Technology

Delivery fee caps are everywhere, but are they the answer?

The piecemeal approach has helped restaurants, but some say other solutions are needed.
delivery person
Photograph: Shutterstock

Last week, the City Council of Dublin, Ohio, chose to zig where some of its neighbors in the Buckeye State had zagged. The small city perhaps best known as the home of Wendy’s Corp. decided it would not enact a cap on third-party delivery fees for restaurants.

The reason, City Manager Dana McDaniel said during a virtual Council meeting on Tuesday, was that Dublin—unlike Columbus, Cleveland and Cincinnati—simply does not have the capacity to administer and enforce one. 

Instead, he urged residents to consider the costs restaurants have to bear when ordering delivery. 

“If such rates are exceeding 15%, as is the suggested cap, I would encourage our residents as customers to these services to complain directly to the delivery company and/or to not use their services at all,” he said.

It was an illustration of the limitations of such piecemeal caps, which have become a go-to solution for local governments looking to help restaurants during the pandemic. Dozens of cities and counties and three states have enacted them, and New York, California and Texas are considering similar legislation. Most are intended to expire sometime after the pandemic is over.

Restaurants have generally welcomed the caps, which typically aim to cut in half service charges that can rise to 30% or more. But delivery companies have decried what they view as a one-size-fits-all approach that has knock-on effects for consumers. 

Katy Connors, director of operations for Hat Yai restaurant in Portland, said the city’s aggressive 10% cap has been a “tremendous” help. Delivery orders from Hat Yai have increased since it was implemented in July—even after DoorDash started charging consumers a $3 “Portland fee” to offset the cap. 

“People understand that restaurants are hurting so much, and without these caps, we’re going to see an extremely high closure rate,” she said.

Even so, she said, “I don’t know that caps are the answer. But I think there needs to be some pretty intense regulation of these third-party companies.”

 “It needs to be regulated what they can do with restaurants’ business data as well as consumers’ dining and consumption data.” —Scott Weiner, Fifty/50 Restaurant Group

Data ownership is one area restaurants feel that providers could cut them some slack. Third-party companies usually do share some data with restaurant partners, but not the kind of information that would allow them to engage customers directly. 

In an October letter to the mayors of 50 U.S. cities, Thanx CEO Zach Goldstein urged leaders to consider a new arrangement: permanent delivery fee caps with an exception for providers that give restaurants access to customer data. And the New York City Hospitality Alliance has called for both permanent fee caps and data-sharing requirements.

Withholding that information “creates a wall between the restaurant and their customers, making them reliant on the [delivery providers], essentially meaning that if a restaurant leaves the platform, they lose access to their own customers,” the Alliance wrote in a statement supporting a statewide cap on delivery fees.  

There are also concerns about what delivery providers are allowed to do with the data they collect. 

“The amount of power that they have, they’re kingmakers,” said Scott Weiner, co-founder of Fifty/50 Restaurant Group in Chicago and a board member of the Illinois Restaurant Association. “It needs to be regulated what they can do with restaurants’ business data as well as consumers’ dining and consumption data.” 

Grant Klinzman, senior manager of policy communications for Grubhub, said there are privacy issues with sharing individuals’ data. But he suggested there could be some middle ground to be found there.

“It's an important issue that will be an ongoing conversation between the delivery companies, restaurants, diners and the privacy community,” he said. 

“There’s a severe lack of transparency around all of it.” —Katy Connors, Hat Yai

More generally, restaurants want state and federal bodies to pay closer attention to what delivery providers are doing, particularly around fees and labor.

“I think there needs to be an independent commission on the federal level and on the state level ... to study this and really understand what’s going on,” Weiner said, suggesting the companies could be regulated more like utilities. 

“Utility companies can’t mark up over a certain amount because they know you have no choice, and I think there’s a strong argument that restaurants don’t have a choice either,” he said.

Connors, who also serves as advisory board chair for the Independent Restaurant Alliance of Oregon, called for more government scrutiny of delivery fees and how they’re negotiated. 

“There’s a severe lack of transparency around all of it,” she said.

There has been some activity at the federal level, most notably a September letter from three members of the House of Representatives asking the Federal Trade Commission to investigate third-party delivery companies for unfair practices.  

“We are very concerned that these firms’ paths to profitability will likely come from eliminating competition, charging higher fees to restaurants and consumers, and misclassifying and undercompensating the workers who perform the labor of delivering the food,” the letter said.

Grubhub would also like to see more involvement from the feds, Klintzman said—albeit in the form of more aid to restaurants. 

“To date, the federal government has not really been there for local restaurants. They haven’t provided the level of capital and support that restaurants need,” he said. “And so I think when those start flowing, I think that’s going to change the conversation. Because that’s a really demonstrable positive effect.”

“There is no excuse to be only on a third-party system.” —Nabeel Alamgir, Lunchbox

Like McDaniel of Dublin, Nabeel Alamgir believes the solution to the restaurant/delivery equation lies outside the realm of government.

“The market should get a little more educated,” said the CEO of online ordering company Lunchbox.

Companies like his provide restaurants with native ordering channels that enable them to skirt some delivery fees and own customers’ data—two of the biggest issues restaurants have with third-party delivery.

To bring awareness to the issue, Lunchbox recently launched NotGrubhub.org, which aggregates restaurants that have their own online ordering channels. 

“I just wanted restaurants to know that there are so many online ordering providers. … There is no excuse to be only on a third-party system,” he said.

Delivery providers “are doing their job as a company to go ahead and capitalize on the opportunity here. And that’s fine,” he said. “We need to to go ahead and do everything we can to not let this happen again.”

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