Food Delivery Apps Hit with Commission Caps and New Rules
Image credit: Piqsels
DoorDash, Grubhub, Uber Eats, and other food delivery apps have already started to feel the effects of new regulations. Several major U.S. cities, including San Francisco and New York City, recently imposed regulations to cap the commissions that these apps can charge restaurants. They also issued a series of new rules that may hinder the future growth of third-party delivery companies.
San Francisco imposed limitations in July 2021. New York City followed with a similar fee cap ordinance and new rules approximately a month later. Other U.S. cities may follow with similar restrictions soon.
The legislation caps the fees that these apps can charge restaurants to 15% of food orders for delivery services. It caps commissions to 5% for advertising and other non-delivery services.
The new rules also require food delivery companies to pay workers on a weekly basis, to guarantee couriers receive their full tips, and to pay couriers a minimum amount for each trip. The legislation also requires restaurants to allow couriers to use their restrooms.
Major Players in the Food Delivery Market
In New York City, food delivery is dominated by three main players: DoorDash, Grubhub, and Uber Eats. Data collected in July 2021 data ranked DoorDash first in the market (36%) and Grubhub second (34%). Uber Eats and Postmates together had 30% of the market.
Grubhub is based in Chicago and is a unit of Just Eat Takeaway. The Netherlands-based company acquired Grubhub in 2020 in a $7.3 billion transaction. Uber Eats acquired Postmates in 2020 for $2.65 billion. DoorDash acquired Caviar, a food delivery app focused on more upscale options, in 2019.
Companies React to the New Regulations
Share prices of Grubhub, Uber, and DoorDash fell after New York City passed the legislation to increase regulations on the food delivery industry. A Grubhub spokesperson said, “This permanent price control is flagrantly unconstitutional and will hurt local restaurants, delivery workers, and diners across NYC.” DoorDash echoed this sentiment, stating that the legislation was “unnecessary and unconstitutional.”
Grubhub, DoorDash, Uber Eats, and other major food delivery companies have pushed back on the price controls. Following the passage of permanent price controls in San Francisco, DoorDash and Grubhub sued the city. The lawsuit argues that because of the commission caps, the food delivery costs that are not covered by restaurants will instead be passed onto customers. They assert that this could lead to reduced order volume.
In early September, Grubhub, DoorDash, and Uber Eats sued New York City shortly after it approved legislation like San Francisco’s legislation. Arguing that the limitations on pricing are unfair, these three dominant industry players are seeking an injunction to prevent New York from enforcing the fee caps.
In the lawsuit against New York City, the food delivery companies claimed, “Those permanent price controls will harm not only plaintiffs, but also the revitalization of the very local restaurants the city claims to serve.” They further claimed that the legislation is unconstitutional. They said that it “interferes with freely negotiated contracts between platforms and restaurants by changing and dictating the economic terms on which a dynamic industry operates.” Even though the food delivery companies are resisting these new regulations, they most likely will not succeed.
Is the Golden Age of Food Delivery Services Over?
As the pandemic has increased demand for efficient food delivery, America’s largest food delivery apps have been facing heightened regulatory scrutiny. The city of Chicago filed twin lawsuits against Grubhub and DoorDash in late August. The lawsuits allege that Grubhub and DoorDash operate their businesses in a deceptive manner. According to the filing, such business practices are harmful to restaurants, customers, and even employees. Specifically, these apps had been charging customers an extra cost that they labeled the “Chicago fee.” The city of Chicago claimed this gave customers the false impression the “Chicago fee” was imposed by the city, rather than a fee imposed by the delivery apps as another way to pass costs onto customers.
Many restaurants attributed their very survival through the pandemic to the food delivery apps. During the pandemic, many U.S. restaurants were forced to suspend indoor dining. Restaurants that chose to offer outdoor dining faced decreased customer interest. This was particularly acute during the winter months, with customers unwilling to brave cold weather conditions for a restaurant meal.
Large restaurants have generally been able to absorb the high fees charged by delivery app companies. However, some independent restaurants have had a tougher time absorbing the costs. Restaurants sometimes found themselves paying apps up to a 30% commission on orders. The new regulations cap fees at 15% of a food delivery order.
Due to increases in regulatory battles, some investors have become more cautious about investing in food delivery companies. Jake Dollarhide is the head of the investment firm Longbow Asset Management. He said, “The golden age of food delivery probably already occurred in the worst of the pandemic.” Mr. Dollarhide no longer holds any stock in Grubhub shares at the beginning of the year.