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Thursday, May 19, 2022

App-Less Food Delivery Helps Profit Margins

Frank Howell is something of an anomaly. He’s a local restaurateur who didn’t join the lockdown-induced rush to allow services such as GrubHub and Postmates to deliver his food to customers.“I’ve mostly been against it, just because they take such a high amount of profit in a business that your profit margins already run kind of thin,” Howell said. “The amount they take almost makes it not worth it.”When the pandemic hit a little more than a year ago and local governments forbade eateries from serving guests on premises, most restaurants turned to the delivery apps to sustain their business. But not all did.That was great for the apps but costly for restaurants. Representatives from Postmates and UberEats did not respond to requests for comment for this article and representatives from DoorDash and GrubHub declined to give a range for the total commission fees for their marketplace services. However, according to various reports, the fees for using the services vary anywhere from 10-30 percent of the total purchase price, with 15-20 percent being a fairly typical amount.That means a restaurant that normally charges $50 for a meal delivery would get only $42.50 to have that same meal delivered by one of the third-party apps, assuming a 15 percent fee. That doesn’t leave much for a restaurant which normally makes 15-20 percent or so for a take-out order. Many restaurants may have grumbled about the fees but went along. But a few, such as Howell’s restaurant, named the Burbank Pub, Mrs. Olson’s Coffee Hut in Oxnard and Casa Vega in Sherman Oaks chose not to list their establishments on the apps at all. But customers like themThere are advantages for a restaurant to use the apps. The restaurants don’t have to deliver the food themselves, which means – assuming they rely on the apps exclusively – they don’t have to pay for a driver or a delivery vehicle and the special insurance it requires. And the apps market the restaurants, thereby exposing them to customers who may not know they exist. In that way, the apps may be adding to restaurants’ sales. What’s more, customers increasingly relied on the apps during the coronavirus pandemic.Howell allowed that, like all restaurateurs, his goal is to please customers, many of whom like the apps, even though there’s often a fee for customers, too.    “Especially during this time, it’s convenient for them because they can’t all come pick up. Some of them are older, some of them are high risk,” Howell said, who delivers the meals from his restaurant. “So, I mean, I understand why people want the deliveries, I’m just trying to keep my people employed. So that’s why I do them myself.” Howell not only believes the apps’ fees are too high, he said he has had issues with chargebacks and delayed deliveries in his limited dealings with the services. Beyond that, he doesn’t trust them to deliver his food with the same care that he would himself.DoorDash and its subsidiaries earned a collective 55 percent of U.S. consumers’ meal delivery sales in February and 40 percent of all sales in the Los Angeles area in the same time frame, according to a study by Second Measure. UberEats, which acquired Postmates in December, held the second largest market share nationwide with 27 percent of sales and boasted 47 percent of the Los Angeles area sales between both apps. GrubHub trailed nationwide and locally with 16 and 13 percent of the market, respectively. The Los Angeles City Council in June voted to cap the fees charged by third-party food delivery services to restaurants at a total of no more than 15 percent of the purchase price per order. The cap, which is set to expire 90 days after indoor dining restrictions are lifted, also prevents the apps from taking tips given to delivery drivers.“These efforts ultimately restrict restaurant choice, precisely when restaurants need the full range of options to help their businesses survive and thrive,” a DoorDash statement on commission caps read. A DoorDash representative indicated the caps, or any pricing regulation, could lead to increased fees for customers to offset the cost of doing business, resulting in fewer orders for small businesses. ‘It’s not enough’But even with the cap, some restaurateurs say the amount taken by the apps for listing fees, delivery service and credit card processing charges are still too large to manage for their struggling businesses. “Normally if you have 30 percent (profit) from one order, now we have only like 5 percent. It’s not enough,” said Richard Lam, manager of Lam’s Thai and Chinese Restaurant in North Hollywood. The small, family owned restaurant has been struggling to make ends meet since the shutdowns started and Lam, his brothers and sister-in-law have been working for meager paychecks or no pay since last March, trying to keep the doors open. “I told my family we’re wasting all of our time (using the apps), because we don’t make any money.”Lam completes the majority of the restaurant’s to-go orders over the phone, trying to avoid large commission fees through his restaurant’s listings on GrubHub, DoorDash and Postmates but, without being able to rely on consistent foot traffic, he said he doesn’t have a choice but to use the apps to try to supplement the business income. He can’t afford to hire someone in-house to do deliveries. “We still use (the apps), because we cannot survive without them for now,” Lam said. “But hopefully when things are okay, we might not use them as much then.”For larger chain restaurants, who have more bargaining power to leverage when negotiating service fees, the app commissions have been less of a problem. Some chains, including the Calabasas-based Cheesecake Factory and Chipotle, even credit delivery apps with a surge in business because they are popular with consumers. “Without DoorDash, I wouldn’t be able to reach as many customers and increase awareness of my business, especially during this time,” William Bonhurst, chief executive and founder of Man Vs Fries, a chain with several locations in the Valley, said in a statement for DoorDash. “The commission on my orders enables me to tap into DoorDash’s customer base and operate a delivery function that would be near-impossible to do on my own. It also gives me the flexibility to scale up those services if I need to down the line.”For local restaurants, third-party app affiliations aren’t limited to just delivery and marketing services for their own menus. The Burbank Pub signed up in the wake of the pandemic to be a so-called ghost kitchen in which Howell’s staff prepare orders from larger chain restaurants, using their recipes. Those meals are picked up and delivered by third-party app drivers. But even those profits, while helpful for now, are slim. The arrangement costs him between 30-40 percent, including the third-party delivery fees, and has made Howell even more cautious of using the apps for his own food.“We’re doing the ghost kitchen thing, which is the only reason why we use any of the delivery apps currently,” Howell said. His kitchen makes meals for such restaurants as Smash Burger and Nash’s Hot Chicken, but he plans to stop as soon as his restaurant’s capacity returns to normal. “You know, it’s a little extra something, but it almost doesn’t seem worth it.”For now, the Burbank Pub won’t reopen for inside dining until everyone on the staff can be fully vaccinated. The outdoor patio dining is available at limited capacity, and the kitchen crew continues preparing meals for their patio diners, take-out orders and in-house delivery service as well as for third-party delivery of meals for other restaurants.“We’re planning on doing it until our capacity’s back at 100 percent, we’re open inside and people feel safe coming back out. I don’t see us stopping (in-house deliveries) for a while,” Howell said. “My goal is to have my whole staff back. And if that means still limited capacity, but we’re running an extra person so they can do deliveries, I want to do that.”

Katherine Tangalakis-Lippert
Katherine Tangalakis-Lippert
Katherine Tangalakis-Lippert is a Los Angeles-based reporter covering retail, hospitality and philanthropy for the San Fernando Valley Business Journal. In addition to her current beat, she is particularly interested in criminal justice topics, health and science stories and investigative journalism. She received her AA in Humanities from Moorpark College in 2016, her BA in Communication from Cal Lutheran University in 2019 and followed it up with a MA in Specialized Journalism from USC in the summer of 2020. Through her work, Katherine aspires to help strengthen the fragile trust between members of the media and the public.

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