Is Regulating Delivery Company Fees the Answer to Save Restaurants?
The pandemic has been extremely hard on the restaurant industry and its not over yet. Numbers continue to rise and the weather is getting worse so patios are no longer a viable option for most guests. This means that takeout and delivery become a lifeline for some restaurants. The delivery apps charge significant fees for orders meaning that restaurants that are challenged by reduced volumes and higher costs are squeezed, often into negative margins, in an effort to access customers. There have been calls for a reduction in the fees charged by these delivery apps to allow restaurants to at least maintain a delivery option during the pandemic restrictions and survive.
A better approach may be fostering delivery only companies or cooperatives.
The delivery companies like Uber Eats, Skip the Dishes, Door Dash and others provide not only the delivery service, but a platform for ordering. The apps create competitive clustering that shuts out the restaurants that choose not to participate. Competitive clustering is when a group of similar businesses (car dealers, quick service restaurants) locate close together to be in the choice set for a consumer. In the case of a delivery app, the choice of restaurant is often not made until a consumer evaluates the roster of choices on the app itself. Given the relatively small number of apps and the large number of choices, this represents significant market power. It also explains why there is such competition for market share between the apps. The bigger the share of consumers, the more the draw for restaurants to join and the more power the app has on demand. The majority of the delivery apps are not making money yet but are fighting for share to get to a point where they are profitable.
The apps charge a significant share of the price for food charged to consumers - up to 30%. Most restaurants work on tight margins and these charges can often mean there is no profit left for them after they pay the delivery fee. This means they get caught between a rock and a hard place in making the choice to access an app - sell nothing or sell through the app and lose money.
Part of the problem is that the delivery companies aren't making money either. Foodora actually pulled out of Canada earlier this year. Uber Eats is actually a bigger business than Uber Rides but is not yet profitable. Asking them to discount fees would be asking them to lose more money in order to support the restaurants. It is also worth noting that a portion of the delivery fee goes to an independent driver who is also a low wage earner. It is estimated that drivers earn approximately $8-$12 per hour after car expenses delivering for Uber Eats with high variability based on markets and time of day. Once again, taking money out of the delivery margin could take money from someone who is already in a low income situation.
The real issue is that the business model is broken. In an effort to build delivery business and drive share, the pricing model is one that doe not cover the costs associated with delivering that value. One can understand the idea here. We're trying to build the delivery market so pricing too high might prevent growth. It is, however, extremely difficult to raise prices later once people develop an expectation of the cost of delivered food. This might make it hard to raise prices now BUT it may be worthwhile to begin to build a sustainable pricing model in increments. Even if there are rate reductions by the app companies it makes sense to start moving the price up slowly to reflect the real cost of these services.
Despite the concerns outlined above, there may be merit in the app companies and delivery drivers sharing some of the pandemic pain with restaurants. The model requires restaurants to succeed - without them there is nothing to deliver. It is also a time in which delivery and/or pick up demand is increasing so getting more customers and restaurants on a specific platform should be a strategic priority for these companies. Reducing fees is one approach to doing that.
There have been some initiatives by delivery companies to respond to the current crisis. Skip the Dishes instituted a rebate program on both take out and delivery to reduce fees during the pandemic. This helps restaurants in the crisis time and helps Skip to maintain and grow their customer base to drive share and to keep a larger variety of restaurant options on the app. Uber Eats has introduced a delivery only function at a reduced service charge. In this case the restaurant takes the order themselves and just uses Uber Eats to deliver the food. This makes sense for restaurants who have a loyal customer base who come directly to them. This allows restaurants to use delivery services without the other infrastructure and the delivery firms to drive volume to keep drivers busier. Uber Eats has also introduced a zero commission for pick up orders option. In this case customers who come through the app and order for pick up at the restaurant. This helps restaurants and drives traffic through the app (at a very low marginal cost) to build share and also keeps a wider range of restaurant choices on the app. These provide benefits to both sides of the transaction.
The industry needs a long term sustainable business model for delivery but a carefully structured and implemented short term regulation may level the playing field between companies and help restaurant survive this acute period of pain. Flexibility here is in everyone's best interest.
There remain calls to regulate these fees. Ontario has proposed caps of 15% on deliver (intended to maintain the incomes of the drivers) and 20% overall. New York City and other jurisdictions have already done so. This will help restaurants. There is, however, no free lunch (pardon the pun) and it will cost delivery companies money. There is a risk that they drop unprofitable restaurants. There is also a risk that companies leave unprofitable or more restrictive markets rather than bleed even more money. That helps no one. Regulation is complex and the outcomes don't always reflect what the objective was. The industry needs a long term sustainable business model for delivery but a carefully structured and implemented short term regulation may level the playing field between companies and help restaurant survive this acute period of pain. Flexibility here is in everyone's best interest.
A better approach may be fostering delivery only companies or cooperatives. For most restaurants the volume of delivery and the associated cost doesn't justify the dedicated delivery person. The coordination of delivery without the ordering platform could give restaurants a more affordable choice and allow them to maintain the customer relationship (and ownership). It won't work for everyone (it doesn't bring in new customers) but could prove an affordable lifeline for some restaurants. It likely explains the delivery only option from Uber Eats - a defensive measure.
Recommended citation format: von Massow, Michael. "Is Regulating Delivery Company Fees the Answer to Save Restaurants?". Food Focus Guelph (105), Department of Food, Agricultural and Resource Economics, University of Guelph, December 2, 2020.