Restaurants losing money on delivery orders

EL JEFE’S TAQUERIA, a casual Mexican restaurant in Cambridge’s Harvard Square, used to generate about a quarter of its sales through home delivery. Because of the commissions paid to delivery services – apps like GrubHub and DoorDash – the restaurant barely broke even on those sales.

When Gov. Charlie Baker ordered all restaurants in the state to close their seating due to the coronavirus outbreak, allowing only takeout and delivery, El Jefe started relying on delivery for three-quarters of its sales. Owner John Schall said the delivery services, which had been taking 7 to 8 percent of his revenue each month, are now getting 18 to 19 percent. That’s an amount Schall said his restaurant simply cannot afford.

“I will lose money in April, but the delivery companies made $25,000 off of me,” Schall said. “If this problem isn’t dealt with, there will be a whole second wave of restaurant closures.”

When Baker announced the restaurant closures, which went into effect March 17, allowing takeout and delivery was seen as a way to help patrons continue to get food and help restaurants stay afloat. But since then, many restaurants are discovering that the economics just aren’t working, due to the commissions – generally 25 to 30 percent – that delivery services charge.

Now, some municipalities – and state legislators – are looking into capping these commissions. The efforts are causing an outcry from the delivery services, which warn that caps will force them to raise prices on consumers, lower wages for deliverers, or limit services.

“Arbitrarily setting on-demand delivery prices has real consequences that undermine our ability to operate, fund relief efforts and benefit programs for merchants, couriers and customers, and kills the whole industry’s ability to provide the services restaurants need to stay open during this national emergency,” a spokeswoman for Postmates, an app-based delivery service, said in an email.

The food delivery market is comprised almost entirely of four companies and their subsidiaries – GrubHub, DoorDash, Uber Eats, and Postmates. The commissions they charge depend on the type of service a restaurant buys, since they generally offer marketing, order processing, and delivery services. The companies will not all reveal their commissions, but restauranteurs say they all charge around 25 or 30 percent of the cost of a meal for delivery.

In good times, restaurants generally break even or lose money on delivery sales, but business owners swallow the expense because those customers also sometimes eat in the restaurant. “In this world, you have to be on delivery,” Schall said. “If I’m not available on the delivery apps, then they find someone else.”

Now, with sales moved entirely to takeout and delivery, restaurants are finding the fees untenable. But contractually, restaurants cannot raise their prices to cover the delivery cost.

Bob Luz, president of the Massachusetts Restaurant Association, said he wants the delivery services to lower their fees voluntarily. “Since their business has grown exponentially due to the pandemic, we’re asking them to roll back the fees, then go back to their business model when all is said and done,” Luz said. Luz warned that without relief, many restaurants won’t be around when the pandemic ends.

Of the four companies, only DoorDash, which also operates Caviar, has agreed to reduce commissions. DoorDash cut commissions by 50 percent from April 15 to May 31 for restaurants with fewer than five locations. The policy will let 150,000 restaurants in the US, Canada, and Australia save $100 million, according to DoorDash.

Some municipalities are trying to force delivery companies to cut their fees. San Francisco and Seattle capped delivery commissions at 15 percent during the coronavirus outbreak. Washington, DC, passed a 15 percent cap on Tuesday. Other cities, including New York and Chicago, are considering it.

In Massachusetts, the Cambridge City Council passed an ordinance capping commissions at 10 percent and requiring the apps to tell customers how much of their money is going to the delivery service. The ordinance has not yet gone into effect because councilors are waiting for a legal opinion on whether a municipality has authority to cap fees.

“I hope whatever we can do [legally], one thing that’s been done is to start to raise the conversation in the public of whether these fees are legitimate, whether they’re excessive and why don’t I know where my dollars are going,” said Cambridge City Councilor Patty Nolan, who proposed the ordinance. “I think we all have to step back and think about when we’re relying on services, do we feel comfortable with the implicit business practices and the economics of that?”

City councils in Boston and Newton are also considering caps.

Boston City Councilor Matt O’Malley said many pizza stores or Chinese restaurants, which were already doing a large percentage of sales through delivery, have their own delivery people on staff. He said the fees are particularly hurting the “sit-down, brass and fern, white tablecloth restaurants” that usually do almost all their business through sit-down dining. “Given the fact that the economic climate is so perilous…not acting on ways to support businesses could be a death knell to their survival,” O’Malley said.

Newton City Councilor Susan Albright had a similar take. “If you have to give away 30 percent of your costs to a delivery service, you don’t have much left for yourself to make a living and make it a go,” she said.

State Rep. Michael Day, a Stoneham Democrat, introduced a bill that would cap delivery commissions statewide at 10 percent for restaurants with four or fewer locations, with a $100 fine for violations, until 45 days after the coronavirus state of emergency ends.

Day said he introduced the bill after hearing from primarily dine-in restaurants that had to pivot to takeout and delivery due to the pandemic and are being hit with 30 percent delivery fees. Day said larger restaurant chains may be able to negotiate reduced rates, but smaller restaurants can’t. “They’re really, from what I’m hearing, signing up under duress. They’ve got no other options for this short period of time,” Day said. He said delivery fees are “essentially wiping out any margin they have.” Day said the fact that apps are in some cases offering free delivery to customers shows they have “some wiggle room” to charge less to restaurants.

Day believes a statewide approach would be better for both restaurants and delivery services than a patchwork of local regulations.

But the delivery services say they rely on commissions to pay delivery people, keep consumer fees low, and provide services restaurants rely on.

Amy Healy, GrubHub’s head of public affairs, raised the prospect of a legal challenge should Cambridge put into effect the ordinance passed by the City Council limiting delivery charges. “Any cap on fees — regardless of the duration — will result in damaging, unintended consequences for locally-owned businesses, delivery workers, diners, and the local economy; in fact, it will result in the exact opposite of what the legislation is designed to accomplish,” Healy wrote in a warning to the City Council. “We believe that any cap on fees represents an overstep by local officials and will not withstand a legal challenge.”

Healy wrote that if GrubHub has to cut back services, restaurants would have to hire their own delivery people or update their technology to accept online orders. Healy said caps “would force us to exit certain markets and/or suffer substantial losses that threaten the sustainability of our business.”

The delivery services are not necessarily profitable. According to public financial information, Uber Eats was operating at a loss at the end of 2019, and Uber was subsidizing it through profits from its ride services. GrubHub also reported a net loss in the last quarter of 2019. DoorDash and Postmates are privately owned companies.

Uber spokeswoman Alix Anfang said some restaurants choose to pay lower commissions and do the delivery themselves, using Uber Eats for marketing and order processing, while other restaurants without resources to hire delivery staff use Uber Eats for delivery. “A commission cap would simply shift the costs back onto small, local restaurants who can afford it the least,” she said.