‘All the power’: Inside the high costs of food delivery apps on restaurants

(Shimi Goldberger/Daily Bruin)

By Mridhula Thyagarajan, Isabella Sharp, Grace Bashawaty

May 22, 2024 at 1:32 a.m.

Rosti Tuscan Kitchen, a local restaurant chain in Los Angeles, relied on a small group of drivers and its own private delivery system for takeout and delivery before the pandemic, said Kevin Goldfein, the restaurant’s former owner. 

“We had our own (system) in place that we took pride in,” Goldfein said. “We were really good at it.”

Then came the COVID-19 pandemic, the lockdown and a surge in business for Uber Eats, DoorDash and other delivery apps, which had just a narrow slice of the delivery market before the pandemic.

Rosti Tuscan Kitchen’s loyal customer base seemed to love the tech platforms, which offered a one-stop shop for consumers to browse all the nearby delivery options, Goldfein said. The activity levels on third-party applications during the lunch and dinner hours were too high to ignore, Goldfein said. Prior to 2020, only 8% of restaurant sales were completed online or via telephone, according to a proposal the LA City Council introduced in September to increase transparency about delivery fees. The post-pandemic figure for online and phone sales, however, is between 30% and 50%.

“We had to be a part of it, otherwise we would miss out and lose our market share,” Goldfein said.

Rosti Tuscan Kitchen had no choice but to abandon its private delivery system, Goldfein said, and join DoorDash, Uber Eats and Postmates – the most popular platforms in the LA area at the time.

Restaurants all across LA faced similar decisions at the onset of the pandemic. 

Seemingly overnight, as restaurant dining rooms closed by order of health officials, third-party delivery companies saw demand for their services skyrocket.

Joe Reinstein, executive director of the Digital Restaurant Association, said that because consumers and restaurants alike relied so heavily on these platforms for food delivery, the companies had the power to dictate the rules of the market. 

This includes commission fee rates and information-sharing practices. In the United States, three online platforms – Uber Eats, DoorDash and Grubhub – are responsible for 99% of all nationwide meal deliveries as of July 2023, according to the LA City Council motion titled “Third-Party Food Delivery Companies / Transaction Transparency / Service Charges.”

The motion, introduced by District 3 Councilmember Bob Blumenfield and District 4 Councilmember Nithya Raman, calls for greater transparency about charges – including any commissions, fees and tips. The motion also requests the creation of avenues for direct contact between customers and restaurants.

Despite wanting to keep up with the rapidly transforming restaurant industry, Goldfein said the transition to third-party services was difficult because the delivery apps’ high commission fees ate into already tight profit margins. The restaurant was now making only a portion of its original profits.

The commission rates that the delivery companies charge restaurants are one of the key sources of revenue for these companies. Typically, the commission rates are roughly 15% to 30% of the price of the meal that was ordered, according to McKinsey & Company.

However, Marc Canter, the co-owner of Canter’s Deli, said fees charged to restaurants by delivery companies that are listed as 30% are often as high as 35% when factoring in extra hidden fees such as the “small order fee” for low-price items. Although Canter said he understands the need for delivery platforms to charge fees to stay afloat, he said it is unfair for restaurants to be paying more than 25%.

Uber Eats conducted a Merchant Impact Report in 2023 that revealed 85% of restaurants on Uber Eats have seen their revenues increase since joining the platform.

The food delivery services effectively saved the restaurant industry during the pandemic, Reinstein said. A study conducted by Uber Eats in partnership with Technomic found that more than three-quarters of the roughly 400 restaurants surveyed would have been forced to close during the pandemic if not for third-party delivery services.

Nevertheless, the high fees charged by delivery services make it extremely difficult for restaurants to profit from online orders, said Olav Sorenson, the faculty director at the Harold and Pauline Price Center for Entrepreneurship & Innovation and a professor at the UCLA Anderson School of Management.

Uber Eats, for example, marks up its prices well above the actual price charged by the restaurant, Sorenson said. But instead of allowing the restaurant to profit from the marked up prices and cutting only a margin off the top, Uber Eats keeps the whole profit margin for itself while still charging high commission rates, he added.  

Popular restaurant chains are able to secure lower commission rates than smaller eateries because they do not need the platforms’ assistance attracting customers, Canter said. Lesser-known restaurants, however, increasingly rely on the apps to drive business their way, which limits their ability to negotiate lower rates. 

“They (restaurants) don’t really have much bargaining power,” Sorenson said. Uber Eats has thousands and thousands of restaurants. They don’t really care whether any specific restaurant happens to be on there or not.

The motion before the city council seeks to address this power imbalance between restaurants and delivery service platforms. According to the text of the motion, Blumenfield and Raman hope to ensure that restaurants are not disproportionately bearing the brunt of the delivery costs and fees associated with the platforms.

“It’s the third-party platforms that have all the power,” Reinstein said. “They’re charging super high fees, and they’re capturing all the data for their own purposes. And that’s what we’re working against.”

DoorDash and Uber Eats did not respond in time to requests for comment on the motion.

The latest motion isn’t LA’s first attempt to level the playing field.

In October 2020, the city council capped the fees delivery apps could charge restaurants at 15% to help restaurants that were struggling to stay afloat during the pandemic lockdown. That cap expired 90 days after COVID-19 restrictions on retail food establishments were lifted June 15, 2021.

The new effort to rein in the apps contends that the 2020 ordinance was crucial for keeping many restaurants in business during the pandemic. However, even before the 2020 fee cap was lifted, the delivery apps found ways to disguise their fees and bypass the limit, according to the motion. For example, some apps charge a “bag fee” that gets tucked into the service fee, and others charge a “minimum fee” for orders with lower-priced food items, according to their online fee breakdowns.

Tumara Arnett, the co-owner of Joselito’s Mexican Food, said even during the height of the pandemic in October 2020, Grubhub did not honor the 15% fee cap imposed by city council.

Arnett said that delivery services used hidden fees to indirectly increase the commission fee above the 15% cutoff. Additionally, Arnett said Grubhub switched the restaurant’s phone number to a Grubhub number on its Yelp page without the restaurant’s permission. As a result, customers trying to call the restaurant first reached Grubhub instead, allowing the platform to take a commission for each order. 

Grubhub did not respond to a request for comment on Arnett’s experience.

Eventually, Arnett said she negotiated the post-pandemic fees down to between 20 to 25%. But even that was too much for her small restaurant, she said, forcing her to transition to a cheaper delivery option with more limited advertising. Joselito’s now uses DoorDash delivery drivers but opted to have its own customer interface instead of being listed on the DoorDash website.

Three years after the pandemic restrictions, both consumers and restaurants have continued to use third-party delivery services at pandemic-era levels, Reinstein said.

Without the protections instituted during the pandemic, Reinstein said, the abuse of power by third-party delivery platforms has intensified.

When customers order from DoorDash, they pay a “service fee,” which covers roughly 15%, with at least a $3 minimum. The delivery portion only allocates about $2 to $3 for drivers. If recipients live more than five miles away, they’ll also pay an expanded range fee of $0.75 per mile, and if the order is less than a certain amount, DoorDash tacks on a “small order fee.” Additional unspecified fees are also often included on top of all of this.

Uber Eats also has additional restaurant fees on top of the initial delivery fee, including service fees, local operating fees, marketplace fees, California drivers benefits and unspecified other fees.

These fees are what the customer pays to the delivery company apps. However, it makes customers less likely to order as much food as they normally would and often makes them less inclined to tip the driver as much, despite how small a share of profits they are getting.

Sorenson said without transparency regulations, Uber Eats often still marks up the prices even further and makes it difficult for restaurants to verify the price of their items listed on the app. 

The system creates a disconnect between restaurants and their customers about pricing, Sorenson said.

Arnett added that restaurants don’t receive any of the high fees the delivery apps charge consumers. A burrito that costs only $7 to $8 at Joselito’s Mexican Food, for example, costs as much as $21 when ordered through a third-party delivery service. But Joselito’s gets only $4 of that total, he said.

“The consumer thinks, ‘Wow, the restaurant’s making a lot of money,’” Arnett said. “However, there’s all of these hidden fees that the delivery apps directly collect from the consumer.”

Emma Wruck, a second-year psychobiology student who used to work at House of Meatballs in Westwood, said customers should know that the money for delivery orders is mainly going to DoorDash and Uber Eats rather than the drivers or the restaurant.

“I think it’s (the city council’s motion is) an important bill to have the transparency of fees available to consumers and to restaurants,” Arnett added. “Fees are a very huge chunk of what the customers pay, and the restaurants don’t see any of it.”

Beyond the fees, Maiyah LaMar, a second-year film and television student who used to work at CAVA in Westwood, said that better communication between restaurants, customers and drivers would help ease the delivery process. Currently, they are disconnected from one another, and thus problems that come up for one cannot be addressed by any of the others, she said. As an employee, LaMar said she often felt overwhelmed by the number of delivery orders, which was made worse by pressure from rushed delivery drivers who complained when in-person orders were given priority. 

LaMar said an open communication system would allow restaurants to warn customers and drivers when they are overrun with orders, which would ease impatient delivery drivers and customer concerns about delayed orders.

The inability of restaurants to communicate directly with consumers who order through third-party delivery services makes it difficult to address complications with orders, Reinstein said. He added that in the case of delivery issues, refunds must be completed through the online delivery platforms. 

Reinstein said that refunds result in restaurants getting charged by delivery services, despite them often not being at fault. The delivery platforms do not inform the restaurants that a refund was issued until a week later when they are expecting to receive payment, he added.

Arnett said customers sometimes call the restaurant directly to request a refund. But because the refund must be processed through the delivery app, the restaurants must call the delivery services and go through a lengthy refund process, which often takes over half an hour – time that busy small restaurants don’t have. However, the DoorDash website states that if the restaurant needs to file a refund, they can process the request through the merchant portal, and then customers will receive their refund notifications within five to seven business days.

“There’s a reason why consumers are so willing to demand a refund with poor service,” Reinstein said. “They think that they’re hurting the platform, and they don’t realize that the delivery companies are just charging the restaurant back for that refund.” 

The LA City Council motion is still in the early stages, Reinstein said. It has only been introduced, but Reinstein said the next steps in supporting it are to spread public awareness and push for the motion to be passed. Rather than shifting to state-level advocacy, groups supporting the motion have continued to push for change at the local level because the uniqueness of each city’s economic landscape requires a tailored approach, Reinstein added.

“This issue is so important to Los Angeles, and specifically small business entrepreneur owners that are an economic engine for the city,” Reinstein said. “These small businesses are feeling the impact of these big tech platforms that now basically control the online marketplace and can dictate the terms to … small business owners who don’t have the leverage or scale to fight back.”

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