During the pandemic, when state and local social-distancing directives have forced the closing of most restaurant dining rooms, delivery and takeout have become the lifelines of places that have remained in business.
Jump in off-premise business
At the end in March, restaurants were among the first businesses ordered to close to help contain the spread of Covid-19. Sales collapsed, bottoming out at negative 35% during the last week of March. However, they were offered a lifeline – they could stay open as long as it was only for takeout or delivery. As a result, to-go orders doubled, tripled, and in some cases quadrupled in comparison to pre-COVID-19 orders. Digital sales surged over 80% in the quarter, hitting its highest level ever, and accounted for 26% of total revenue. Prior to the pandemic, digital sales accounted for 19.6% of total sales.
In the pandemic economy takeout has become survival
What was once a useful supplemental service to expand reach to more consumers before the coronavirus outbreak has since proved to be a vital life raft. As more restaurants update their business operations and report earnings, it is increasingly clear that had they not previously established takeout and delivery operations before the onslaught of the COVID-19 pandemic, many chains might not have survived. Of course, in order to make this all possible, the third-party food delivery industry has been crucial for restaurants to get their food to their customers. Until recently, some restaurants, whether they had established off-premise operations or not, didn’t think too hard about Grubhub and DoorDash. The math was never appetizing. But when states begun announcing stay-at-home restrictions many grassroot eateries had to pivot to online ordering — and fast.
While third party delivery facilitates a way to generate some cashflow, there is one problem, that predates the pandemic – commissions. The fees charged by all delivery services were already extreme – typically, 25% to 35%, in some cases as high as 40% per order. It has been by far the biggest grief restaurants and restaurant advocates have voiced over the last year. They were often ruinous to restaurants even in better times. And now, amid the coronavirus crisis, with commissions unchanged, volume on that conversation has been cranked up full blast, with some critics arguing that the third-party delivery companies have become wantonly parasitic.
Commission-Free
Unsurprisingly, pressure has been building in cities across the United States and Canada to cap the commissions charged by third-party services for the delivery of restaurant meals. Local governments, with several municipalities like Washington, D.C., and Seattle are passing or mulling delivery fee caps to protect restaurants. In May, New York limited third-party delivery service fees to 15% per order, a bill is before Chicago City Council to cap at 5%, and Boston 15%. “Restaurants are struggling to survive, and delivery is their main option for staying open,” Mayor London Breed, City and County of San Francisco. “I’m instituting a cap on the fees that delivery services can charge restaurants during this emergency, because it can make the difference between them staying afloat or laying off staff.”
What happened next no one could have predicted. Several of the major delivery services “voluntarily” cut their commissions – but with limitations. DoorDash, for instance, announced that it would cut the commissions charged to some customers by 50% from April 13 through May 31, Postmates said in March that it would waive commissions for new customers in areas that were hard hit by the coronavirus. And Grubhub ignited a controversy when CEO Matt Maloney announced early in the pandemic that his service would forgo $100 million in revenues by dropping commission charges for independent restaurants – Grubhub later clarified that the fees would be deferred, not dropped.
The latest in surprise announcements comes from, Uber, who said, among other things, that they will allow restaurants to add online ordering to their websites, at no cost and is waiving commission fees on delivery and pickup orders placed through one of these sites through the end of 2020 (restaurant still pay a 2.5% processing fee), “because we know pickup will continue to be an important revenue source for restaurants in the coming months given ongoing health concerns and restrictions around dine-in, we are extending a commitment we made in March when lockdowns began. Through the end of 2020, we’ll waive all restaurant fees on any Uber Eats pickup orders in the US & Canada.”
Delivery brands using coronavirus to increase market share?
On the surface, offering commission-free tools and promotions, like Uber Eats’ could give restaurants a much-needed boost. Similarly, it is a great way for restaurants to get a head start on delivery and pickup and can be particularly meaningful for independent restaurants that don’t necessarily have the resources to build a delivery service or be capable of such reach on their own.
Longer term, however, getting locked into a third-party delivery company ecosystem could ultimately be a damaging one – even in times of a crisis, we only need to look to the hotel industry to find similarities. Several global events such as the 9/11 terror attacks and the recession starting in late 2008, hotels got caught in a vortex of declining occupancy and demand and declining rates, not knowing how to fill their rooms. With the advent of OTAs came what they believed to be a mechanism that could help drive that business. However, both these events served as springboards to boost the OTAs’ share of hotel distribution.
And now a very similar situation seems to be unfolding with third party food delivery. Many believe that delivery brands may see coronavirus as an opportunity to take advantage of the desperation caused by this massive global crisis and rather than offering genuine help for sinking restaurants, current initiatives are no more than an attempt to boost revenues and market share for the major delivery companies. They have the ability – on mass scale – to embed themselves in the life of the consumer, making home delivery a universal habit. Not only that, but partnering with any third party will thoroughly limit the amount of control restaurants have over their own data and ultimately their customer relationships.
Will history repeat itself?
So, are these latest products and so-called commission free offers “supporting the restaurants you love” and solely for the benefit of restaurant or a front to help increase their own share of the take? Only time will tell.