By Rachael Follmer
You know the routine: you order roughly $30 in Chinese food delivery from a local restaurant, but by the end of the check-out process, you have an order totaling nearly $60. Well, the margin is going somewhere. The question is to whom, and the answer is usually not to the restaurant.
The Current Food Delivery Landscape
Food technology apps such as DoorDash, GrubHub, and Uber Eats dominate the delivery portion of the sharing economy and strong arm restaurants into utilizing their platforms or facing exile from the 53.9 million users in the US expected to frequent the food delivery apps by 2023.
As the price of food inputs continues to rise, restaurants cannot afford to pay soaring commission to delivery platforms without increasing prices beyond a consumer’s willingness to pay. Cities are stepping in to mediate.
Delivery fees are two-pronged: charged to restaurants for the usage of the platform as well as consumers who place an order. In a groundbreaking move to limit fees charged to restaurants by delivery platforms, San Francisco and subsequently New York imposed 15% fee caps in June 2021 and August 2021, respectively – decreasing commission fees that had spiraled to 30% in the pandemic era of heightened food delivery.
Food technology companies are now retaliating against the new legislation by suing the cities who imposed the fee caps. However, if the new rules are upheld and delivery fees charged to restaurants remain capped, the way to offset this change could be to increase delivery fees charged to consumers as stated by delivery platforms such as Grubhub.
Delivery fees are two-pronged: charged to restaurants for the usage of the platform as well as consumers who place an order.
Why Do Food Delivery Apps Have The Power?
The question remains – what are the sources of value leading delivery platforms to charge ever-higher commissions?
Market Consolidation: The largest providers in the segment have maintained a firm hold over the delivery market, with continuous consolidation occurring when sector disrupters exhibit technological prowess and/or ability to capture consumer interest. For example, Grubhub acquired Seamless in 2013 and both were subsequently acquired by Just Eat Takeaway in June 2021. DoorDash acquired Caviar in November 2019. Uber Eats owner Uber acquired Postmates in December 2020. The continuous roll-up of the industry ensures that the main players have an ever-prominent voice.
Proprietary Technology: Food technology apps leverage groundbreaking artificial intelligence (AI) and machine learning (ML) capabilities employed to create and maintain the services. For restaurants, AI and ML-driven demand forecasting enables a smooth ordering process and limits waste in the execution of food production. For drivers, AI and ML-optimized routes allow for a more manageable work shift with decreased gas expenditures and more orders delivered per hour. For consumers, AI and ML-directed analytics offer information to personalize the app experience and showcase food options and promotions known to be more desirable for the customer based on historic purchasing behavior. These benefits are attributable to the work of the food technology apps, continuously becoming more insightful regarding industry patterns in food consumption as the AI and ML leverage increased quantities of data and advanced analysis tools.
What Are The Options Outside Of Using A Traditional Delivery App?
Given that the food delivery apps, not restaurants, are best positioned for market consolidation and technological prowess, what can food providers do to take back control and impede fee raises?
Use The Restaurant’s Ordering Platform (e.g., The Domino’s Method): Restaurants can create a process whereby consumers can order directly with the restaurant for pick-up and delivery. Domino’s is an example of a quick-serve chain that has used this strategy, investing in both the technology and labor to avoid outsourcing delivery to third-party delivery apps. The restaurant-owned delivery platform strategy does require capital to finance the increased labor and technology, but in the long-term, the financial success and benefits of ownership are evidenced by the total shareholder return of Domino’s since IPO.
Use A Food Aggregator App (e.g., The Slice Method): Intermediary food technology apps such as Slice aggregate restaurants onto a digital storefront at a lesser fee, and for the most part, do not offer delivery services. As a result, restaurants can minimize fees while ensuring consumers have a user-friendly ordering platform. Restaurants do require the capital to properly staff for delivery, but the cost can be decided primarily based on their own willingness to pay for labor.
How Can Consumers Prevent Fee Increases?
Given that restaurants have limited options outside of paying commission to traditional food delivery apps, the crux of forcing a price ceiling may be lying in plain sight: social media.
Consumers are powerful advocates who can support the alternate ordering strategy preferred by the restaurant and influence the broader delivery landscape through their behavior and voice on social media. More specifically, if consumers use social media, e.g., the Instagram landing page of a restaurant, as a single point of entry, the majority of individuals ordering with a restaurant can be directed to the channel preferred by the restaurant. The restaurant pays no fee to create a profile and can include a link to the least commission or margin intensive delivery ordering platform. Consumers can use their social media behavior to enact change, preventing further increases in commission and potentially driving down pricing.
Consumers are powerful advocates who can support the alternate ordering strategy preferred by the restaurant and influence the broader delivery landscape through their behavior and voice on social media.
Given that the majority of individuals between 18-44, and nearly 1/3 between 45-60, already leverage online delivery platforms, and thus are digitally savvy, the solution of defining one social media source to access information about the restaurant and redirect people to the preferred strategy requires limited investment for the consumer.
Imagine a world where that $30 order of Chinese food totals to $40, including delivery. Can restaurants and consumers cooperate to make this a reality? Let’s find out.
Rachael Follmer (’22) is an MBA Candidate at Columbia Business School. She is a restaurant and consumer packaged goods food fanatic who is dedicated to making innovative, healthier options available to global consumers. Rachael holds a BA in International Affairs and Anthropology from The George Washington University.
You can connect with her on LinkedIn.