The fee cap experiment is probably over
The fee cap experiment is probably over
Commission caps imposed on third-party delivery services will likely become one more relic of the Covid era.
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The city of San Francisco doesn’t want to fight with delivery services anymore, it seems. SF has reportedly struck a deal (if you can call it that) with DoorDash and Grubhub after the pair of delivery giants sued the city over its permanent commission caps. They’ll drop the pending lawsuit in exchange for changes to a city law that currently caps commissions restaurants pay delivery services at 15 percent.
San Francisco was the first city to make Covid-era fee caps permanent, voting in June 2021 to impose a 15 percent cap on the commissions restaurants pay delivery services. The apps pushed back immediately, calling the caps unconstitutional.
Now, it seems like the big tech companies are getting what they want in San Francisco: the ability to charge restaurants more for services beyond basic delivery. The city, in return, will mandate a 15 percent cap on commissions paid for “core delivery services.”
Conveniently, this falls within — or pretty close to — the apps’ current pricing strategies: DoorDash announced a new three-tiered pricing plan in the spring of 2021. Its most basic marketplace plan costs 15 percent commission, a rate that DoorDash president Christopher Payne said, during a call with press, was not in response to the caps levied by cities. Instead, Payne said, the changes came after listening to feedback from restaurants.
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Aaron Peskin, the San Francisco city supervisor who sponsored the original fee cap legislation is now the sponsor of the amended proposal. Per coverage in the SF Chronicle:
Peskin doesn’t see the amended ordinance as a concession to the tech companies, but rather a win for the city and restaurants. Business owners get protection and flexibility, he said, while San Francisco avoids a costly lawsuit.
The emphasis on that last part is mine, because, well, this move seemed inevitable.
I wrote about the big delivery lawsuits for Robb Report last October, under the prescient headline, “Why the big restaurant delivery apps will need the courts to save their business.” At the time, fee caps were an existential threat to delivery businesses, levied in many cities across the country. While the caps were left to expire in most places that had instituted them as emergency measures, San Francisco and New York, notably, voted to make them permanent. (DoorDash, Grubhub, and Uber Eats filed a different lawsuit challenging that cap. No word yet on a similar NYC compromise, but I suspect city officials are watching the case in SF with great interest.)
Even then, experts said that the caps had little chance of surviving a court challenge. From my aforementioned piece:
“It’s been few and far between where governments have stepped in and imposed an explicit pricing constraint on a company’s business,” said [Len] Sherman, [an adjunct professor at Columbia Business School in New York]. “That’s not to say they don’t exist, but where they exist, they exist under conditions that I believe are just fundamentally different from DoorDash.” He points to cases of rent control and regulated monopolies like electricity services, but also things like bottled water during a hurricane, or Uber rides after a terrorist attack when people are trying to evacuate the area. Independent restaurants, he said, are not on the same scale.
Laurie Thomas, executive director of the Golden Gate Restaurant Association, worked on the changes. She told me that the deal ensures the delivery platforms can’t raise rates in San Francisco for basic services in the future, providing a level of certainty for the city’s restaurants. What’s less clear — and would be visible in the law’s implementation, she said — is exactly what those basic services entail. The proposed amendment requires delivery companies to offer “the option to obtain only core delivery service.”
Per the filing, performing a “core delivery service” requires the delivery companies to list and make discoverable partnered restaurants, and facilitates or performs delivery to customers. “Core delivery service does not include any other service that may be provided by a third-party food delivery service to a covered establishment, including but not limited to advertising services, search engine optimization, business consulting, or credit card processing,” it reads.
Arguably, services above and beyond so-called core delivery are what make the platforms attractive to both restaurants and diners in the first place. In a call with investors and analysts in February, DoorDash chief financial officer Prabir Adarkar said “a small fraction” of restaurants had opted into the new pricing tiers as opposed to their prior pricing agreements. Of those who opted in, he continued, the majority have picked one of the two higher tiers, he said, “which was in line with what we expected, and makes sense given the value that we drive at the higher pricing tiers.”
(This was also what we heard from DoorDash in August 2021.)
Current premium services from DoorDash include access to DashPass subscribers (that’s DoorDash’s growing subscription for free delivery from certain restaurants), and a larger delivery radius, with those commissions starting at 25 percent.
Grubhub offers similar tiers of service. To access “premium Grubhub+ customers” — like those customers that, say, just got Grubhub’s subscription service for free as part of their Amazon Prime subscription — a restaurant must opt into Grubhub’s middle tier. Similarly, Grubhub’s “premium” tier includes the ability for a restaurant to respond to ratings and reviews on its platform. (Unlike DoorDash, Grubhub does not publish its rates; in a FAQ section on its website, it says it charges a “negotiable marketing percentage for driving the order.”)
If it sounds like I’m splitting hairs here, it’s because I am.
But it’s in service of a larger point: this seems to be the outcome big delivery companies were hoping for. These companies lost millions due to commission caps at the height of Covid; why wouldn’t they throw power and money behind overturning these ordinances?
Others agree. In March of this year, the US Chamber of Commerce (which is, reminder, a lobbying organization) came out in support of the delivery companies, saying that fee caps have harmful and counterproductive effects. Over a year earlier, in February 2021, the Progressive Policy Institute, a Washington, D.C. think-tank, said that price controls imposed by lawmakers were “unknowingly destroying the delicate balance platform owners have struck to attract enough consumers and suppliers on the platform to make the economics work.”
This is not some grand triumph of evil over good. Both Thomas and the delivery companies reiterated that they believe this legislation to be a collaborative effort that benefits both large companies and independent restaurants. Plus, third-party delivery services do work for plenty of restaurants. The fact that so many restaurants choose to opt into services beyond basic delivery proves this point. (Though Thomas, a restaurant owner herself, said she plans to stick with DoorDash’s lowest-priced tier after the probable change.)
Detractors of delivery and even impartial observers like me enjoy pointing out that third-party delivery companies still struggle: Grubhub is likely up for sale; DoorDash is still unprofitable. But the business is evolving. In a recent DoorDash earnings call, the company said that its marketplace orders in the US grew by over 250 percent between the first three months of 2020 and the first three months of 2022.
“Now the core U.S. restaurant business is profitable. It's growing, and the profit margins continue increasing,” DoorDash’s Adarkar said on the call.
Maybe the legislative changes in San Francisco just prove that big delivery has been very effective in communicating its value to those who previously thought otherwise. In that case, Laurie Thomas’s point that the amended law would require basic services to be priced at 15 percent commission, regardless of future platform changes or soaring inflation rates, is well-taken.
In an emailed statement about the legislation, the Golden Gate Restaurant Association said, in part: “We are thankful for the hard work and collaboration from all sides. This is an example of how we can all work together to ensure a safe and fair business environment for all."
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What else?
Shrinkflation, longer waits, advanced booking. These are some of the key trends from Yelp’s latest economic average report. Inflation is impacting all parts of life, with diners noticing portion sizes shrinking — a phenomenon that has been termed “shrinkflation.” According to the report, this is most commonly reported about pizza, burgers, Chinese food and BBQ, among others. People are also making reservations further in advance. In April, May, and June, the average time between booking a reservation on Yelp and the reservation date was 3.3 days — a 14 percent increase in time compared to Q2 2021 and 55 percent more than in Q2 2020. And, in news that surprises nobody (remember, chronic understaffing), the median wait time for a table in Q2 2022 increased to 35 minutes. In the same period in 2021 and 2020, the median wait time was 22 and 16 minutes, respectively. As they say, dining out isn’t what it used to be!
-Danielle Hyams
With an eye on profitability, restaurant tech layoffs abound. While investors were once happy to pour money into new startups, with the current economic landscape, that way of thinking has shifted, and many companies are feeling the crunch. Most recently, Sunday, the QR code restaurant payments app, said it laid off an undisclosed number of employees and exiting 60 percent of its markets, ending operations in Italy, Spain, Canada and Portugal to focus solely on the US, the UK, and France.
"With the current state of the market, investors are now expecting profit from the get-go. Sunday, which is just 16 months old, has been navigating this shift by refocusing its geographical footprint to its most important markets," the company told Insider in a statement.
No company is immune to these pressures. ChowNow, the online ordering platform aimed at independent restaurants, also shared last week it has laid off nearly 100 people because of current economic conditions. "Interest rates have been essentially zero for 12 years, and that has allowed businesses, ChowNow included, to grow very quickly and take advantage of cheap capital," ChowNow CEO Chris Webb told Insider ($). "That era is now behind us."
Webb said he thinks the industry’s layoffs will continue. He’s also looking back. "We were too ambitious with our plans for this year. And now we need to bring it back in line,” he said.
-DH
Disclosure: Expedite partners with ChowNow on unrelated initiatives.
Here’s an update from everyone’s favorite virtual brand: MrBeast himself shared some updated stats on MrBeast Burger, launched in partnership with Virtual Dining Concepts. According to a tweet from Jimmy Donaldson, aka MrBeast, the virtual brand has shared over $100 million in revenue with restaurants. The burger “chain” has 1,500 locations.
DoorDash is raising its order minimum for subscribers. Details are vague, but the delivery company announced plans to increase subtotal minimums for DashPass members. Currently, to receive free delivery, subscribers must order at least $12 of food or $35 worth of groceries. In an email update, DoorDash said minimums “may increase and vary by store, city, and time of day.” On a recent call with investors and analysts, a DoorDash executive said that the company’s average order value had already increased slightly due to inflation.
-DH
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