Apps are killing the restaurant industry

The sudden onset of the pandemic in March sent the restaurant industry into a death spiral. Working in a notoriously low-margin business, many couldn’t withstand weeks of limited or no indoor dining. As a result, about 1 in 6 restaurants nationwide has closed permanently, and as of September nearly 3 million restaurant workers had lost their jobs.

Under pressure to pay rent and retain workers, some restaurants turned more of their attention to delivery, particularly from app-based companies like DoorDash, UberEats and Grubhub. Few restaurants that hadn’t done delivery in the past had the time or money to create their own delivery service, which typically brings in less money than dining rooms, where customers are more apt to order more profitable items like appetisers, desserts or a second round of drinks.

These restaurants have quickly found that the apps, with their high fees and strong-arm tactics, may be a temporary lifeline, but not a saviour. Fees of 30% or higher per order cut eateries’ razor-thin margins to the bone. And a stimulus package that would bolster the industry has stalled in Congress, even as states and municipalities enact new limits on both indoor and outdoor dining.

Restaurants are entering a critical stage as a new coronavirus surge takes hold and outdoor dining becomes less appealing during the colder months. Lawmakers can help by extending federal grants to independent restaurants that will help them close the gap in lost sales and cover payroll and other expenses. But legislators also should consider caps on the fees the apps can charge, particularly amid the pandemic, as places like New York City, San Francisco, New Jersey and Washington state have done, or risk seeing additional restaurant casualties. Officials in Colorado and Santa Clara County in California are considering similar fee limits, though app firms are pushing back by imposing $1.50 to $2 per-order charges on customers in some cities.

App companies have said the high fees are necessary to pay drivers, acquire new customers and expand into new markets, and caps could force them to alter their service. But the fees are also funding a consolidation among the four largest players that together represent an estimated 99% of delivery market share and which will give them greater pricing power.

Though still unprofitable, Uber this month completed its acquisition of Postmates in a $2.7 billion deal. And DoorDash, also a money loser, is going public this week with hopes of raising more than $3 billion from investors. DoorDash’s IPO will net already wealthy investors billions in profits, particularly galling as restaurants wither.

The apps’ fees have hobbled many restaurateurs that had viewed app-based delivery as a temporary solution until the coronavirus could be contained.

While several vaccine trials offer hope that indoor dining might safely resume next year, Stephanie Vitori, owner of the Cheeseburger Baby restaurant in Miami Beach, says she worries she will not be able to hold out that long.

The fees were acceptable when delivery represented less than 15% of her business last year, but with delivery now nearly 90% of her sales, DoorDash and others are taking a big chunk of her revenue. “It’s not sustainable at these rates; the fees are killing my business,” she said, noting her overall sales are down nearly 15%.

Even larger chains, which can negotiate lower fees, have had their profits nibbled away by the delivery apps.

A former Grubhub executive compared the apps to payday lenders. “They give you the sensation of cash flow, but at the expense of your long-term future and financial stability,” he wrote in May.

There are other causes for concern about the app companies, particularly the treatment of their legion of contract drivers who face inconsistent earnings and are denied health care and other benefits from the companies. DoorDash, Uber and Postmates, among others, pulled together $200 million to back a winning ballot proposal in California last month that circumvented the legislative process and entrenched a system ensuring drivers can’t attain status as employees or other benefits like consistent minimum wage guarantees and help with vehicle costs. The companies have since vowed to bring similar limits to other states.

Restaurants of course do not have to use the apps, but those that don’t or that refuse to pay marketing fees to push their eateries higher up in search results find that customers are funneled to competitors. Desperate to maintain typical profit margins of just 5% or less, some restaurants have fought back by encouraging customers to order directly through their websites for pickup. Others are slipping flyers into delivery boxes to promote less costly options, including a few new startups that charge lower commissions.

Ashish Arnold, who operates two restaurants in Maryland, implored customers to delete all delivery apps from their phones. “It’s a predatory business,” he said, noting Uber, DoorDash and others had been unwilling to negotiate lower fees with him even as sales slipped. “They say the onus is on us to make it sustainable, but this is not a service we asked for.”

With deep pockets, the dominant app companies have devised ways to put pressure on restaurant owners to sign contracts with them, including downloading menus without restaurants’ consent and then offering their own delivery. Grubhub registered internet domain names of tens of thousands of independent restaurants. Legislators should curtail such anti-competitive practices.

Dan Raskin, an owner of Manny’s Deli in Chicago, said his greatest frustration was the companies’ unwillingness to share customer information with him. That means he cannot verify their claims that they are bringing him new customers. Worse, they appear to be using that data to create competing virtual restaurants — which have no dining rooms, offer multiple cuisines from one location and operate only on the apps.

App-based food delivery will become only more vital to the industry as the coronavirus stretches into the new year and more communities issue shelter-in-place orders. With a vast on-demand workforce, Uber and DoorDash do offer a service that is difficult and expensive to replicate.

But the power imbalance between restaurants and delivery apps willing and able to absorb billions in losses to maintain market share threatens to force more cherished dining establishments out of business.

Consumers can help by ordering directly from restaurants for pickup and by using the apps sparingly. And lawmakers too should wait no longer to extend workers a new stimulus package and help to limit the prohibitive fees the apps charge small businesses.

DoorDash’s IPO will mint countless new millionaires. But is an industry designed to enrich the elite and built atop a growing heap of struggling restaurants truly worth celebrating?

c.2020 The New York Times Company