Delivery Fee Caps Aren’t A Life Preserver for Restaurants, They’re a Deadweight.
New study on caps’ impact & new service tiers show permanent caps are counterproductive, outdated
All around the country, leaders of local restaurant associations have urged cities to permanently cap the fees that restaurants pay to third party delivery services like DoorDash, Grubhub, and Uber Eats.
They’ve characterized these fee caps as an important life preserver — but a new study and the delivery services’ recent changes suggest the caps may actually be an deadweight for restaurants.
Caps understandable at beginning of Covid, but most cities have let them expire
As I wrote earlier this year, these fee caps were understandable in spring 2020 when restaurants shut down completely and faced an uncertain future. Now that restaurants around the country have reopened for indoor dining, and many restaurants have adapted their business models, the vast majority of cities have allowed the initial fee caps to lapse.
I’ve warned that these caps ultimately hurt consumers (who end up bearing more of the cost of delivery), restaurants (who see fewer orders), and drivers (who have fewer orders to deliver). Recent data shows that cities with fee caps have seen customers’ delivery costs increase $2 to $3 per order — a 5 to 10% reduction in order volume — and reduced driver earnings by millions of dollars.
My colleague Montana Williams made these arguments to the New York City Council earlier this year:
Sadly, many city leaders don’t seem to care about the impact on consumers. But even if they’re narrowly focused on helping restaurants, a new study should prompt them to think twice about delivery fee caps.
Study: Fee caps hurt smaller restaurants, help chains
In a research paper released a few months ago, Boston College economics professor Zhuoxin Li and University of Delaware economics professor Gang Wang looked at 14 U.S. cities that have implemented temporary or permanent delivery fee caps:
By looking at aggregated mobile app location data illustrating foot traffic to restaurants as well as aggregated transaction data, Li and Wang were able to project the before-and-after effects on restaurant revenue of fee caps in each market.
Their key finding? After caps were implemented, national chains fared better while independent restaurants fared worse:
Li and Wang find that:
“Delivery demand for chain restaurants in regulated cities is 3.6% higher compared to restaurants in nonregulated cities. In contrast, independent restaurants experience a negative effect — demand for independent restaurants is 6.8% lower compared to chain restaurants in regulated cities.”
The authors conclude that these changes are likely driven by the increase in delivery fees and changes in how platforms market independent restaurants. Their conclusion for cities is clear:
“While a fee cap may protect restaurants’ profit margins, such a policy regulation may end up hurting independent restaurants. Our findings on delivery platforms’ shift of promotion efforts to other restaurants sound alarms about the consequence of imposing a fee cap.”
Surely no city official thought that these delivery caps would help McDonalds more than the local diner. But according to this study, that’s what has happened.
New tiered services means restaurants are missing out on choices
The fees that delivery services charge to restaurants don’t just cover the driver’s fee. They also cover marketing for the restaurant, credit card processing, driver background checks, customer service, and driver coordination. So when cities capped restaurant fees at 10% or 15% of the order, it meant that delivery services couldn’t afford to offer all those services.
In fact, partly in response to feedback from restaurants, each of the three big delivery services created pricing tiers in recent months. DoorDash and Uber Eats/Postmates both introduced service options at the 15%, 25%, and 30% fee levels. And Grubhub offers 3 tiers of service as well.
This means that in most cities, restaurants now have the option to choose which service level — and commission rate — they prefer. This gives them flexibility and control. But in New York and San Francisco, the cities’ permanent 15% caps means that restaurants don’t even have the option of utilizing the additional services that can help them grow their business.
To understand this, let’s take a closer look at the Uber Eats service tiers for restaurants, which they call Lite (15% commission), Plus (25%), and Premium (30%):
DoorDash has similar tiers as well:
And finally, check out Grubhub’s service tiers:
By looking closely at these tiers, you can easily see that restaurants in permanent-cap markets like SF and NYC are only able to utilize the services at the lowest-tier, 15% commission option. That means that restaurants in those cities aren’t able to take advantage of additional services like:
- Allowing their customers to pay lower delivery fees. With service tiers, restaurants can choose how much of the delivery fee they want to bear themselves, vs. pass on to the customer.
- Order volume guarantees. Both DoorDash and Uber Eats guarantee higher-commission restaurants a minimum of 20–25 orders a month, but restaurants in capped markets can’t enjoy that guarantee.
- Promotion. Uber Eats gives restaurants paying a 30% commission up to $100 in advertising spend matching, while restaurants in capped markets have to pay extra for advertising. Grubhub offers premium-tier restaurants the ability to run promotions and access to review tools.
- Visibility. Restaurants in capped markets aren’t eligible for the highest level of visibility in the apps’ home screens and search functions, reducing their exposure to potential customers. Nor are capped-fee restaurants included in loyalty programs like DashPass, Uber Pass, and Grubhub+.
- Wider delivery area. Fees paid by high-commission restaurants help support delivery to a wide delivery area, but restaurants in capped markets can only deliver to more limited zones.
Of course, not every restaurant will want or need these additional services. But that should be restaurants’ choice, not the dictate of city governments.
To use an analogy, when you order a new car you have the option to add all kinds of accessories onto the basic model: bigger tires, a sharper sound system, a better dashboard display — all for a cost. Or you could stick with the basic model and save some money.
Or to use a different example: gas stations don’t usually sell one grade of gasoline; they sell 87 octane, 89 octane, and 93 octane, and let the consumer decide.
That’s exactly the kind of choice that cities are denying restaurants when they impose permanent caps.
Let Each Restaurant Decide Its Fee and Service Level
Delivery fee caps were an understandable response to the restaurant crisis of spring and summer 2020. But we now know more about the impact they’ve had, particularly on independent restaurants.
Professors Li and Wang’s new paper shows that in markets with a delivery fee cap, chains like the Cheesecake Factory have fared better than the local Chinese restaurant. That certainly wasn’t the intent of most city officials.
And delivery services’ new tiers have given restaurants more choice, with different fees for different levels of service. Restaurants can choose the fees and service levels that work best for them.
There’s an old saying (of disputed origin): “When the facts change, I change my mind — what do you do?” When it comes to how delivery fee caps are actually affecting restaurants, the facts have changed. Will city officials have the courage to change their minds too?
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