A Night of Money, Mansions and Mexican Food Showed Us How Delivery Could Reshape Franchising
Someone in Madison, Wisc., has conjured Greek food. They went to MrDelivery.com, picked their local Greek restaurant and made their order. That information then zipped off to a centralized data center in South Africa (long story, hang on), which acted like a control tower. It notified the Madison restaurant, then located the closest delivery driver, calculated a guaranteed delivery time for the customer and sent directions to the driver’s phone. And then the driver picked up the food, zoomed toward the customer’s house and ran into a problem no algorithm can solve: The addresses on some older houses are small and often hidden in shadows.
That’s why Emin Buzhunashvili, owner of the local Mr. Delivery franchise, is now leaning out the window of his Jeep Cherokee in single-digit temperatures on a winter night, shining an LED flashlight at the Victorians along Terrace Avenue, trying not to beam anyone’s windows. He gives up, pulls over and calls the customer -- because, wouldn’t you know it, sometimes a ring from a block away is more efficient than a global data operation. The woman who answers directs him (and her Greek salad and gyro) to a large mansion divided into apartments. Its driveway faces a different street. Problem explained.
A former professional soccer player and men’s clothing boutique owner in his native country of Azerbaijan, Buzhunashvili moved to America as a refugee in 1996. Now he is middle-aged and a bit paunchy, but he still carries himself like an athlete, with a quick measured pace. He steps out into the cold and hands over the food, briefly chitchats about the weather, then hustles back to the car. “See, see, I talk to the customers a little bit, they get to know me,” he says. “Then they call again.”
For decades, delivery was a straightforward affair. You called, say, your local Chinese restaurant, ordered a heap of lo mein and one of the restaurant’s drivers brought the noodles to your door. But most restaurants told you to put on your pants and pick up the food yourself. That’s because it didn’t make economic sense to employ a delivery person. Some experimented with third-party delivery companies, which would serve as middlemen and deliver food for them. In the late ’90s, a company called Kozmo made a huge splash by doing this nationwide -- delivering basically anything from anywhere, whether it was a hot meal or a Snickers from 7-Eleven. When the company went under in 2001, after only four years in business, it became a cautionary tale. Perhaps, it seemed, the economics of delivery just didn’t make sense.
But in the past couple of years, the demand for delivery has spiked again -- fueled by customers who, in large part thanks to Amazon Prime and the Uber-fication of everything, are now trained to order online and expect instant gratification. Lots of third-party delivery companies have rushed in to meet this need, and they may seem interchangeable to most consumers: After all, if Delivery.com, Seamless, Orderup and others all deliver the same food from the same restaurants, what’s to differentiate them?
Behind the scenes, delivery is going through something of a grand experiment. Morgan Stanley estimates that consumers spend about $30 billion per year on restaurant delivery, with more than half of that coming from pizza. But the total potential market for delivery, it reports, is actually $210 billion. Many different business models are now competing for that very rich pie, with the result having a potentially profound impact on franchising. And one of the best ways to understand it all is to hop in a car with a franchisee like Buzhunashvili -- spending a night with food as the most important passenger, and seeing what the future of delivery might look like.
Buzhunashvili isn’t usually behind the wheel. He’s the boss, after all: His partner bought this Mr. Delivery franchise in 2008 (then called Straight2YourDoor), joining the 24 other units across the U.S. Buzhunashvili hired dozens of drivers who sign up for weekly shifts, some for just a few hours, others for almost full-time work. His team now delivers from 175 chains, franchises and local restaurants around Madison in three service areas, picking up and dropping off 1,200 meals per week. But tonight, one of his drivers is sick and Buzhunashvili doesn’t want to fall behind during the dinner rush. More than 100 orders will be coming in over the next two hours. So he left the office, jumped in his car, cranked up the local Jamz station and logged into the Mr. Delivery app, ready to deliver hot meals to customers’ doors.
If a customer had placed an order through another service, they’d still get a hot meal, but their money would have followed a different route.
There are three main models of delivery services. Mr. Delivery represents one type: It uses self-employed delivery drivers who pick up and drop off meals from partner restaurants. (DoorDash and UberEats do roughly the same.) Typically, drivers for these brands pocket all or part of a delivery fee, which usually ranges from $4 to $8, plus any tips. The platforms and franchisees make their money on a transaction fee, which comes from the restaurant.
Then there are delivery portals like Grubhub and Delivery.com, which serve as a single ordering platform for restaurants that have their own delivery services. Order from your local Indian place via one of these sites, and the guy that brings the saag paneer will be an employee of that restaurant. That business model doesn’t involve a delivery fee, but the online platform does take a transaction fee, eating into the restaurant’s cut.
A third model is the “deliver anything” brand popularized by Postmates, which allows customers to order from any restaurant or retail shop. Users place their orders through the app, then a Postmates driver more or less does the shopping for them -- standing in line somewhere, picking up a meal or grabbing cold medicine and condoms from Walgreens. Postmates lets the courier keep 80 percent of a delivery fee that is based on the difficulty of the task plus any tips, while corporate takes a 20 percent cut.
But the lines between those models are beginning to blur, as many companies are now moving in on each other’s territory. Grubhub, for instance, has begun buying up delivery companies in the past few years, even merging with Seamless, and now contracts with its own delivery drivers in more than 50 markets. Postmates has started partnering with restaurant brands and franchises like 7-Eleven so orders are ready and waiting for couriers -- no need to wait on line.
Meanwhile, many of the larger companies are flush with venture capital money, which allows them to endlessly experiment. Grubhub raised $192.5 million when it went public in 2014. DoorDash raised $127 million in capital in 2016. Postmates got $141 million last October (though has yet to fully solve its notorious problem with high fees; just Google around for horror stories of $20 burrito deliveries).
It’s fair to assume that, eventually, some losers will drop out and a few winners will emerge. But for now, delivery companies are in an interesting stalemate -- because neither consumers nor restaurants are willing to pick a favorite.
The chain BurgerFi, which has almost 100 fast-casual units in the eastern U.S., exemplifies the problem. Its COO, Steven Buckley, would prefer to use his own store employees for deliveries -- but when the company tried that six years ago, it found the logistics too complex and expensive. In lieu of that, Buckley would prefer to work with only one delivery vendor -- but he can’t do that, either, because no one company covers all his territories. So the burger chain is forced to do what most restaurants do: It uses multiple delivery services and spends a lot of time vetting new ones. That’s not ideal, says Buckley. “It’s a distraction from the core business, which is cooking great food,” he says. “If delivery is not done well, it reflects badly on our brand, so we treat it seriously.”
This creates a big opening for guys on the ground, like Buzhunashvili, who can build brand loyalty one customer at a time. And anecdotally, at least, he’s doing just that. He pulls up stats showing one customer who has ordered 168 times in the past 10 months, or at least every other day. Several others are in triple digits. And currently he’s arriving in front of a large McMansion on the outskirts of town with $125 in Mexican food they just ordered. “These are the first people I ever delivered to, seven years ago,” Buzhunashvili says, almost reverently. “Every day for almost five years they ordered. All types of things. Twice on Saturdays and Sundays. Now, I don’t know why, they only call a couple times a week. Maybe they are getting healthy.”
Emin Buzhunashvili is, in the grand scheme of delivery, a very small guy. He’s in one metro area, and his company, Mr. Delivery, has a tiny footprint. Even if it were to successfully double its geographic reach to 48 cities within the next year, that would put it at, say, roughly 8 percent of the cities Seamless is in right now. But to Mr. Delivery COO Jason Moldoff, the company holds one big advantage over many of its competitors: It is a franchise.
Seamless, Delivery.com, UberEats, Postmates -- these operate by different models, mostly as single companies that open offices in new markets and appoint managers to grow business there. But in Moldoff’s admittedly biased view, franchising is better suited to thrive in local markets. In 2006 he founded Straight2YourDoor, which then merged with a South African company (which explains the global data center) to become Mr. Delivery in 2013. And delivery, he argues, is more blue-collar than high-tech. “Drivers are difficult to manage, and you need someone local who can show their face at these restaurants,” he says. “Franchising allows you to do that. This is a manual business. You can’t automate a driver or a customer.”
Indeed, Buzhunashvili is hands-on about everything. He’s in charge of signing up restaurants, calling customers to check on food quality, handling complaints and vetting drivers. The harder he works, the more money he makes: That’s franchising. And when there are problems, he can react quickly without corporate red tape. Buzhunashvili has had to stop working with a few local restaurants because they were giving him a bad name. One couldn’t get its timing right, so drivers burned precious minutes waiting for orders to be done. Another started serving subpar food. “I don’t know what they did, changed their recipes or something, but the fries were always soggy, and so were the buns,” he says. “I’m the one who has to refund the customer when that happens. I can’t work with a restaurant if it loses me money.”
And Buzhunashvili is finding a lot of business with other franchises. He has signed up IHOP, Burger King, Noodles, Quizno’s, Dickey’s and Chili’s, to name a few. While some franchises, like Domino’s and Jimmy John’s, were built with a delivery fleet at the heart of their model, retroactively adding a similar fleet to, say, McDonald’s would cost franchisees millions of dollars with no guarantee of a sales bump. That means delivery services could make a lot of money with franchises -- and when a restaurant franchisee meets with a delivery franchisee, the theory goes, they may understand each other better than a manager who reports to Silicon Valley.
But even if that connection isn’t made, the boom could certainly go the other way: Food franchises stand to make a lot of money as delivery becomes more popular. “We’re still in the early stages of delivery in franchising, but I can see this becoming a much more common way of ordering food,” says Marty Ferrill, president of the Philly Pretzel Factory, a 159-unit brand that sells soft pretzels, pretzel dogs and other snacks. He recently began testing out delivery with -- well, it wasn’t another franchise. It was UberEats. Over the past six months, some of his test units have seen three to four extra delivery sales per day, while others are doing 10. All of these are sales from customers who wouldn’t have otherwise ordered, making the service worth it. “I wouldn’t say it’s a home run,” Ferrill says, “but there are a lot of singles being hit, which is great for franchisees,” and could portend more business to come.
In fact, a franchise delivery happens to be one of Buzhunashvili’s last of the night: It’s from Five Guys, and to a family that uses Mr. Delivery several times a week. He gently taps on their window, because last time he was here filling in for a driver, he rang the doorbell and accidentally woke up a baby. A man comes to the door and greets him warmly. Even after seven years of this, Buzhunashvili remains surprised by how ingrained his service has become in people’s routines. “There are people downtown who will order from restaurants on the first floor of the building they are in,” he says, back in the car. “We just carry the food up a few flights of stairs for them. I think that’s crazy. But that’s what they want.”