When the coronavirus hit and restaurants were forced to shut down or severely restrict their seating, the prospect of earning some revenues through takeout orders, many delivered by independent delivery services, seemed like a lifeline. Even if they could not maintain their pre-virus sales levels, at least they could keep afloat, and keep their loyal customers fed, until lockdown restrictions eased and people came back to their dining rooms.
But nearly a year into the pandemic, customers have not returned in the same numbers. Even in locales where stay-at-home restrictions have been lifted, many people continue to seek social distance and find the convenience of delivery apps too appealing to give up. Thus for many restaurants, deliveries through the prominent apps, including GrubHub, DoorDash, and Uber Eats, account for a dramatically larger percentage of sales.
That shift has had substantial cost implications for the restaurants, because each delivery requires the restaurant to pay a percentage of the revenue to the delivery service. As the amount of sales through delivery have increased, those delivery costs have mounted. Imagine, for example, a small, independent restaurant that used to earn about 10 percent of its revenues from delivery services. It kept consumers who didn’t feel like venturing out happy, and it paid the delivery services a relatively small amount.
But today, if 90 percent of its sales are taking place only with the assistance of the delivery firm, the fees paid reach such levels that it simply might not be sustainable. Many of the delivery apps charge about 30 percent of the cost of the order, so for every $100 family dinner, the restaurant is handing over $30 to the app provider. With few other options, restaurants feel compelled to enter into the contracts with the apps though; they simply do not have the capacity to run efficient delivery operations on their own. They might seek to negotiate better terms, but the apps are national, popular, and standardized, which leaves little room for individual alterations in the contracts.
On top of the growing fees, delivery orders tend to be smaller on average than the tabs that diners would run up when they sat at tables in the restaurants to consume their meals. When they eat at home, the consumers tend to drink what they already have in the house, might ignore the appetizer menu altogether, and are less likely to be tempted to add dessert, because they are not lingering in the appealing dining atmosphere after they finish their main course. Thus, restaurants face diminished income, earned at higher costs—an unsustainable equation over the long term.
The contested cooperation between eateries and apps isn’t just limited to fighting over fees either. Restaurants complain that the delivery apps, with their imbalanced dominance (the top four companies account for about 99 percent of the food delivery market), engage in unethical activities to ensure that customers keep clicking their apps, instead of placing direct orders with the restaurants themselves. Some allege that the apps promise to bring in new customers, to justify their high fees, but then refuse to share customer identifying information that would back up that assertion. That is, the restaurants have no way of knowing if an existing customer or a new one is placing the to-go order. Another alleged and ethically questionable practice by the delivery apps indicates that they have bought up domain names that mimic the restaurants’, hoping to trick consumers into visiting that site, instead of the real one, so that they can ensure they accrue all the profits from the order.
In response, restaurant owners often encourage customers to order directly from them, then pick up their order from the location. But consumers appear happy to sit at home and let the food come to them, and their expanding uses of mobile apps makes the process incredibly convenient and painless. Still, if they are not careful, they might find that their favorite local restaurant cannot cook up their desired meal, in person or for delivery, because it cannot earn enough to stay open
- What are the pros and cons to restaurants of relying on food delivery apps?
- How could restaurants balance out the power imbalance in their relationship to achieve more benefits from the delivery market?
Source: Greg Bensinger, “Apps Are Helping Gut the Restaurant Industry,” The New York Times, December 8, 2020