May 22, 2020

Restaurants and apps are fighting over fees. Is delivery too cheap to support both?

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Some cities are cracking down on app fees, limiting them to 15%

Most restaurants right now are open for delivery or pickup only, and that means a lot of them are relying on third-party delivery services like Grubhub, DoorDash or Uber Eats. Those services can charge significant fees to restaurants.

Some restaurants complain those fees are unsustainable. Los Angeles voted this week to impose a 15% cap on delivery charges, and now the delivery companies say the caps are unsustainable. It’s a topic for Quality Assurance, where I take a second look at a big story in the news. I spoke with Venessa Wong, a senior reporter at BuzzFeed News who’s been following this. The following is an edited transcript of our conversation.

Venessa Wong (Photo courtesy of Wong)

Venessa Wong: Right now, you can’t eat at a restaurant in most markets, so the only way you can support any of these businesses is to order from them online. Grubhub does provide a platform for drivers if you need them, but subtracting a 20% fee from what you already have to pay to your staff just makes it a very difficult proposition for restaurant owners. I think they feel stuck with it right now. I don’t think they know how to get off of it because if you come off, where does that leave you?

Molly Wood: During the pandemic, lots of cities passed a limit on the fees that delivery apps can charge to restaurants. Does that help restaurants, and also though, make these delivery businesses even less sustainable? 

Wong: I think it depends on who you ask. There are a lot of restaurant owners who seem relieved that cities are capping fees, but there are some who rely on platforms for their drivers and worry about the impact of a cap on driver pay. There was recently a petition against fee caps by Postmates. The third-party apps themselves are saying that a cap on fees to the restaurants would just shift the cost to consumers, and that means people won’t order delivery from these restaurants because they’ll see higher prices and business will decline, and that will defeat the purpose of the fee cap to begin with. The apps are also saying, “Look, we have to cover our costs, too. If you cap our fees, it may not make sense for us to serve these markets anymore.”

Wood: What do you think the restaurants have to say about that?

Wong: I think that restaurants are all looking for a new solution. I don’t know if the fee cap will be the right solution. Maybe it will be, maybe it’ll depend on the restaurant, but I think they’re all looking for alternatives because the way online ordering and delivering was going was a broken system that wasn’t good for anybody. It wasn’t good for the restaurant, and the apps weren’t making money off of it either, which it seems like something’s gotta give in that equation.

Wood: Looking toward the future, even before the pandemic started, there was this kind of trend of ghost restaurants, which don’t have sit-in dining rooms at all. One of the few restaurants that’s ever made money on delivery is Domino’s, which is essentially like a cloud kitchen. Do you think that that is potentially a way forward?

Wong: Ghost kitchens are really interesting because the only way that you ever reach anybody is by marketing yourself through a third-party app. The argument in favor of ghost kitchens is that if you’re a restaurant owner, and you have existing costs already, this is a way to reach customers that you wouldn’t have reached before and that you would just be adding incremental revenue to anything you’d been making before you open that ghost kitchen. But again, if you’re still looking at paying 15 to 30% of every sale to someone else, it does make the question of how to make this a viable business a little bit more difficult.

Wood: Doesn’t it seem like if there are caps on fees, restaurants need to make money, and Grubhub or DoorDash need a higher margin, is some of making this all work going to come down to consumers willingly paying more for delivery?

Wong: I think the restaurant industry is looking at a lot of that right now. I’ve been asking restaurant owners what things will look like after coronavirus. It’s not just the question for delivery and online ordering, it’s even for dine-in, whenever we are allowed to do that. What happens to your servers if you’re only allowed to have a fraction of the customers that you had before the pandemic? How will servers support themselves if they’re earning a tipped minimum wage? Will you as a customer need to support them with a higher-percent tip than you’re normally accustomed to? I definitely think that the way we order and what we order is going to change radically after this.

Related links: More insight from Molly Wood

I’ve got more information on that 15% cap in Los Angeles, which also mandates that 100% of any tips go to the delivery driver. Seattle, San Francisco and Washington, D.C., have similar caps. Although some restaurant owners in L.A. pushed back on the idea of a fee cap, saying it could lead to reduced deliveries at a time when they really need them, and pointing out that, like Venessa and I talked about, somebody’s got to pay, right?

There’s an interesting Business Insider story on ghost kitchens and virtual restaurants, which I find totally fascinating. It’s been a trend for a while, where a restaurant opens up a virtual brand that only does delivery. The best-known example recently is Chuck E. Cheese — you may have heard me discuss this recently on Make Me Smart. It’s been delivering pizza and wings as Pasqually’s Pizza & Wings. According to Food and Wine, Applebee’s also has a virtual restaurant on Grubhub called Neighborhood Wings, which obviously sounds nice and local — but totally isn’t. At least it’s listed as Neighborhood Wings by Applebee’s, whereas Pasqually’s just expects you to know the entire character backstory of the Chuck E. Cheese mouse. But it all points to this disconcerting and very sci-fi dystopia-feeling trend, where there’s a future in which your favorite restaurant brand might only be a brand online, and in the real world it’s just a warehouse cranking out food and putting it in branded boxes and sending it out to be delivered to your house.

Also watching

A rush of Silicon Valley companies are saying some of their employees may never have to come back to work. Twitter, Square, Coinbase, Shopify and even Facebook, which on Thursday became the first to explicitly say that if you take your cool tech job and move out of the San Francisco Bay Area, they will cut your pay to reflect your new location. Sorry, no mansions in Ohio on Silicon Valley salaries.

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The team

Molly Wood Host
Michael Lipkin Senior Producer
Stephanie Hughes Producer
Jesus Alvarado Assistant Producer