, what customers (and most franchise operators) don’t consider is that Uber Eats also takes up a fee of up to 38 per cent of the sales value from the business. Put another way, from an order of $50, Uber charges up to $19, and your restaurant is left with as little as $31. So overnight, a business model that has evolved slowly and cautiously over decades to balance expenses with sales has been hit with a brand new unavoidable up to 38 per cent overhead. Based on this new metric, you must adapt or die.

But, as someone who loves the QSR industry and has worked in it all my life, I had to fall in love with Uber, and now I have absolutely no hesitation in saying that Uber Eats and similar platforms have also created an unprecedented opportunity for business owners. I think about how Uber Eats has transformed the QSR industry as being very similar to how the invention of the automobile transformed the transportation industry. That’s because smart operators who were involved in the industry saw the introduction of cars as a massive opportunity and quickly repositioned their business to capitalise on this new product. Holden is one such great example, instead of watching their sales of horse-drawn buggy carriages decline, they partnered with General Motors and started making car bodies instead. I think most business people would agree, Holden’s massive success over the last half-century would not have happened had they refused to change with the industry. That’s why at New York Minute we have changed our business model to work with Uber Eats. Delivery is what customers want, and as a QSR professional, I want to provide my customers with what they want. 

But despite New York Minute’s success, small businesses (including franchisees) are going bankrupt in their droves. They have the sales revenue Uber Eats is delivering, but they are unsuccessfully trying to carve a profit via an outdated business model that has not been built to work with delivery partners. I know the pain that this reality has caused the industry and individuals, because I, along with my franchisees, have experienced it ourselves. We at New York Minute decided that we needed to build a new business model designed specifically to be profitable despite a high percentage of Uber sales because our franchisees and our business were hurting. That’s why for 12 months, New York Minute decided not to charge our franchisees a single cent in franchise fees while we designed and implemented a root and branch restructure of our business model. Of course, we are still evolving, as every successful business must do, but I am proud that we have been able to return every single one of our franchises to profitability. More importantly, our current and future franchise partners now have access to a business model designed to not only survive a high percentage of delivery orders but to thrive in this space.

So, with all of the upheaval our industry has and is experiencing, I would offer you the following advice if you are considering investing in a QSR franchise; Ask the franchisor how their business model is designed to be profitable with 60 per cent to 80 per cent of sales coming via delivery apps like Uber Eats. If they can’t give you a quick and convincing answer to this question that is backed up by existing stores and solid numbers, walk away.

Customers have voted with their feet and chosen the Uber Eats delivery model. Though this fact has undoubtedly caused the traditional QSR players much pain, it has also created an unprecedented opportunity for new entrants to make a splash with a modern, updated business model. As a potential investor in your own QSR franchise, the opportunity for prosperity has never been greater provided you pick the right franchise partner.

Antony Crowther is the Managing Director of New York Minute Burgers and a 20-year QSR industry veteran. The New York Minute burger concept was born of founder Antony Crowther’s goal of marrying local Australian produce with traditional New York style street cuisine. Today, New York Minute honours its beginnings by fixing a firm focus on providing the best quality burgers in Australia.