x
At the end of March 2020, about two weeks into the national coronavirus lockdown, three of the leading food delivery apps were struck by the same marketing strategy, aligning themselves with a mission to “save” independent restaurants. Postmates shot an ad campaign titled “#OrderLocal” featuring celebrities like Mindy Kaling saying, “You don’t want to come out of this tough time and find that all your favorite small businesses are closed.” DoorDash launched a campaign called “Open for Delivery,” temporarily waiving the delivery fees charged to consumers, and later followed up with an ad campaign featuring celebrities like George Lopez and Ming-Na Wen talking about restaurant jobs they had before they were famous. Grubhub also rolled out a promotion called “Supper for Support,” exhorting its 23.9 million users to rally around the small enterprises that “are the lifeblood of our communities” and promising a $10 discount on any order placed between 5 p.m. and 9 p.m. as a kind of reward for their solidarity, “so you can save while supporting the restaurants you love.”
Few outside the restaurant industry could appreciate the way these marketing campaigns misrepresented the economics of restaurants. The four dominant delivery apps—two of which have since announced they intend to merge with one another—charge large commissions to restaurants for the service of processing orders, even more for delivering them, and still more for lending promotional support like the $10 discounts. These fees virtually guarantee that all orders placed to independent restaurants over delivery apps are unprofitable for the restaurants.
Before the pandemic, many chefs and small operators paid the fees, believing they lacked the leverage or power to do anything else. But once the pandemic shut down most dining rooms, wiping out more than $145 billion in restaurant sales between March 1 and June 30, thousands of chefs realized that staying open to feed the delivery apps would bankrupt them.
In San Francisco, the local independent restaurant association began pleading with the apps for a 50% break on commissions, reasoning that surely 50% commissions from all the restaurants would be preferable to 100% commissions from no restaurants at all. But the corporations refused, instead hatching more predatory cash extraction schemes like “Supper for Support,” which required restaurants to shoulder the entire $10 discount, and also pay Grubhub its commissions on the full pre-discounted price of the transactions, so that a $32 order would yield just $12 to the restaurant.
By mid-April, many city governments had begun to fight back, using emergency orders to cap the fees the apps were allowed to charge. Over the next three months, state and local legislators in Seattle, San Francisco, Los Angeles, New Jersey, New York City, Washington D.C., Philadelphia, Cincinnati, Portland, and many smaller municipalities passed laws capping the fees third party delivery apps were allowed to charge restaurants during the pandemic at maximums of between 10% and 20%. Many of the laws passed with unanimous support from local legislators.
The apps’ response to the rash of new laws was illuminating: in city after city, they simply refused to acknowledge them. Postmates was the most consistent in its disregard for the law, flouting the first caps passed in Seattle then Los Angeles and Washington D.C., and finally Portland, where the smaller delivery app was joined in its noncompliance by its much larger rival Grubhub.
In San Francisco, where DoorDash’s 64% market share is more than quadruple that of its next biggest rival, the company admitted to continuing to charge 30% commissions for nearly three months following Mayor London Breed’s April 10 institution of a 15% fee cap. DoorDash ultimately agreed to pay back the commissions, while Grubhub, after initially complying with California’s caps, increased commissions again in June, telling partner restaurants the fee cap had expired once local laws allowed them to open for patio dining.
Restaurants are increasingly struggling to fend off this deep pocketed clique of tech companies determined to use them purely as vehicles for extracting fees and consumer data, which together with an unprecedented shutdown of dining rooms now threaten their industry with extinction. And far from providing great service to consumers, these delivery apps have often failed miserably to improve on the old pizza delivery guys; one survey of regular app users found that cold food and order inaccuracies led them to report being dissatisfied with more than a quarter of all delivery app transactions.
What the apps have done, instead of competing to serve customers and restaurants, is use Wall Street money to accumulate market power, raise barriers to entry, and then merge with each other and set up regional monopolies.The people who have invested tens of billions of dollars in the four dominant delivery apps tolerate huge short-term losses purely because they see the likelihood of monopoly power.
