When you order your favorite food from an app-based delivery service, you may not be aware that restaurant owners say those companies’ high commissions could drive them out of business.
New York City Council members have heard that concern. Thirty-one of them recently warned Grubhub Inc. executives to change industry practices or face some of the first U.S. laws regulating fees they charge restaurants. The council members also say they will put an end to companies charging for calls that don’t result in food orders.
The convenience of ordering food through online delivery platforms comes at a cost almost always paid by restaurants. New York eateries average margins of less than 10%, and they’re paying as much as 33% per order in fees to these companies. The companies say restaurants get their money’s worth from marketing algorithms that boost their prominence on search-engines and lure new customers.
“Restaurant owners are caught in an unsustainable business model that not only fails to add to their bottom line, but could actually eat away at their profits and their ability to keep their doors open,” said Councilman Mark Gjonaj, chairman of its small business committee. Gjonaj said online companies may be one reason why 80% of restaurants fail within five years in a city already worried about a rise in storefront vacancies.
The delivery industry is growing at a rapid clip but also has its own problems. UBS predicted last year that the global online food ordering market could grow more than tenfold over the next decade or so to reach $365 billion by 2030.
In New York, there are about a dozen food delivery services competing for what GrubHub has labeled “promiscuous” customers who increasingly order from multiple platforms. Outside of New York, other state regulators are also scrutinizing the delivery companies, from UberEats to Postmates Inc. and the U.S.’s biggest, DoorDash Inc., over concerns from high delivery fees to tipping policies and the way they classify their workers.
While DoorDash has benefited from financial backers including SoftBank Group Corp. that give it a war chest exceeding $2 billion, it remains unprofitable as it readies plans for a stock market debut next year. Investors have begun to balk at listings that don’t maintain profitability. DoorDash’s closest competitor, publicly traded GrubHub, has seen its stock plummet 44% this year.
Rapid growth has been accompanied by complaints. In Philadelphia and New York, restaurant owners say Grubhub set up its own phone numbers to route calls to its business, and then charged commissions even when no food was ordered. Grubhub’s offer last month to allow restaurants 120 days to appeal the charges didn’t satisfy the City Council. In an Oct. 30 letter, two-thirds of the Council’s 51 members told Grubhub Chief Executive Officer Matt Maloney to avoid any time limit on the refunds and to hire independent auditors to evaluate disputed charges.
GrubHub spokeswoman Katie Norris said “the City Council has provided strong suggestions on how we can improve our service in New York City. We look forward to seeing their new proposals and continuing to work with them.”
Uber and DoorDash declined to comment.
In June, Grubhub senior vice president Kevin Kearns defended the commissions and fees to the City Council small business committee, saying his company spends $60 million a year to promote its clients. It also tries to “upsell” orders to raise take-out bills, he said.
“For example, if you’re ordering a cheeseburger in a restaurant, the server isn’t always exactly saying, ‘Do you want bacon on that? Do you want avocados on that?”’ he said, adding that Grubhub’s 115,000-customer database means it’s “actually driving more customers through restaurant doors and having that dine-in experience.”
That conflicts with the City Council’s research, which found a 3% drop in in-house dining in restaurants with app-based services.
As delivery companies take control of the food-order market they obtain data on thousands of customers — their email and home addresses, phone numbers, favorite foods and credit cards — which gives them leverage over restaurant owners who might want to discontinue their use of the app.
“We’re finding that a food app could come in and actually take over your business,” said Gjonaj, who spent his youth delivering food and later managing a Bronx pizzeria. “The websites control all the customer sales data and don’t share it, and that gives them the power to undermine your existence and take away customers if you decide to end the deal.”
At Nanoosh, a Mediterranean restaurant near Manhattan’s Union Square, where about half its business is in take out and delivery, monitors displaying a dozen app-based services crowd the desk near the cash register. Commissions for each order range between 20% and 30%, said manager Israel Gutama.
“It’s too much but if we don’t use them our competitors will, and we can’t afford to lose customers,” he said.
This article was provided by Bloomberg News.
