- by Alex Alper |
- May 28, 2020
- Third Party Apps | 14 min read
Restaurants Fight Back: Is the Cost of Third Party Delivery Too High?
We’ve written before how third party delivery services benefit your restaurant, especially as the COVID-19 crisis makes profit margins even thinner than they usually are for restaurants. These platforms can do a lot of good, but lately restaurants are wondering whether the negatives outweigh the advantages.
A Greek restaurant in Brooklyn, NY has decided to take a stand against the high fees associated with these apps. Although Pitas and Sticks continues to work with Grubhub, they’ve started asking their customers to support the restaurant, and other small businesses like theirs, by ordering delivery directly through their company website. Currently, the owner estimates that as much as 90% of the restaurant’s online orders come from Grubhub, who takes a hefty commission fee on each one. Now, with every Grubhub order they send out, Pitas and Sticks also includes a note describing how the third party service takes exorbitant fees from them and asking consumers to order directly from the restaurant next time.
Pitas and Sticks isn’t alone with these concerns. They’re part of a new wave of restaurants encouraging customers to get off the third party delivery apps and start supporting local favorites directly instead. This comes as a direct result of the COVID-19 crisis; although restaurants have been speaking out for years against the expensive commission fees that third party apps charge, even culminating into a lawsuit about gouging prices amongst some of the major players, restaurants are now even more strapped for money than usual.
Even outside of a global pandemic, restaurants operate on extremely thin profit margins. In this time of crisis, every single order counts and they simply can’t afford to pay commission fees that can get as high as 30%. However, many restaurants can’t refuse to partner with at least one of these popular delivery platforms, usually for one of the following reasons:
- Many initially turned to these delivery apps because they were losing so much money to their competition, who had a bigger delivery range and large marketing presence, both of which made them more widely visible to the public and put smaller restaurants at a disadvantage. Additionally customers are extremely eager to buy delivery, especially during this pandemic when social distancing is of paramount concern. Restaurants who can’t afford to set up their own delivery system or get their name out to a larger audience often turn to established channels, like third party services, to begin offering delivery themselves.
- Customers find it more convenient to find, order and pay for food all from one app on their mobile devices. Thus these delivery platforms have a built-in customer base that merchant partners can market to directly.
- Third party platforms streamline payment processing, customer support, marketing services and more on behalf of the restaurants, which cuts down on operating costs. This is especially attractive for restaurants trying to get business off the ground.
- These apps provide their own drivers and deliverers so restaurants don’t need to hire that manpower or spend time and money establishing a delivery system of their own.
Restaurants were more willing to compromise the loss of income in exchange access and easy startup, but that was when online orders only accounted for a small portion of their overall sales. Now, however, these third party platforms are more prevalent than ever and restaurateurs the world over face unprecedented financial difficulty. These issues coalesce to cause many restaurants to pull, or want to pull their business off these apps. However a majority of these merchant partners can’t or won’t do so, either because they can’t afford to decrease their sales range, the third party funding delivery workers is a massive asset, or they simply accept that the majority of their online customer base prefer ordering that wayeven when it costs them thousands.
Breakdown of Fees
Delivery apps can charge commission fees as high as 30%. The exact number depends on the restaurant, the particular platform that they partner with, and the services that they sign up for on the app. Many third party platforms give restaurants the option to sign up for services like payment processing, customer support, credit card processing, marketing, employee on-boarding, payroll and more. Some of the more popular apps have statistics available regarding the average price for their services:
- Uber Eats
Their fees tend to vary on average because the price depends on the services they choose. For example they give restaurants the option to use their own delivery team. Restaurants that take on the burden of delivery themselves can pay as little as 15% commission on average whereas those that rely on Uber Eats to handle those services for them can pay up to 30% per sale.
They include marketing and delivery commissions in their “service fee,” but restaurants can opt into other services too so they can maximize profits. Rather than a flat rate, Postmates privately negotiates how much each merchant partner pays. They don’t charge any upfront costs but restaurants pay a commission fee based on how much each customer spends on their order.
Like Postmates, DoorDash personalizes the rate they charge each merchant partner depending on which services the restaurants decide to use. With DoorDash’s delivery system, the platform pays for the drivers, background checks, and the insurance and credit card processing fees associated with the orders. These fees appear as a percentage of the customer’s total at checkout so they can see the breakdown of service fees for themselves.
These restaurants’ concerns have become a partisan issue. Politicians all across the U.S.A. have started passing laws to protect the merchant partners on the apps, particularly by putting a cap on how much third party apps can charge as commission. For example Chicago requires these platforms to be transparent with their customers and break down their fees; D.C., San Fransisco and Seattle capped commissions at 15%, which Los Angeles is considering too; New York limits these fees up to 20%; and Jersey City capped them at 10%.
Although these third party delivery services have fought against these fee limitations and protest the accusations, more politicians have passed legislation to protect restaurants. In these platforms’ defense, it’s a lose-lose situation: Grubhub’s May 2020 report revealed an increase in orders but decline in profit for the first three months of the year, and Uber Eats gives a similar account of their finances. Despite high rates, many third party deliver platforms continually operate at a loss.
Likewise, many restaurant owners reveal that they don’t even hope to gain a significant profit during this pandemic; many already expect to operate at a loss, and the real question for them is how big of a loss they’ll face. Customers also struggle while restaurants and third party apps both vie for profit: They’re seeing prices rise, either inflated by delivery apps or by restaurants trying to make ends meet during this crisis. Although these commission fees have long been troublesome for merchant partners, the COVID-19 crisis has made restaurants’ financial situations more tenuous than ever, and this problem with high commission fees increasingly dominate their most pressing concerns.
Restaurants Speak Out
As the problem continues, some restaurants have decided to speak out and encourage their customers to support local businesses. A few took to social media to inform the public about their cause; others are promoting special offers for anyone who orders directly from their website. Making the situation widely known does tend to help these restaurants’ causes; the customers they educate have, by and large, demonstrated a willingness to change and start ordering directly from the restaurants’ websites, with some even giving positive feedback about the switch. People want to support small businesses through this crisis; the problem is that they simply don’t realize how even the smallest change, like ordering from the company directly, can help them so immensely.
Restaurants than can afford to have gotten off these apps, although that’s not viable for every business and has its own risks and consequences. Others have decided to take a less digital approach and promote their ideas directly: For example, Bareburger in Brooklyn, NY put a sign in their storefront window for passersby to see. They posted about their new specials, only available through their website, and included a message on the sign asking customers to patronize local restaurants directly, not through a third party. Restaurants are getting creative as they ask their customers for support.
If you’re a restaurant trying to get off delivery apps and encouraging customers to come directly to you for all their online ordering needs, consider implementing some of these educational promotions to inform customers about the benefits, detriments and risks associated with supporting third party apps. You’ll be surprised how many people are willing to directly support small businesses in their communityonce they know how to do it.
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