The Food Delivery Industry During COVID-19: Pinnacle Perseverance
Nowadays, we expect our packages to arrive within two days. Convenience has become so highly desired that it is now prioritized over other features, such as quality and price. Due to the widespread implementation of technological advancements in our everyday lives, convenience has become ingrained in our daily lives. Given the huge desire for convenience, the food industry jumped at the opportunity to capitalize on this trend. Companies created websites and apps, allowing customers to simply add an item to cart, and press order for food to be delivered right to their front doors. With this easy accessibility there has become a lack of transparency in the food delivery industry as it is unclear what goes on behind the scenes of an order. Surprisingly enough, the partnership between restaurants and food delivery apps is more parasitic than appears at first glance.
The food delivery industry has been greatly affected by the difficult circumstances created by COVID-19. The industry grew 20% per year in the past five years and is expected to grow to $220 billion by 2025 (Lavu 2020). The unprecedented times created by COVID-19 further skyrocketed this exponential growth. COVID-19 caused a huge shutdown of businesses and restaurants around the world as deadly cases began to increasingly spread. As of December 7, 2020, over 110,000 U.S. restaurants were closed permanently or long-term and only 48% of these restaurant owners believed that they would be able to remain in the industry in the following months or years (National Restaurant Association 2020). However, as countries gradually brought the situation under control, businesses began to hesitantly reopen with numerous health precautions. Unlike fast-food restaurants that had the ease of drive-thrus to facilitate their business, sit-down restaurants were unable to recover as gracefully. For these businesses that had no pre-existing means to facilitate their own delivery service and no ability to quickly create and implement an entirely new online ordering system, food delivery apps were vital in helping them begin to reopen and operate. In fact, the top four food delivery apps experienced a rise of $3 billion in revenue in the second and third quarter of 2019 due to partnerships with various restaurants that experienced increased orders due to mandatory stay-at-home orders and quarantining (Sumagaysay 2020).
The more harmful side of this seemingly mutualistic partnership was unveiled as restaurants began retaliating against the overly punitive fees and commissions charged by these food delivery apps. In July 2020, a class-action lawsuit was filed against Grubhub, Uber, and Postmates, accusing the companies of antitrust violations. It argued that these companies raised the charged commissions fees extremely high, forcing restaurants to charge higher prices. The lawsuit claimed that the companies typically charge a 30% restaurant commission to restaurants that do not provide their own delivery, a consumer commission fee of between 5-10%, and a consumer delivery fee of about 5% (Guszkowski 2020). Given these high fees, it seems that restaurants would hardly be able to operate profitably with these small margins, especially after deducting their own expenses and fees. Restaurants were already in an extremely vulnerable position as they were forced to close at the beginning of the COVID-19 spread and have experienced several difficulties in reopening due to various health precautions and concerns. Despite this, food delivery apps still maintained their extremely high rates in such a period of instability. In response to these circumstances, in May 2020, the mayor of Jersey City signed an executive order capping all commissions to third-party delivery apps to 10%. Similar measures were also passed in D.C., Seattle, and San Francisco. In response to these proceedings, DoorDash, Grubhub, Postmates, and Uber Eats sent a joint letter to a member of the D.C. City Council stating, “Delivery people—who are currently relying on on-demand work opportunities to earn an income—would have fewer work opportunities and lower earnings” (Kludt 2020). However, the claim seems erroneous given that DoorDash only pays its drivers $2 per each $10+ order. The tip they receive comprises the majority of their pay (Lippe-McGraw 2021). Therefore, the restaurant commission fees charged by the food delivery companies have little to no correlation to the pay received by delivery workers.
Despite how much food delivery apps have sharply risen in popularity due to increasing preference for convenience, increasing technological implementation in everyday life, and the effects of stay-at-home orders and quarantining due to COVID-19, food delivery companies are still unprofitable. This may come as a surprise given the high commission fee received by these apps, but food delivery companies are operating at huge losses. Of the key players in the industry, only Grubhub made a profit in 2019. The company earned a net income of $1 million for Q3 compared to the $23 million it made in the prior year (Lucas 2019). Meanwhile, for the year ended December 31, 2019, DoorDash had a net loss of $667 million (Yahoo Finance). Despite these clear net losses, due to lack of transparency in food delivery companies’ operations as many of these companies are privately-held, it is somewhat unclear why these companies are experiencing such losses considering the high commission and fees they receive. Of the major competitors, only DoorDash is a public company. DoorDash had revenue of $885 million for the year ended December 31, 2019, however, it also had a substantial selling and marketing expense of $594 million (Yahoo Finance). Therefore, its selling and marketing expense comprises 67% of its total revenue. Although these companies have received a massive boost in revenue due to COVID-19, competition is still extremely stiff. Companies are forced to spend immensely on marketing and promotions to draw customers away from the competition. Although it is unclear why other companies in the industry are unsuccessful, DoorDash’s financial situation is likely representative of the circumstances faced industry-wide, therefore implying that their unprofitable nature is primarily due to the huge operating and marketing costs that the companies must take on. Overall, it seems that the partnership between restaurants and food delivery companies is relatively unprofitable to both parties. Restaurants cannot operate on the small margins received after food delivery companies take a large cut through commission and fees. Meanwhile, food delivery companies are still unable to profit as the industry is very competitive and costs are extremely high.
COVID-19 has highlighted the somewhat parasitic relationship between restaurants and food delivery apps. What was previously a relatively private and mutually agreed upon relationship has been completely changed due to the extreme pressure placed on restaurants to successfully operate and profit in these unstable times. As a result, there is a delicate dynamic between local and state governments, food delivery companies, and restaurants. Overall, there is great uncertainty regarding what will occur once life and business operations return to normalcy following COVID-19. Although advocates have placed intense pressure on local and state governments to make executive orders that limit commission fees, these actions are only temporary. It took tremendous time and pressure for only a few governments to see it fit and necessary to place these restrictions even during such difficult times as during COVID-19. Without the dire need by restaurants for these limits to help them stay afloat during COVID-19, it seems extremely unlikely that governments will take more permanent action in the future. Furthermore, although multiple class-action lawsuits have been filed, it is also unlikely that these lawsuits will result in any country-wide, substantial changes in how these food delivery companies operate. As they did before COVID-19, restaurants will be forced to agree with the high fees required by these companies as it would be much too costly and time-consuming for many of them to create their own delivery services. However, the high rates that have been so controversially maintained by these companies may not even be the most profitable strategy. Offering lower rates would attract new partnerships which may result in greater profitability and create a more mutually beneficial partnership. However, these companies may not be willing to decrease their rates solely based on the possibility of potentially garnering new partnerships and obtaining higher profit in the future. Regardless, it seems that the issues lying within the partnerships have been revealed; it will be intriguing to watch how the industry operates and changes once COVID-19 is no longer an issue and food delivery remains in high demand.
Works Cited:
Adams, E. (2020, April 14). NYC Leaders Push Mayor to Cap Food Delivery Fees for Restaurants Following SF Mandate. https://ny.eater.com/2020/4/14/21219552/mayor-city-council-food-delivery-fees-cap-legislation-coronavirus-nyc
DoorDash, Inc. (DASH). (2021, February 21). https://finance.yahoo.com/quote/DASH/financials?p=DASH
Guszkowski, J. (2020, July 8). Grubhub, Uber and Postmates accused of antitrust violations. https://www.restaurantbusinessonline.com/technology/grubhub-uber-postmates-accused-antitrust-violations#:~:text=A%20lawsuit%20filed%20this%20week,restaurants%20to%20charge%20higher%20prices.
Kludt, A. (2020, May 11). Action, Finally, Against Delivery Apps. https://www.eater.com/2020/5/11/21254488/from-the-editor-letter-delivery-apps-legislation
Lippe-McGraw, J. (2021, January 15). DoorDash Review: Real Dashers Tell How Much You Can Earn. https://studentloanhero.com/featured/doordash-review-real-dashers-reveal-how-much-you-can-really-earn/#:~:text=As%20a%20Dasher%2C%20you%20make,a%20set%20period%20of%20time.
Lucas, A. (2019, December 14). Grubhub, Uber Eats and DoorDash made online food delivery a $10 billion business. Restaurants aren't happy about it. https://www.cnbc.com/2019/12/13/grubhub-uber-eats-and-doordash-drove-an-online-food-delivery-boom.html
Restaurant Industry in Free Fall; 10,000 Close in Three Months. (2020, December 7). https://restaurant.org/news/pressroom/press-releases/restaurant-industry-in-free-fall-10000-close-in
Sumagaysay, L. (2020, November 25). The pandemic has more than doubled food-delivery apps' business. now what? https://www.marketwatch.com/story/the-pandemic-has-more-than-doubled-americans-use-of-food-delivery-apps-but-that-doesnt-mean-the-companies-are-making-money-11606340169
The growth of online ordering and food delivery is transforming the food business industry. (2020, January 21). https://lavu.com/the-growth-of-online-ordering-and-food-delivery/#.YC1Yq2hKhGM
