September 09, 2022

Sticker Shock: While Food Delivery Companies Fight Fee Caps, Indie Restaurants Fight Delivery Companies – Will Anyone Win?

By Hitha Herzog

TL;DR: 

  • Debates about fee caps imposed on food-delivery platforms in New York City and San Francisco could inform how other major U.S. cities approach the issue. 
  • Proponents of fee caps claim they are a “critically important step toward protecting New York City eateries” due to “outrageous” delivery fees.
  • However, economists point out that such fee caps will drive delivery companies to change their prices and services in response, which will ultimately hurt the very restaurants they are intended to help.

When NYC pandemic lockdowns went into effect in March of 2020, one thing was certain: customers like me paid for the privilege of delivery. Maybe it was the haze of fear and uncertainty, or maybe we were all unbothered, but once I started looking at the charges, sticker shock settled in. The breakdown of the prices, according to TechCrunch, include: 

  • Menu item: the actual food you are ordering
  • Service fee: a fee charged by the delivery company for providing the service
  • Taxes: sales tax on what your order (four percent in NY State) 
  • Delivery fee: the price of having the food delivered 
  • Gratuity: the optional tip for the delivery driver 

In a report by global market information company NPD, food delivery sales increased by 300 percent in 2020 as shutdowns were put in place. To help struggling restaurants, cities such as New York City and San Francisco imposed a mandatory delivery fee cap at 15 percent to help mitigate the cost third party apps were charging. 

More recently, the New York City Council (NYCC) passed a law instituting a permanent 15 percent delivery fee cap, much to the chagrin of popular delivery apps like DoorDash, Uber Eats, and Grubhub. In filing a lawsuit against New York City, these companies collectively said the government-imposed caps would force them to shift the costs to delivery customers. What’s more, the companies said the 15 percent was arbitrary and unconstitutional, “because, among other things, it interferes with freely negotiated contracts between platforms and restaurants by changing and dictating the economic terms on which a dynamic industry operates.” 

The delivery app companies are not fighting this battle alone. At the beginning of April, the U.S. Chamber of Commerce filed an amicus brief in support of companies and their lawsuit against the city saying permanent caps will “ultimately hurt the restaurants they are intended to help.” The basic argument is this: with delivery fee caps, companies will have to raise their prices and cut back on services, which in turn will depress demand and ultimately hurt the restaurants. 

Lawrence Diaz, operator of the 43-year-old family owned pizza place “Frankie and Peppers” on the Upper West Side of New York City disagrees with the U.S. Chamber of Commerce. “What customers don’t realize is that restaurants will ultimately have to charge the customer back in the form of price increases in order to mitigate the increase in fees,” he said to me in an interview at his restaurant. “Third party apps take almost 30% of the total cost of the order even with the delivery app caps. If caps were to end, for a small business, it would become financially unsustainable.” 

Likewise, Andrew Rigie, executive director of the NYC Hospitality Alliance said in an interview with Retail Dive that the third-party delivery fees are “outrageous” and “predatory,” and the decision to adopt permanent caps is a “critically important step toward protecting New York City eateries.”  

Curious to figure out exactly what the economic impact of such a government “price control” in the form of a fee cap would be on delivery app companies as well as restaurants (and to some extent the independent delivery personnel), the Data Catalyst Institute created a working group of economists, legal scholars and retail analysts to discuss the economics of delivery fee caps. Broadly, the group concluded the new law mandating delivery fee caps would not accomplish what the NYCC intended, and moreover could have negative unintended consequences for indie restaurants. 

While it may feel like the cap on delivery fees is fighting for the “little guys,” it might just be helping DoorDash and McDonalds. The logic is that the breadth of exposure to potentially new customers by way of in-app marketing has a higher ROI than saving money on the bottom line in increased delivery fees. Put differently, delivery apps act as a powerful mechanism for increasing business. 

New York City restaurants are starting to make countermoves. In delivery bags from Uber Eats, midtown restaurant “Indian Accent” appeals directly to its customers by including a card that says, “Like delivery but hate paying the fees? Call the restaurant directly to save on fees!” Appealing directly to its customers paid off. In an interview I did with the manager, 60 percent more orders came directly to the restaurant vs. the app after the direct appeal campaign started. Curbside pickup and more specialized delivery apps like Slice (only pizza) have also emerged as a way to “level the playing field.”

Back on the Upper West Side, Diaz of “Frankie and Peppers” uses the Slice app instead of other third party apps (e.g., Uber Eats) to deliver food. “We end up having to pay the apps much less because they [Slice] charge a small monthly fee, and the credit card processing fees are much lower. Customers don’t realize prices of food tend to be higher on third party apps instead at the restaurant. Slice allows me to keep my prices the same by ordering directly from us.” 

New York isn’t the only city coming under fire. San Francisco imposed permanent delivery fee caps in June of 2021. It took DoorDash and Grubhub less than a month to sue the city. What happens in NYC may influence how the rest of American cities deal with caps. As COVID cases in urban areas rise and fall, it leaves restaurants in a precarious position. Fragile restaurants are constantly under the threat of shutdowns. 

Local rules about COVID safety seem to be changing monthly. While uncertainty is part of the equation, one thing remains the same: the “eat-at-home” option is still very much in high demand. In a study done by Acosta, a CPG sales and marketing firm, 92 percent of families plan to continue eating together at home at least as often as — or more often than — they do now after the pandemic ends.

While the economic writing is on the wall on how uncapping delivery fees can help smaller restaurants, there are still owners who stand firmly against using them. When asked if customers will go back to the old way of ordering (AKA, picking up the phone and calling the restaurant), Diaz was realistic. “Look, I know everyone orders food from their phones or online these days. That’s just technology evolving. But, I do think there is going to be a point where customers are going to become fed up with the third party apps – either for the fees they are charging or not being able to connect to their restaurant if they have a specific order, etc. The third party apps have greatly disrupted the restaurant scene. My family has run this business for 43 years and I can tell you, the market was very efficient and operated for years without issue.” 

Looking at my credit card statements, I realize I’ve spent more than $1,000 a month on food delivery. As a mom of two, spending that kind of money for the sake of convenience hurts my soul. However, the psychological aspect of ordering on third party apps is deeply rooted. The incredible photos, the ease of which you can choose your food and have it within minutes…it’s too good to pass up. Will I stop ordering? Probably not. Will this hurt small, independent restaurants? According to our working group it won’t, but I might force myself to order directly from Freddie and Peppers anyway, because it supports them. 

For more on the DCI working group on delivery fee apps and our conclusions check out the report

Hitha Herzog is Chief Research Analyst at H Squared Doneger TOBE and a Data Catalyst Institute Retail Fellow. The views written here by Herzog do not necessarily reflect the views of the Data Catalyst Institute. 

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