Delivery fees: The double-edged sword that is slashing into Utah restaurants’ shaky profits

(Trent Nelson | The Salt Lake Tribune) Signs for DoorDash and Grubhub delivery drivers at O'Falafel in Salt Lake City on Friday, July 17, 2020.

When he signed on with Grubhub and Uber Eats, Osama Khader didn’t despise the 30% commission he paid to the online food ordering and delivery platforms.

In 2018, delivery was a small part of his overall business, said the owner of Salt Lake City’s O’Falafel Middle Eastern restaurant, and the financial impact seemed minimal.

“The technology service offered some marketing, which increased sales a bit,” Khader said, “and it was cheaper than hiring my own drivers and paying liability insurance.”

When the coronavirus struck, however, and all dine-in service ceased for a time, his feelings quickly shifted. Delivery mushroomed to more than 50% of all transactions, while the volume of fees escalated and threatened to bankrupt his business.

The fees “do a lot of work for you,” said Khader, who has a degree in finance from the University of Utah. If left unchecked, though, “they are a double-edged sword that can kill you.”

Khader is one of many Utah restaurant and bar owners who want Gov. Gary Herbert and the Legislature to step in and police the industry.

“It needs to be regulated,” Khader said, “so they don’t play games with us.”

Fat fees, thin profits

(Trent Nelson | The Salt Lake Tribune) Signs for DoorDash and Grubhub delivery drivers at O'Falafel in Salt Lake City on Friday, July 17, 2020.

Several large cities, including New York, Seattle and Washington, D.C., recently passed restrictions on how much food delivery apps can charge restaurants and bars.

In Utah, capping delivery fees is one of six items on a food industry petition launched last week.

The Save Utah Bars initiative — which has about 6,000 signatures — is focused mostly on making changes to liquor laws to help boost business profits during the pandemic. Allowing sealed to-go cocktails and letting businesses pay wholesale prices for liquor are two of the items being requested.

But third-party delivery fees have become a such a threat to the bottom line it was included on the petition.

Currently four companies dominate the online ordering and delivery landscape — Grubhub, DoorDash, Uber Eats and Postmates.

The companies take a percentage — the average is about 30% — of every online order their mobile application directs to the restaurant. Those charges are steep, because most restaurants operate on razor-thin profit margins of between 3% and 9%.

DoorDash eliminated or reduced some commission fees between mid-March and the end of April, when states across the country mandated the closure of dining rooms. Grubhub also temporarily suspended up to $100 million in commission fees for independent restaurants.

But those commissions are now back in effect, and restaurants are struggling to pay.

Why delivery firms fight caps

(David Zalubowski | AP file photo) A food delivery rider waits for the traffic light to change Monday, March 30, 2020, in Lone Tree, Colo.

The delivery companies have balked at fee caps, saying their platforms provide needed services to business owners — most of whom don’t have the time or computer know-how to create such systems.

“Any arbitrary cap... will lower order volume to locally owned restaurants, increase costs for small-business owners, and raise costs on customers,” a Grubhub spokeswoman wrote in an email. “Delivery workers would have fewer work opportunities and lower earnings.”

Grubhub, which has the largest share of the delivery market, argued its “fee-for-service” model allows restaurants to pay only for the services they want.

“If a restaurant wants us to deliver on their behalf, there is a 10% fee to provide this service,” the statement said. This money is used to help pay drivers and cover related costs, including background checks, insurance, driver app technology and customer care support.

The company also allows eateries to market themselves on the platform, and “each restaurant owner determines the right level of marketing needed for their business,” the statement said. “The fees are negotiable, with the average marketing fee around 10% to 15%, though restaurants can choose to spend more if they believe it will drive more orders to them.”

Additionally, there is an ordering processing fee of 3.05% plus 30 cents on each order received on Grubhub’s platform to cover credit card processing, fraud protection, undeliverable orders, customer care inquiries and other support requests it handles on behalf of the restaurants.

“These processing fees are costs the restaurant would have to pay,” the statement noted, “regardless if the order went through Grubhub’s platform or through the restaurant directly.”

Court fight

While restaurants could simply not offer delivery services, that might be unwise in today’s free delivery — aka Amazon Prime — world. In fact, studies have shown that restaurants are likely to lose business if they don’t align with at least one delivery service.

Even before COVID-19, food industry experts projected that online food ordering would rise more than 20% annually, according to a study by Zion & Zion, an Arizona-based marketing agency. “The use of these multi-restaurant delivery websites/apps is widespread and restaurants that resist app delivery are risking significant revenue loss.”

But, according to class-action antitrust lawsuit, consumers also have been burned by the companies that offer these services.

Filed in April in a New York federal court, the suit alleges the platforms keep commissions high and courier wages low. Together, the companies create a monopoly by not infringing on established geographic turfs.

A major complaint is the inclusion of a “no price competition clause” in most contracts with restaurants. The clause requires restaurants to guarantee that the menu prices for delivery are the same that customers would pay if they were inside the restaurant.

“The purpose and effect of the no price competition clause is to act as an unlawful price restraint that,” according to the suit, “prevents restaurants from gaining market share and increased profitability.”

Alternative delivery outlets

There are other, less-expensive delivery platforms available to restaurants, but they lack the reach of the larger players.

Chefpanzee is a Salt Lake City-based delivery service that debuted about two years ago from Caleb Askins and his wife, Indu Sudhakar. Diners can order — delivery or takeout — from more than a dozen restaurants and food trucks through its website chefpanzee.com.

It charges participating restaurateurs — most of whom are immigrants or refugees — less than 10% for the service.

Hasen Cone uses ChowNow for food delivery at his Sweet Lake Biscuits and Limeade in Draper. Cone, who uses the bigger delivery companies for his Salt Lake City outlet, pays a flat fee for his Draper service, which allows customers to order through his restaurant website and share a portion of the delivery cost.

“It doesn’t generate a ton of business,” Cone said, “but it doesn’t make me feel like I’m being gouged.”

Khader, at O’Falafel, was able to lower his delivery fees.

After several exhaustive telephone calls, he renegotiated his contracts so he could increase the online/delivery prices of his food. Now delivery customers pay about 20% more, which covers most of the costs and ultimately is keeping the restaurant financially stable until it reopens for sit-down service.

“If you want the convenience of delivery, it’s only fair,” Khader said. “I don’t think the restaurant owners should be liable for that.”

The issue is not as clear-cut for Anna Davidson. Co-owner of Jessie Jean’s Homestyle Cafe in Ogden, she doesn’t feel like she can raise prices. “People already think they are too high,” and even she fears even a small bump “would keep some people from supporting my business.”

Right now, with her Grubhub and Uber Eats commission, delivery orders don’t bring in any profit.

“We’re basically putting food out at cost,” she said, “and that’s not enough to keep the doors open.”