Delivery companies are being squeezed between investors and new caps on fees
Sep 11, 2021 @ 11:44
Delivery companies are being squeezed between investors and new caps on fees

Food delivery companies DoorDash, Grubhub, and UberEats filed a lawsuit against New York City Aug. 9 over the city’s cap on how much the platforms can charge restaurants to use their services.

In response to the pandemic, the city first imposed the fee cap as a temporary measure to help restaurants stay afloat. But last month it was made permanent, prohibiting food delivery companies from charging more than 15% per order for delivery and more than 5% per order for all other fees (except for transaction fees).

US restaurant sales are back to pre-pandemic levels, and the companies argue the price control is no longer related to a public-health emergency but “driven by naked animosity towards third-party platforms.” They claim it is unconstitutional because “it interferes with freely negotiated contracts between platforms and restaurants.” Left unchecked, the permanent cap will set a dangerous precedent, the companies said in the suit.

The food delivery companies also said they have spent “hundreds of millions” annually in marketing for restaurants on their platforms to help them reach new customers.

When the world shut down, the pandemic was a boon for food delivery. The US food delivery market has grown from $36 million in 2019 to $76 million last year, according to Euromonitor, a market research firm.

Restaurants saw them as a lifeline, but began to complain the commission fees were too high, with food delivery companies charging as much as 30% per order. So cities from Jersey City to San Diego enacted temporary caps on the fees to help restaurants stay afloat.

The economics of food deliveryBut the caps have put further financial pressure on the delivery companies, which are already struggling to turn a profit.

For years, the delivery services depended on their venture capital backers to subsidize deliveries for users, leading to frequent offers of food discounts and free delivery to lure new customers. But the freebies are long gone, and Uber and DoorDash, which are now public companies, are expected to show a clear path of profitability.

In a typical food-delivery transaction, the companies make money by charging fees to the customer, taking a cut of the bill from the restaurant, then paying the delivery person—making the the margins, particularly, thin. Uber reportedly lost more than $60 million in the New York City market due to pandemic-related fee caps, according to the Wall Street Journal. Meanwhile, Grubhub said it lost more than $100 million nationally last year due to fee caps.

With restaurants fighting back on delivery fees, earlier this year, DoorDash rolled out a tiered commission structure, ranging from 15% to 30%.

The food delivery companies say the caps will result in costs shifting to consumers, which will result in fewer orders and a decline in earning opportunities for delivery workers. But US customers are only willing to pay so much, and consider a $4 delivery fee “to be fair,” according to a Deloitte study from last year. There are only so many levers the delivery companies can pull.

DoorDash and Grubhub filed a similar lawsuit against San Francisco in July for passing permanent delivery fee caps, highlighting the burgeoning battle between food delivery companies and cities.

More broadly, delivery companies have been searching for new sources of revenue and performing more services for restaurants, such as operating ghost kitchens, which allows the companies to take a bigger share of restaurant sales.

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