A food delivery courier for Grubhub Inc. wears a protective mask in New York, U.S., on Monday, April 6, 2020.
Jeenah Moon | Bloomberg | Getty Images
With the survival of many independent restaurants hanging in the balance, lawmakers are stepping in to limit how much third-party delivery companies like DoorDash and Grubhub can charge restaurants for orders for the duration of the coronavirus pandemic.
The New York City Council on Wednesday voted to restrict food delivery fees paid by restaurants to delivery providers like Grubhub’s Seamless to 15% or less of the order. The council also voted to approve caps of 5% for non-delivery services. Mayor Bill de Blasio still has to sign the bill into law, but he has previously voiced support.
Jersey City, Seattle and San Francisco have implemented similar caps on delivery fees through emergency orders last month.
Without restrictions on delivery fees, restaurants typically pay between 15% to 30% on orders placed with delivery providers. Even before the pandemic forced dining rooms to close and restaurant sales to plummet, restaurateurs were lobbying for regulation on the fees cutting into their already razor-thin profit margins. The crisis forced many holdouts to join the platforms in the hopes of keeping their businesses afloat.
“We’ve kind of seen an acceleration from off-premise dining of about 10 years in about 10 weeks,” said Andrew Nolan, a principal in advisory at KMPG. “It was trending that way, and off-premise has definitely been a growing segment of the market, but in the last few weeks, we’ve definitely seen an acceleration of that.”
Delivery companies say that limits on commission fees just passes along the cost of delivery to consumers, leading to reduced orders for the restaurants it was supposed to help.
“We’ve already seen negative impacts of this in San Francisco,” Grubhub CEO Matt Mahoney told analysts on the company’s earnings call. “Our preliminary data shows that on average, our independent restaurants are seeing over 10% fewer orders since the fee cap.”
He added that many customers have shifted to ordering from large chain restaurants that were not impacted by the city’s emergency order. Grubhub said in a statement that fee caps “will not withstand a legal challenge.”
A spokesperson for DoorDash said in a statement that a cap to restaurant commission fees will hurt earnings for its delivery drivers and could reduce restaurant sales.
“Regulating the commissions that fund our marketplace — particularly during these unprecedented times —would force us to radically alter the way we do business, set a far-reaching precedent in a highly competitive market, and could ultimately hurt those that we’re trying to help the most: customers, small businesses and delivery people,” a spokesperson for Uber Eats said in a statement.
The fee caps are temporary, but a potential merger between Uber and Grubhub could mean more permanent regulatory scrutiny. The two companies have had discussions about a deal, according to people familiar with the matter, but CNBC’s David Faber reported Tuesday that they are at odds over a price. Neither company confirmed that Uber made an offer to acquire Grubhub.
“We believe it is unlikely that these fees caps are eliminated any time soon, and especially if both companies merge,” BTIG analyst Peter Saleh wrote in a note to clients Tuesday.
Some consumers are becoming savvy to the hefty commission fees as restaurants ask that they order takeout with a phone call rather than placing an order with a delivery app.
Giuseppe Badalamenti, the owner of Chicago Pizza Boss, posted his Grubhub receipt on Facebook, showing that he made only $376.54 on $1,042.63 in orders after the company’s fees. The post racked up more than a thousand comments and was shared by thousands of users.
“Grubhub is a fee for service model — meaning restaurant owners select the services they want and only pay a commission when we help generate a sale,” Grubhub said in a statement. “We are happy to work with any of our partners on finding a plan that helps them manage costs while continuing to grow their business.”
And new rules in Chicago will likely increase consumer awareness. Starting May 22, third-party delivery providers will have to give customers an itemized breakdown of all charges, including the commission fee paid by the restaurant.