In the background of the coronavirus pandemic, the cries of restaurants over the way 3rd-party delivery apps are oppressing them finally reached San Francisco decision-makers.
In April last year, Mayor London Breed announced a 15% cap on food delivery service fees. This emergency order was initially planned to stay in place for 60 days after restaurants fully resume indoor dining. With restaurants set on reopening at 50% indoor capacity this month, operators could be looking at fees bouncing back to over 30% as soon as August.
2020 is far behind us, but restaurants are still not out of the woods. When it comes to the in-house vs third-party service dilemma, operators have a good reason for concern. No doubt, takeout, and delivery have played a key role in helping restaurants survive COVID-19 lockdowns – but now comes the long journey to recovery.
Before making any move, restaurant operators better make sure their 3rd-party delivery app partner really has their best interest at heart. Here’s our take on the issue.
What’s Behind DoorDash’s New Pricing Scheme
Last April, DoorDash announced they are retooling restaurant fees with tiered pricing. Restaurants can now pick lower commission options for the delivery app in exchange for less reach and promotion, while the commission on pick-up orders is 6% (down from 15%).
According to the post, restaurants can partner with DoorDash for three different commission prices:
- The lowest tier of 15% lets restaurants stay listed in the app but reduces the delivery radius and charges customers more for the delivery.
- The middle option of 25% expands the radius and reduces fees for customers.
- The highest option of 30% includes a guarantee of at least 20 orders a month, the largest delivery area, and the lowest fees for consumers.
The new pricing scheme looks simple enough. And DoorDash’s assurance that the company is acting to “empower every restaurant to meet their individual goals” sure sounds promising. Still, there’s something eerie about the whole thing.
Early on in the pandemic, DoorDash and its major competitors like UberEats, Postmates and GrubHub came under fire for their fees. In response, San Francisco and other cities forced a cap on what 3rd-party delivery apps can charge restaurants. In other words, DoorDash’s lower tier of 15% is nothing new.
There’s also the question of whether the 15% basic plan is, in fact, a viable option for restaurants. Considering the tightly limited delivery radius, less prominence on the app, and additional fees forced on to customers – restaurants might feel pressured to upgrade to the pre-pandemic cuts of 25% and 30%.
In addition, officials are concerned about DoorDash’s growing market share. The company’s reach grew bigger as the app became essential for many restaurants amidst COVID-19 lockdowns. There’s always the question of the company raising its fees after having won a big enough market share.
Other issues raise questions about whether the new pricing plan was nothing more than a marketing stunt designed to ward off scrutiny from legislators. For example, the fact that larger restaurant businesses with several locations can negotiate a different fee outside of the three tiers or the fact that the higher costs aren’t going towards better income for couriers.
3rd Party Delivery Apps, Can’t Live With Them
High fees aren’t the only thing wrong with 3rd-party delivery apps. One of the critical objections to the way they operate has to do with a lack of transparency. Mostly, these companies are unwilling to provide insight into how they structure their merchant agreements and what exactly do merchant fees cover. Even with its new tiered pricing, DoorDash declined to reveal its typical commission rate before the change.
For years, and exacerbated by the COVID-19 outbreak, 3rd-party delivery apps have helped fuel some trends that are now jeopardizing the entire foodservice industry. It’s hard for any food operator to differentiate itself from competitors when it’s evaluated by their food only (after it gets delivered) and not by the complete experience of eating out. In other words, by taking hospitality out of the equation, restaurants have been commoditizing their products. And we know that we only care about prices when comparing commodities, and we end with a race to the bottom situation.
Another way to look at this is as if 3rd-party delivery apps contribute to the dumbing-down of the food consumption experience as a whole. We live in a culture dominated by consumer convenience, where customers have been accustomed to getting what they want, when they want it, never having to do more than click a single button, and food would arrive at their door.
The result is a distorted restaurant business model. The interaction restaurants and customers share became extremely limited, to the point where restaurants have lost all control over the customer experience.
The divide that’s being created between small restaurant operators and their customers is destroying the chances of smaller establishments who rely on a personal, unique customer experience to compete with big brands and food chains.
It seems the restaurant world has been split in two. There are now those that can afford to keep delivery in-house and those that can’t – mostly new, smaller restaurants with outdated technology that are understaffed and that can’t afford the staff and resources a well-oiled delivery operation requires. Think about the family-owned neighborhood restaurant; they are the ones that have lower margins and suffering the most.
From a supply chain perspective, 3rd-party delivery apps have also contributed to a dangerous distortion of prices. The aggressive promotion of low-cost food has fueled consumer demand for cheap food. Again, the race to the bottom in full play here. How can a consumer thoroughly compare a $10 burger versus a $15 burger by looking at a phone screen? Meanwhile, and especially since COVID-19, diners have come to expect a higher level of food safety, originality, and taste. The dissociation of what it actually costs to prepare and deliver quality food and what consumers expect to pay is enough to make your head spin.
Finally, when labor issues are at the forefront, the way most major 3rd-party delivery apps are treating couriers should worry restaurant operators and consumers alike. It’s not uncommon to hear stories about low or inexistent driver benefits, minimal hazard pay, scornful base salaries and tipping policies.
Can’t Live Without Them
With all this, there’s no denying that the future of restaurants lies in food delivery. 3rd-party delivery app sales might have been pushing an aggressive sales pitch, saying that a restaurant would be left behind as the competition is already on their platform. Well, we know this is a bit of fear mongering, but they have a point.
The most significant benefit of working with 3rd-party delivery apps is still about being able to outsource delivery. A delivery operation and order fulfillment system need a lot of time and money investment to work correctly.
Working with third-party apps frees restaurant operators from issues like:
Setting up in-house delivery processes & infrastructure
- Delivery drivers & vehicles
- Delivery-tracking system
- Food storage & delivery equipment
- Customer service issues – to some extent
Using 3rd-party delivery companies also means increased exposure and restaurant awareness. Platforms like DoorDash and UberEats have a vast marketplace home to millions of hungry people ready to place an order.
Not being listed on one of these means losing substantial traffic and visibility. Essentially, it’s like being taken off the restaurant map.
National Restaurant Association Steps In to Lay Down Some Ground Rules
In December 2020, The National Restaurant Association released 7 public policy principles for fair delivery practices. These are the result of a year-long collaboration and dialogue with restaurants and 3rd-party delivery companies (including Grubhub, Uber Eats, and DoorDash) and are meant to guide lawmakers in developing public policy.
The principles are:
- Restaurants have a right to know when and if their food is delivered.
- Customers should expect the same degree of food safety as they do when dining in a restaurant.
- Restaurants should be able to offer alcohol to customers through third-party delivery safely and legally.
- Restaurants deserve transparency on fees (including commissions, delivery fees, and promotional fees) charged by third-party delivery companies.
- Third-party delivery contracts need contractual transparency, and issues surrounding fees, costs, terms, policies, marketing practices involving the restaurant or its likeness, and insurance/indemnity should be made clear.
- Sales tax collection responsibility must be clear regarding which party is collecting and remitting the specific sales tax to the appropriate authority.
- Third-party delivery companies should offer restaurants access to anonymized information regarding orders from their restaurant that originate on third-party delivery platforms.
This move is an essential first step towards developing a much more positive framework for restaurants, 3rd-party delivery apps, and consumers. But there’s still a long road ahead.
The most important thing the industry needs to reevaluate is the actual value for money of working with these services. To be a growth driver for restaurants, 3rd-party delivery companies need to offer:
- Access to data. Restaurants should be able to see orders, know when they were placed, by who (new / repeat customer, demographics), where they originated (restaurant website / third party app, organic/promotional), average delivery time, and so on.
- A relationship-building platform. Restaurants should be able to see and respond to customer feedback and reviews. In contrast, customers should have the option of communicating directly with the restaurant before and after placing an order.
- Price transparency. Simply put – what do costs cover? Do base commissions include credit card processing fees, one-time activation fees, service fees, tablet and hardware rentals, customers, merchants, and driver support?
- Marketing tools. A “marketing commission” needs to offer more than simply the chance of being listed on the platform. Committing to some orders per month or at least being upfront about what marketing efforts are being applied to each restaurant is a must.
- Workplace fairness. Employee safety and fair treatment should not be left in the hands of startup founders and CEOs looking for quick gains. Instead, it is the shared responsibility of restaurant operators, consumers, and 3rd-party apps.
Once these conditions are met, restaurants and 3rd-party delivery apps would form a partnership that strengthens the relationship between diners, drivers, and restaurants and is a positive force within the entire foodservice industry.