Houston Restaurants Weigh Benefits and Pitfalls of Third-Party Delivery Services
A mere decade ago in Houston, restaurant delivery was limited to pizza joints and a handful of other restaurants. Third-party delivery services such as DoorDash, Uber Eats, Grubhub and Postmates have changed all that. What started with one online platform in 1995 — World Wide Waiter — is now a $18 billion industry in the United States, according to Restaurant Dive.
In many ways, it’s the perfect business model for tech developers. Mobile apps, once released, don’t need much more than updating and maintenance. Drivers are independent contractors. Restaurant managers are responsible for updating the menus.
However, the challenges for the restaurants are numerous. For example, when problems arise, it can be difficult for owners and customers to contact a human representative for help and get problems handled efficiently. However, for most owners, the biggest problem is the high commission fees.
The pay structure of third-party delivery can be very confusing. In one example that went viral on social media, Giuseppe Badalamenti, owner of Chicago Pizza Boss in Chicago, posted a Grubhub invoice that showed that out of $1,042 in orders, only $376 actually went to the restaurant. The rest was deducted as commissions, delivery fees, processing fees, promotions and other adjustments. While this seems excessive, it’s worth noting that restaurants have the power to opt in or out of various services that third-party ordering services offer, including opting out of delivery and limiting orders to pick-up only.
“Our platform is free for any restaurant owner who wants to join since we have a fee-for-service model,” a Grubhub representative explained. “If a restaurant wants us to deliver on their behalf, there is a 10-percent fee to provide this service. This is optional; a restaurant can choose to perform its own delivery. But the costs associated with delivery are not optional. For instance, it costs money to coordinate drivers, perform driver background checks and create/update delivery technology. We also allow restaurants to market themselves on the platform and each restaurant owner determines the right level of marketing for his or her business. The average marketing fee is around 15 percent, and restaurants can choose to spend more if they believe it will drive more orders to them.”
That said, larger restaurant chains can negotiate better deals than small independents. For those, fees can amount to upwards of 30 percent of delivered meal sales. That stings in an industry where profit margins are typically three to five percent, according to Upserve.
For many restaurants, offering food through third-party delivery services represents a financial loss or, at best, breaking even. Some, though, see third-party apps as important marketing and advertising tools. Edgar Navarrete, a manager at Laurenzo’s at 4412 Washington in Houston, said, “It was worth it when you considered the push notifications and coupons.”
That said, there are controversies and legal issues that are both diverse and numerous about how third-party services operate. DoorDash and Caviar have been in the news for misleading tipping policies. Drivers are paid an agreed-upon fee for each delivery. However customers can opt to add an additional tip. The Washington D.C. Attorney General, as well as others, claim drivers aren’t receiving those tips and that those are instead pocketed by DoorDash. For example, if a driver was paid $7 for delivery and received a $3 tip, they would still only get $7.
In January 2019, Grubhub was sued by a group of restaurants in Philadelphia for charging restaurants commission on non-order calls placed using numbers on Grubhub’s website. This problem has since been fixed. In August 2019, Vice reported that Yelp replaced restaurant phone numbers on its listing pages with options that instead garnered a commission for Grubhub. In addition, Postmates, DoorDash and Grubhub have all been accused of signing up restaurants without consent.
Alex Au-yeung of Phat Eatery in Katy says this happened to him. After being involuntarily signed up, he discovered that he couldn’t change a menu item or get help by phone, nor could he contact his customers to clarify their needs. In August, he discontinued all third-party delivery services — although even that was difficult. Auyeung tried to get Phat Eatery removed from DoorDash, but the best he could do was to change the menus to say “We Do Not Use DoorDash Anymore. Do Not Order Here.” He’s now managing his own deliveries, which has been helpful during the COVID-19 crisis in keeping his servers employed as drivers.
Another issue for restaurant owners is loss of control over their product. Food can show up cold, disheveled or stolen by the driver. According to NPR, one in four delivery drivers have admitted to stealing food.
Restaurants aren’t the only ones who have issues with these companies. Some state governments have expressed concerns about the practices of third-party delivery services and some are attempting to institute additional regulations. Pennsylvania and New York are questioning whether sales taxes are being applied correctly. The Illinois Restaurant Association is concerned with food safety, among other things. California wants to classify drivers as employees instead of independent contractors, and a bill in Rhode Island will prohibit adding menus without permission.
All of these problems existed before COVID-19 became a global pandemic. As many restaurant dining rooms are still shuttered and sales have taken a nose dive since mid-March, delivery are now an important source of gross revenue for many area restaurants — and a source of food for customers.
In light of how important and prevalent delivery services are now, owners, such as Justin Turner of Bernie’s Burger Bus, are pushing back against high, third-party delivery fees. Turner had to lay off the majority of his staff after he had to scale back operations to all but one of his restaurants. Before, he employed 103 employees in four locations. Now, he staffs one restaurant with 10 people.
Turner urged customers to order directly from his one open restaurant, both through social media messages and the notes he staples to each order. He said it’s made a huge difference in how much margin the restaurant keeps, which translates to money he can use to pay staff and expenses.
The mayors of San Francisco and Seattle recently capped third-party commissions at 15 percent in an effort to help restaurants survive the pandemic. When asked if he thought a similar law should be passed in Houston, Justin Turner stated that, for his business, it wouldn’t change anything. Now that he has set up an online ordering system, he no longer believes third-party delivery justifies the cost.
Third-party delivery services are also suffering in the wake of COVID-19. Sector-wide, these businesses are experiencing slower than anticipated growth. Each has responded to the pandemic in various ways. DoorDash, for example, is cutting all commissions by half and taking zero commissions from new restaurants for their first thirty days. UberEats has waived all commissions for independent restaurants and created an “Eat Local” banner on its app to showcase these businesses.
While those sound like equitable, fair concessions, in the background, these delivery services are starting to look more like competitors to independent restaurants. Some are now building “ghost” or “cloud” kitchens, These are “dorms” of fully licensed rental kitchens that are geared towards the delivery market.
Restaurant owners who want to take more control over delivery may face stumbling blocks. Will they build their own apps? How can they publicize that these are available and teach customers to use them? Owners considering that path may want to heed the advice of Roland Laurenzo, founder of El Tiempo and son of “Mama” Ninfa Laurenzo. “We have done in-house delivery several times in the past, before all the delivery services started. It worked very well but required an investment of some significance, and some time for it to develop”.
Currently, in-house dining is only allowed by Texas governor Greg Abbott at 25-percent capacity. However, many restaurants are beginning to gear up for more in-house customers. So, the energy and attention that some restaurant owners have put into direct delivery logistics may be re-aimed at running dining rooms. As table service returns, the convenience of letting a third-party company hire drivers and remember birthdays may be too tempting to ignore.
However, other owners feeling particularly mistreated as third-party delivery service customers may decide it is still in their best interest to never do business with those companies again. Those owners, as well as diners, will have to decide for themselves how much they want to rely on these platforms as we all head into what may be a forever-changed restaurant landscape.