Opinion piece by Eric Parker
The “Covid” lockdown has significantly accelerated the impact of internet sales/delivery services.
This has led to a big question:
How should franchise royalties be paid in the instance of using a third-party delivery service i.e., should royalties be charged on gross sales or net sales?
Here are our thoughts:
- The customer places the order with the delivery service.
- The delivery service places the order with the franchisee.
- The delivery service picks up the order and receives a cash slip for the full amount. At this stage, the franchisee does not receive any income. The cash slip is just a pro-forma invoice.
- The delivery service delivers the product to the customer and is paid the full amount into the delivery service’s account.
- The delivery service reconciles all the orders and pays the franchisees a lump sum, usually on a weekly basis. The delivery service subtracts their fee, normally about 30%, before they pay the franchisee.
So, in terms of sales, the franchisee does not receive the amount rung up at the point of delivery but receives 30% less. The question is: should the franchisee pay royalties on the amount rung up or on the amount received from the delivery service?
In some cases, the franchisee does increase the price of their products by around 10 – 30% on the delivery apps but does that make up for the fees of 20 – 30% through the third-party delivery service company or do they lose out? The franchise will still pay the royalty on the amount received from the delivery service
While restaurants have the discretion to decide how much they charge for their food, they are encouraged by the delivery companies to use the same pricing on the third-party apps as their in-store menu items. With price being a huge factor in any purchasing decision, how easy is it to charge as low a price as possible to incentivise consumers to make orders and to not lose out on profit margins?
Normal menu price: R69.90
Price through the delivery app: R86.90
The franchise will ring up R86.90 but only receive R60.83 and therefore pay royalties on R60.83 assuming the above prices are including VAT.
This is how we think this situation should be handled:
1. The point-of-sale system should be programmed to show:
- Total sales including VAT R ______
- Sales excluding VAT R ______
- Sales over the counter R ______
- Sales to delivery services R ______
- Cash sales and card sales R ______
A cash recon would be total sales less sales to delivery services.
2. The franchisee receives their income less ± 30% from the delivery service. This should be reconciled to the sales recorded on the point-of-sale system, when it receives the recon from the delivery service.
3. We believe the franchisee should pay the royalties on the amount received from the delivery service, not the amount rung up prior to the delivery service fee. We say this because the franchisee is under pressure to cover the ± 30% delivery fee, if you add the ± 6% royalty to it, it will mean the franchisee must pay ± 36%.
4. If you agree with our view on the matter, we would need to make amendments to franchise agreements.
5. An option that will need to be reviewed is where the franchisee does their own delivery. It is different if the franchisee does their own delivery. In that instance, the franchisee receives the full amount and the delivery cost becomes a cost below the gross profit level (expenditure).
We have put this out there because we believe it to be a key issue.
What are the VAT Implications of the Delivery Service?
What is happening?
Do you have insight or comments on how this is handled? Are the delivery services paying the VAT that they receive?