Delivery cost caps only benefit restaurant chains
Right now, the restaurant delivery economy isn’t working for anyone, and it seems like no law can tell the difference between a successful delivery industry and a failure.
After the initial outbreak of the pandemic, as consumers rushed inside to stay safe, orders for delivery through third-party aggregators soared.
This increase in order volume has widened existing cracks in the system, with high third-party commissions making it nearly impossible for some independent restaurants to make a profit. However, even after many U.S. cities announced limits on the fees these services could charge restaurants, the model remains broken.
Zhuoxin (Allen) Li, PhD in Philosophy and Assistant Professor of Information Systems at Boston College studying the legal and economic factors influencing on-demand delivery platforms, spoke with PYMNTS about how ongoing fee caps, such as those adopted by New York and San Francisco, may not be the answer.
âMost restaurants welcome fee caps because they can keep more of the income,â Li said, highlighting the findings of an to study he and a colleague explained the effects of price caps in 14 US cities. âMy research shows that fee caps don’t necessarily benefit restaurants. Surprisingly, chains turn out to be the biggest winner after cities impose fee caps. “
Determining the economics of delivery was not such a pressing issue before the pandemic, when the channel only accounted for a small portion of restaurant sales, but now that consumers have become accustomed to the convenience of the channel, the inability to operate the model could adversely affect delivery services, restaurants and consumers.
PYMNTS research of The Bring-It-To-Me Economy report, created in collaboration with Fiserv Carat, found that nearly half of all consumers (46%) order food from restaurants using third-party aggregators more than they were before the pandemic.
Read more: Bring It On Me Economy Grows As Consumers Embrace Home-Centered Lifestyles
In addition, the results of the PYMNTS restaurant readiness index, created in partnership with Paytronix, indicate that 18% of all restaurant sales come from third-party aggregators.
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The restaurant’s point of view
Uncapped fees can be disastrous for restaurants, with delivery service commissions sometimes even exceeding restaurant profit margins, making the model completely impractical. Still, somewhat counterintuitively, Li’s research found that fee caps might actually make matters worse.
In cities where fees were capped for independent restaurants but not for large restaurant chains with 20 or more establishments, independents suffered, receiving fewer orders and experiencing declining income. Large chains, however, have seen their orders and revenues increase, he noted.
Taking this disparity into account, Li explained, âDelivery apps can change their filters to promote chains and restaurants located just outside a city limit, where they can earn their full commission. “
He added that some cities have even imposed “city fees” on consumers in areas where fees are capped. These higher prices can deter consumers from ordering, which translates into lower sales overall.
âThis is, to a certain extent, a zero-sum game, as fee caps do not create additional value for the whole system,â Li said.
The perspective of the delivery service
Despite the increase in delivery orders caused by the pandemic, delivery services continue to operate at a loss, even the category leaders fail to achieve profitability. From their perspective, permanent fee caps only make matters worse.
âDelivery apps may bear the cost temporarily, but it’s definitely not the balance,â Li said.
Earlier this month, DoorDash, Uber Eats and Grubhub sued New York City over its decision to make these fee caps permanent, alleging that the law is “motivated by clear animosity towards third-party platforms” and that it âinterferes with freely negotiated contracts. “
Read more: Restaurant aggregators sue NYC over fee caps to shape future of delivery economy
Li noted that the high labor cost associated with the delivery business makes it difficult to find a profitable model.
âUnfortunately, so far there have been no significant economies of scale to reduce delivery costs,â he said, adding that attempts to make drivers’ routes longer. effective in consolidating orders have been largely unsuccessful.
The best and worst case scenarios
While there may not be a win-win option for all parties involved, Li said he believes the most promising solution to emerge for the difficult economy of third-party delivery. To date are the tiered pricing plans that top delivery services have launched throughout 2021, allowing restaurants to choose to bear the cost themselves or pass the cost on to the consumer. While far from perfect, he argued that some version of tiered pricing may be the only option that can work in favor of independent restaurants.
âThe worst-case scenario is that delivery apps leave the market and restaurants lose the delivery channel to reach diners who otherwise wouldn’t order from those restaurants,â Li said. âIt could hurt many people. small independent restaurants that do not have the resources to develop their own online ordering and delivery capability. “