As restaurants struggle, cities look to cap delivery fees






A delivery driver picks up food orders. | Getty Images

A delivery driver picks up food orders. | Alex Davidson/Getty Images

Meet the new bad boys of the tech world: Grubhub and Uber Eats.

The restaurant delivery behemoths quickly took over the limelight of most-disliked tech companies as restaurants pivoted to all-delivery and pickup amid the coronavirus pandemic. The companies’ commissions of as much as 30 percent of an order are quickly drawing calls by local leaders for new laws capping fees.

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Cities are scrambling to regulate food-delivery companies like Grubhub, Uber Eats, DoorDash and Postmates as restaurants struggle to stay afloat while not being able to put customers in their seats. The delivery companies counter that they too are trying to make a buck while paying their own workers — and that having to deal with a patchwork of rules that vary from place to place would be untenable.

City councils in New York City, Chicago, Los Angeles and Boston are considering commission caps as low as 5 percent. Washington, D.C., Seattle and San Francisco already adopted emergency orders that limit commissions to 15 percent. The delivery companies say these caps hamper their ability to offer deliveries and some have cut service or threatened litigation.

These cities are acting amid a social media outcry from restaurants and customers who are tweeting images of bills and invoices documenting the commissions.

“Please, please, please: Delete your delivery apps,” chef Ashish Alfred, who owns three restaurants in Bethesda and Baltimore, Md., begged his followers on Instagram. “Every time you call Uber Eats or Postmates or whoever it is, they are hitting the restaurants that are already hurting for 30 percent. These are multimillion, sometimes billion-dollar companies that don’t need that extra money that could really be helping us out right now.”

In an interview, Alfred said he’s begun lobbying Maryland to impose a fee cap after seeing D.C. institute one. His restaurants have experienced an 80 to 85 percent drop in business since the pandemic hit, he said, and what little revenue is still coming in goes directly to employees.

The commissions are “literally taking food off of people’s table,” said Alfred, who still lists his restaurants on Grubhub despite his his opposition to the apps, this week.

“What are we supposed to do?“ he said. “We can hate them all we want, but I’d rather have 70 percent of something than 100 percent of nothing.”

The coronavirus pandemic has hit U.S. restaurants hard: The industry is expected to lose $240 billion by the end of the year, and 8 million restaurant employees had been laid off or furloughed as of April 20, according to a National Restaurant Association impact survey. A UBS analysis last month predicted that about one in every five restaurants will close permanently because of the pandemic.

With sit-down services banned, many restaurants have turned to take-out and delivery to survive. In Boston, local restaurants are now getting about 75 to 80 percent of their sales through third-party delivery apps, which charge commissions between 20 and 30 percent, said Boston City Councilor Matt O’Malley, who is pushing for a temporary fee cap.

The food delivery apps “are making more and more and more money,” O’Malley said in an interview. “They should be working with restaurants, who are teetering in many cases.”

Four food-delivery companies dominate the U.S. market, though which one is the most prevalent depends on the city. Grubhub, which also owns Seamless and Eat24, accounts for roughly 62 percent of sales in New York City, according to an analysis by Second Measure. By contrast, DoorDash, which also operates Caviar, controls 65 percent of the San Francisco market. Uber Eats, the second-biggest player in many markets, dominates in Miami with 56 percent. Fourth place Postmates has small shares in most cities but is the largest player in Los Angeles.

GrubHub on Tuesday told investors it had a record number of new diners using its service in late-March and April. Uber CEO Dara Khosrowshahi said Thursday the Eats business was doing “extremely well” as more restaurants join and consumers place orders.

But restaurateurs are saying they’re drowning.

Kevin Vaughan, who runs seven Irish bars and restaurants in Chicago that normally employ about 170 people, is down to just two — both limited to takeout and delivery — and has nine employees left on staff. He complains that GrubHub, which has monopolized search results for his restaurants, takes 35 to 40 cents for every dollar customers pay.

“You can’t survive on those kind of economics in the restaurant business,” Vaughn said. “I’m not one for caps. But I really think they are hurting a lot of small businesses out there. I think it is time for government to step in, at least during the pandemic, to limit some of this inappropriate behavior.

Even before the pandemic, New York City was considering caps on food-delivery services. The New York City Council held hearings on food delivery apps last year, and a City Council member called on state Attorney General Tish James to look into unwinding the 2013 deal that allowed GrubHub to merge with Seamless, another food-delivery company.

But New York council members said the pandemic has exacerbated the need for caps.

“Every restaurant felt the pressure to partner with third-party food service apps like Seamless before, but now they have no choice,” said New York City Council Member Francisco Moya, who is leading a bill to cap fees at 15 percent, at a hearing on the proposal last week.

San Francisco was the first to impose a cap via an emergency order by Mayor London Breed on April 10. Seattle followed suit April 24 with an emergency order limiting fees to 15 percent, with the cap remaining in place until restaurants can offer dine-in service again. The order also prohibits delivery services from cutting pay to drivers to make up for money lost because of the cap.

Washington, D.C.,’s city council voted unanimously Tuesday to impose a similar 15 percent cap. Mayor Muriel Bowser must still sign the legislation before it goes into effect.

DoorDash said that while they understood why city councils have moved to lower costs for restaurants, politicians don’t fully understand the impact across-the-board commission fees caps will have on their business model.

As the demand for food delivery has increased, the third-party delivery companies have been hiring more drivers, a process that includes paying for background checks and, for some, providing injury insurance. The companies have also invested in marketing campaigns to connect customers new to the platform to restaurants.

Beyond paying a driver to drop off food with the customer, DoorDash also manages things like credit card processing and website design for businesses, the spokesperson said. If revenues from commission fees start to decline, the company would have to make cuts elsewhere to maintain operations.

“We’re disappointed that, in the midst of this crisis and when food delivery is more essential than ever, we’ve seen arbitrary caps imposed that can have the unintended consequence of reducing sales for restaurants when they, in fact, need them most,” the company said in an emailed statement.

In early April, the day before San Francisco announced its commission cap, DoorDash announced it would cut fees by half for all restaurants with fewer than five locations, or around 150,000 businesses in the U.S., Canada and Australia. However, fees stayed the same for larger chains like Chipotle and McDonald’s to help offset losses.

Uber Eats said March 16 it would waive fees for pickup orders made through its app and reduce fees for orders where restaurants make deliveries themselves.

“Any cap on fees, regardless of the duration, will result in damaging unintended consequences, as we have already seen, for locally-owned businesses, delivery workers, diners and the local economy,” Amy Healy, senior director of public affairs at Grubhub, told the New York City Council at last week’s hearing. “In fact, it will result in the exact opposite of what the legislation is designed to accomplish, and we believe that any cap on fees nullifying contracts between two businesses represents an overstep by local officials and will not withstand a legal challenge.”

In a statement, Postmates criticized the fee caps as interfering with private contracts between businesses.

Boston’s O’Malley said he hopes to see action in the next several weeks, although a proposal hasn’t yet been drafted. In Chicago, a city council member introduced an ordinance to cap fees at 5 percent through the end of 2020. The body’s next meeting is May 20, but the council hasn’t yet released its meeting agenda.

Los Angeles’ proposed ordinance, a 15 percent cap introduced by Councilman Mitch O’Farrell, has yet to be included on a future council agenda.

While the major food-delivery apps have lambasted the caps, newer companies are seeking to capitalize on the moment. Tock was already in use by 95 percent of Michelin three-starred restaurants in the U.S., offering reservations, table management and integration with social media and hospitality software systems. In response to the pandemic, the company created Tock To Go to allow restaurants on the platform to offer take-out and delivery orders using their own employees, CEO Nick Kokonas said in an interview.

Dozens of the restaurants using the service have hired back workers to make deliveries. Restaurants pay for credit card processing fees at cost, and Tock To Go charges a 3 percent commission for use of its service, said Kokonas, a Wall Street trader before he became a restaurant executive in Chicago.

The company has about 3,000 restaurants and 600 wineries as customers and has been bringing on about 50 new restaurants per week, along with distilleries, farms and others, Kokonas said.

Boston fintech company Toast sells restaurant management software to tens of thousands of U.S. restaurants including fast casual chain Protein Bar & Kitchen to the fine dining restaurants by acclaimed Boston chef Barbara Lynch. Last week, the company unveiled Toast Delivery Services to allow restaurants already using their system to offer delivery for a flat fee. Customers can order directly from a restaurant website, app or by phone — which a 2016 McKinsey study found still account for the majority of take-out or delivery orders.

For less than $8 per order, Toast’s Delivery Services will deliver within five miles by partnering with local delivery companies, who will hire and pay drivers. The service lets the restaurant decide on minimum order size and how much of the delivery fee to charge customers. The company estimated that a restaurant that does $5,000 in monthly delivery sales would save more than $600 in commission fees by switching from the third-party apps.

The company also is offering software for online ordering, mobile apps and gift card purchases to restaurants free for three months.

“Our market data suggests that 50 percent of all restaurant operators do not have access to a digital solution today, and even those who do often can’t afford it or outsource it,” Toast spokesperson Tejas Kataria said.

Janaki Chadha contributed to this report.





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