Restaurants Raise Prices on Delivery Apps

Written by Aaron Wise
Monday, July 27, 2020 at 08:05pm CDT

Fees passed on to restaurants from third party delivery companies have become too expensive, and restaurants are responding. No one can blame them. With Yelp-listed restaurants reporting that 60% of temporary closures have become permanent, restaurants need every last cent.

In April, restaurants seeking class action status filed a lawsuit in the U.S. District Court of the Southern District of New York, Davitashvili v GrubHub Inc. They claimed that food delivery apps charge “exorbitant fees” that range from 13% to 40% of revenue. (Grubhub and its subsidiaries Seamless and Eat24 command 52% of the NYC food delivery market.)

In order to understand why fees range from 13% to 40%, a bit of math is required. As we reported in our food delivery app investigation, fees vary widely by company. For example, GrubHub charges restaurant owners a base commission rate for food orders of 10% plus a processing fee of 3.05% + $0.30. In addition, most restaurants pay an extra 20% in “marketing commission” to make their listing more prominent within GrubHub’s app. This marketing commission is ostensibly optional, but often akin to a lifeline for many restaurants struggling with today’s 57% YoY decline in seated diners. Moreover, the typical restaurant rents hardware like tablets and printers from GrubHub for an extra $119/month. Finally, the restaurant often splits the delivery fee with the customer, paying up to an additional 4% of order total.

The average restaurant’s profit ranges from 3% to 9% of revenue, making delivery meals for eateries more expensive than direct orders. Moreover, restaurants are facing rolling re-closures and re-shutdowns. Just this week in Hong Kong, sit-down dining is now restricted to no more than two people, except families. In the U.S., there are at least 32 states with statewide mask-wearing restrictions.

Gordon Haskett analyst Jeff Farmer estimates that on average, franchise locations of Panera and Noodles & Co. have already raised their food prices 12.6% higher on delivery apps versus in-store prices. Chick-fil-A’s delivery app prices are 29.8% higher than in-store; Starbucks’ delivery app prices are 20.3% higher; McDonald’s delivery app prices are 19.6% higher.

The pandemic continues to accelerate. The U.S. Centers for Disease Control reports 564 deaths from COVID-19 since yesterday, bringing total deaths to 146,546. The COVID Tracking Project at The Atlantic reports 59,023 patients currently hospitalized, just 917 short of April’s all-time high. In Miami, the COVID-19 test positivity rate is a staggering 18.5%.

Photo by Andrea Davis on Unsplash