Impacts of Third Party Platform Delivery Charges on Local Restaurants

Agenda Bill City Council Regular Business Meeting - 18 May 2020

Department Staff Contact Business & Economic Chris Craig, Economic Development Manager Development

Agenda Bill Title

Summary

As public health and social distancing orders have restricted dine-in options for restaurants, a larger percentage of restaurant orders now come through 3rd party delivery platforms. These platforms charge marketing and delivery commissions to restaurants for their services. Commission and fees differ across the platforms and based on the services provided, but can be upwards of 30% of the price of a restaurant order.

Restaurant orders made through these 3rd party platforms pre social-distancing orders made up a small percentage of overall restaurant sales. With the government mandated public health orders, and encouragement of carry-out and delivery options, these orders now represent a majority of sales for many restaurants. Due to the slim margins in which the restaurant industry operates, these 3rd party platform commissions can result in the restaurant operating at less than half its normal profitability, and potentially at a loss on some orders.

Attached is a staff report on outreach to Burien restaurants and food businesses regarding the impact of these commission fees on their businesses. Also attached is a letter from several of the 3rd party delivery platforms to the City of San Francisco, which provides some context as to the operational costs covered by these commission fees.

Attachments

3rd Party Delivery Fee Memo Letter to City of San Francisco Regarding Delivery Fee Caps Grubhub_One-Pager_Pricing-Overview_Final

Page 1 of 10 MEMORANDUM

To: Chris Craig, Economic Development Manager From: Lorraine Chachere, Economic Development Specialist Subject: Research on 3rd Party Delivery Platform Fees

3rd PARTY FOOD DELIVERY PLATFORMS RESEARCH

BACKGROUND

Restaurants sign up for the services provided by these 3rd party providers and may opt out of the services. Many businesses we talked to report that since they have signed up, they have experienced a lack of transparency in how fees are charged. Restaurants we talked to were concerned with the profit loss caused by these delivery fees, but are also concerned that they will lose customers if they discontinue the service as the use of online delivery grows due to public health orders.

The City of Seattle recently passed a 15% cap on delivery fee commissions from these 3rd party delivery platforms. Other cities, including Washington D.C., San Francisco, and Jersey City have enacted similar fee caps. In Jersey City, in response to a 10% cap on delivery fee, Uber Eats has introduced an additional $3 delivery fee charged to customers.

If the City of Burien passed a cap on delivery fees, it is unknown what potential steps the 3rd party delivery platforms would take in response. In a letter to the City of San Francisco signed by Uber Eats, Door Dash, Grubhub and Postmates as a delivery fee cap was considered in that City, the platforms wrote:

“A proposed cap on these commissions would result in fees for consumers rising and service areas shrinking, cutting off consumers from the services they rely upon in this crisis. Delivery people—who are currently relying on on-demand work opportunities to

Page 2 of 10 earn an income—would have fewer work opportunities and lower earnings. And restaurants that need revenue to maintain operations would see fewer orders, potentially forcing more of these businesses to close their doors.”

PRESENCE IN BURIEN

The more popular and widely used platforms in no particular order are: Grubhub, DoorDash, UberEats. These are widely used by customers familiar with these services and of which Buren businesses have identified through business visits, calls, and a quick online search of each of how many participating restaurants in Burien. All platforms provide a delivery and a pick up option for the consumer to select.

SERVICE FEES

All food delivery platforms require a contractual agreement. Most platforms start off with a 30% fee, but there is some room to negotiate. If a restaurant negotiates with the delivery company it may be possible to move to a lower percentage fee if they become an exclusive partner. The restaurant can also raise the prices on the delivery menu. Yet ultimately, the delivery service company will still take 30%, or whatever rate the contract stipulates, of the actual sale.

Even pre COVID-19 business adjustments, these platforms are known to collect 30% of the sales volume. With the restaurants I spoke with, none had reported that the rates or fees have increased since COVID-19, just that now they are doing more sales in volume via delivery through online sales due to consumer preference. Despite there being an option for pick up vs delivery, consumers are overwhelmingly selecting delivery. These fees get taken out monthly from deposited amounts to businesses. Delivery service fees vary from business to business-- even from a single delivery platform.

RESTAURANT FEEDBACK

On a very small scale of business outreach of Burien based, non-chain entities that have been open throughout the Stay Home, Stay Healthy order, our goal was to learn the following:

1. What percentage of your current food sales is from customer pickup/carryout vs. food delivery (utilizing a third party delivery platform, not in house delivery capabilities)?

2. Which platforms do you use? What are their current fees for the inclusion of your restaurant?

Here is feedback received from Burien businesses:

BUSINESS #1

Delivery platform sales only make up 25% of their food sales. Most of their customers’ prefer carryout and pick up their orders in person. They are charged 25% in fees by UberEats and DoorDash.

Page 3 of 10 BUSINESS #2

“Yes we would support a temporary cap on delivery fees, as sometimes these fees can double the price of the customer’s transactions. And, while in good times if people want to order food and have it delivered, it can be pricey, but in these times ordering food online is comforting and safer. The only unintended consequence I can see, is if drivers don’t want to deliver, so I think the drivers shouldn’t be penalized, the corporations can stand to make less profit.”

BUSINESS #3

“I have pretty strong feelings about this situation and would support a cap on the fees. I consider most of these companies to have somewhat predatory business practices that rely on businesses feeling like they can’t stop using the services once they have introduced it to their customers.

If you look at the charges these companies have been able to get to, many businesses end up losing money as a result to using them. We’ve been talking to DoorDash about starting to work with them for a limited period of time at reduced rates but it’s taken a lot of time to get them to a point where we can actually make any profit.

My biggest concern is to ensure the law if written takes the big picture into consideration. The 15% cap Seattle put in place is great but it left out other fees and “taxes” resulting in some of these companies adding other fees that brought the bill in the end back over 30%. UberEats is the one I’ve seen the worst from. Another big issue they would be worth looking at is that some of these companies allow customers to tip drivers but not all the tips are given to the drivers.

As far as unintended consequences go, the companies will say they can’t operate or that they will leave but many, like DoorDash, have corporate contracts with companies like McDonalds, Taco Bell, and Burger King, so they will not be leaving. The benefits and protections to small business in my mind far outweigh any consequences. Especially when Seattle and other cities are looking at it.”

BUSINESS #4

They prioritize carryout orders (which comprise the bulk of their sales) over delivery ones because of the fees associated with Grubhub and UberEats which are the two food delivery platforms they mostly use.

BUSINESS #5

This business increased the prices of menu items on the delivery platforms by 30% to recoup the costs. They are incentivizing patrons to purchase from the menu directly for the discounted rates (without the markup). They are working creatively to incentivize customers to book directly with there website. Yet it is taking up their time and have to have the bandwidth to do so.

Page 4 of 10 BUSINESS #6

They use UberEats, Doordash and Grubhub which comprise 30% of their food sales. They are charged 15% in service fees. Their sales from in-room dining is down 30% in overall sales.

BUSINESS #7

They started to use UberEats and Doordash just a few weeks ago, because she didn’t have any customers in a single day. They both charge 30% fees but they bring in sales.

BUSINESS #8

Their walk-in sales have decreased 30-40% yet their food delivery sales have increased by 30%. Grubhub charges 28% in service fees and UberEats 30%. These services are helpful as they rely on it for traffic and to maintain sales. While there is a pick-up option, overwhelmingly her customers utilize the delivery option. The payment is monthly to her business and is only minimally beneficial by 15% in revenue. They said they would have major challenges if these 3rd party platforms were not available.

BUSINESS #9

They indicated they lose 50 – 70% in revenue from Uber Eats.

“Usually our customers come and order directly from our restaurant. But, during the lockdown they use the third parties which have 30% fees. This fees usually being compensated by our direct customers. But now most of sales are from the third parties which leave us with tight profits.”

They are working seven days a week, and had they been able to maintain those revenues, it would allow them to hire staff part-time and allow her to have one day off.

BUSINESS #10

“The current rate is around 30-32% of the bottom line. I.e. you order a $15 burger then $5 goes straight to GrubHub along with their 'service ' charge billed straight to the customer. It's an absolutely brutal hit and not economically sustainable in most restaurant/ bar scenarios.

The rationale for taking such a big chunk is they (GrubHub etc) say that any additional business over and above 'dine-in' is mostly straight profit aside from the cost of goods. i.e. our overhead is already accounted for by in store sales and aside from the cost of ingredients any additional sales is profit. This overly simplistic model is pretty inaccurate in the best of circumstances and doubly inaccurate when there is no dine in business to cover overheads.

As far as unintended consequences go, my business partner has told me that there have been massive problems getting accounts set up and serviced ever since the 15% cap in Seattle went into effect. The third party delivery sector as a whole seems to be conspiring to under-serve the Seattle metro area. Endless hold times on the phone, wildly inaccurate menu representations or other essential business info, or no contact back at all.”

Page 5 of 10 BUSINESS #11

They have increased their prices to recoup the 30% service costs. They would be supportive of a cap on fees as they say they can only raise prices so much before their customers go to competitors.

SUMMARY

Based on the conversations and email responses received, which is a small sample, a few items became evident:

 Delivery service fees vary from business to business-- even from a single delivery platform.  Food delivery sales supplemented lost revenues from in-room dining, almost the same exact percentages before the platforms’ service fees are deducted.  For those restaurants who rely on delivery sales as a lower percentage of their sales, they were not as concerned about the service fees.  Minority and immigrant businesses rely on delivery food platforms for potential new customers to learn of their business.  Customer confidence in delivery orders is high and convenience is a top factor in selecting delivery over a pick up option.  Educating the public regarding the effects of ordering online from restaurants would be beneficial to our local businesses. Restaurants reported that they would prefer that customers call them directly to make an order, or order carry-out so that they can avoid the fees they pay to third party delivery companies.

Page 6 of 10

April 8, 2020

Dear Mayor Breed and President Yee:

On behalf of the nation’s leading delivery network platforms, we write to you today to indicate our strong opposition to the Mayor’s proposed emergency order limiting restaurant delivery commissions through the ongoing health crisis. Our platforms are proud to enable local businesses to remain open and continue to generate much-needed revenue, provide safe earning opportunities for workers, and help vulnerable San Francisco households put food on the table during this crisis. While we are pleased that Governor Newsom and others in California have deemed our platforms “essential services,” we are disappointed that a rushed, arbitrary policy is being considered in San Francisco that fundamentally threatens the very communities we all aim to help. Now is not the time to impose untested, one-size-fits-all policy changes to one of the best current lifelines for fast and accessible work opportunities.

Any cap on commission fees—regardless of the duration—will result in damaging, unintended consequences for San Franciscans from all walks of life. To date, no city has enacted a cap on delivery commissions. If the City attempts to dictate contract terms between delivery services and restaurants, it would force our services to radically alter our businesses just as we desperately try to meet the needs of restaurants, delivery people, customers, and our communities. This would result in making food delivery more expensive—putting it out of reach for all but the city’s most prosperous residents—and significantly reducing restaurant revenues and earning opportunities for thousands of residents.

Restaurant commissions cover a broad range of services made available to restaurants through our platforms. They are not one-size-fits-all, and they are tailored to each restaurant’s needs. As an industry, we would like to detail the operational costs that are covered by commissions and fees in our efforts to maintain reliable services. These include: ● Onboarding new delivery people, including background checks for every delivery person on the platform; ● Ensuring that delivery people earn a fair amount for their work. ● Maintaining the safety of our platform, including insurance costs and personal protective equipment to protect delivery people; ● Marketing our services to customers, including advertising and marketing to drive demand to local restaurants; ● Technology services including payment processing, order management, application maintenance, and dispatching technology. ● Teams of dedicated customer service specialists to provide support to restaurants for orders placed through our platforms.

A proposed cap on these commissions would result in fees for consumers rising and service areas shrinking, cutting off consumers from the services they rely upon in this crisis. Delivery people—who

Page 7 of 10

are currently relying on on-demand work opportunities to earn an income—would have fewer work opportunities and lower earnings. And restaurants that need revenue to maintain operations would see fewer orders, potentially forcing more of these businesses to close their doors.

We believe in the importance of empowering local economies, especially during this time of need, which is why our platforms have announced financial assistance packages and made significant investments to continue driving demand to local businesses. It is also why each of us has funded thousands of meals to first responders, medical personnel, and other at-risk communities in the Bay Area.

Steps taken by delivery platforms to support restaurants and small businesses include: ● Grubhub is funding $30 million directly to restaurants through S upper for Support. As part of the program, Grubhub w ill give $250 to each participating restaurant. Grubhub’s Community Relief Fund is collecting more than $1 million per month. Those funds are being used to directly support restaurants, workers, drivers, first responders and others impacted by the current crisis.. ● Uber Eats is waiving customer-facing delivery fees for all orders from small business restaurants. This has driven a significant increase in orders to independent restaurants on the platform. We have launched a daily pay out feature to ease cash flow concerns, waived commissions on all pickup orders facilitated by Eats, reduced commissions on orders where restaurants use their own delivery people (15%), and launched a first-of-its kind feature allowing Uber Eats customers to contribute directly to restaurants in-app and a commitment for Uber to match with donations to the Restaurant Employee Relief Fund. ● Postmates, per a policy announced in partnership with the Golden Gate Restaurant Association, and on the heels of the first shelter in place ordinance, is waiving all commissions fees for all new brick & mortar retail merchants in the City of San Francisco, looking to use the delivery platforms as their singular form of revenue. Postmates will continue to extend that policy for the duration of the emergency order, while also offering reduced pick-up/carry out orders, as well as reduced customer fees for homebound seniors, students, residents in food deserted neighborhoods of the City, and households in food deserts. The reduction in merchant fees, and customer fees (to boost restaurant revenue & residential demand for delivery) is also paired with an increase in worker earnings, including new resources for income replacement, the cost of doctor's visits, and protective equipment. ● In addition to the measures DoorDash and Caviar have taken to protect and support delivery providers during this public health emergency, we have made significant investments to support local restaurants. DoorDash and Caviar eliminated commissions for restaurants that chose to join our platform for the first time and for pickup orders facilitated through our platforms. DoorDash also lowered commissions for existing restaurants. We are investing millions of dollars to reduce or eliminate consumer fees, generating more orders for

Page 8 of 10

restaurants, which is helping them keep their doors open for delivery. Every independent restaurant and franchise can also elect to receive daily payouts to ease cash flow concerns.

In the middle of what is quickly becoming one of the worst economic downturns in a century, delivery network companies are ensuring that thousands of local retailers and restaurants can stay in business; thousands of San Franciscans can continue to earn income to provide for themselves and their families; and our most vulnerable populations—including the elderly and immunocompromised—can continue to access food and essential supplies from their homes. We strongly urge you to reconsider this hasty measure and work with us to support San Francisco’s restaurants and retailers as well as their employees and delivery drivers—in a fair and sustainable fashion.

Sincerely,

Max Rettig, Global Head of Public Policy Emilie Boman, Head of Uber Eats Policy DOORDASH UBER TECHNOLOGIES INC.

Amy Healy, Head of Public Affairs GRUBHUB

Vignesh Ganapathy, Head of Government Relations POSTMATES

CC: San Francisco Board of Supervisors, City Attorney Dennis Herrera

Page 9 of 10 Grubhub pricing Taco Fix Pricing Example Marketing Commission 20% Grow revenue and get more orders by Delivery Commission 10% partnering with Grubhub Processing Fee 3.05% + $0.30 Delivery Tip 15% Sales Tax 8%

2 × Fish Tacos $8.00

3 × Carne Asada Tacos $10.50 Online Ordering Platform 1 × Carnitas Plate + Rice & Beans $12.50 1 × Guacamole & Chips $6.00 The Grubhub platform increases your order volume by putting your restaurant’s menu in front of millions of hungry 1 × Bottled Soda $2.00 diners, enabling them to easily order online. 1 × Bottled Water $2.00

Product Total $41.00 Complete Delivery Solution Sales Tax $3.28

Receipt Total $44.28 delivery solution. Here’s what Grubhub Delivery can do for you: Marketing Commission1 ($8.20) Delivery Commission1 ($4.10) Manage Your Deliveries We’ll provide on-demand drivers—fully equipped and ready Processing Fee2 ($1.65) when you need them. Each delivery is backed by our 24/7 Total Commissions & Fees ($13.95) Customer Care. Total Revenue3 $30.33 Take Care of Your Customers restaurant: top-notch and professional. We strive to provide diners the most competitive delivery fee in the market. Restaurant Partner Commission Save You Money Handling delivery on your own means paying salaries, The following illustrates Grubhub’s fees. insurance and tip-outs. Grubhub Delivery means you don’t have to. Your Site Grubhub Prepaid Orders4 Orders Grubhub Pricing Marketing Commission — 20%+ The Marketing Commission level that you select will Delivery Commission 10% 10% inﬂuence your restaurant’s exposure on our website. Processing Fee Restaurants that have a higher Marketing Commission 3.05% + $0.30 3.05% + $0.30 will get a broader access to our diners. (per transaction)

1 Applies to Product Total. 2 Applies to Receipt Total. 3 Receipt Total less commissions and fees. 4 Placed through a Grubhub provided Online Ordering Link. Page 10 of 10