The Dark Side of Third-Party Delivery Services

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on Sep 4, 2019 9:00:00 AM
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There seems to be a love hate relationship developing between high tech third-party delivery businesses, such as GrubHub, and the restaurants they serve. The latest war erupted after an article in The New Food Economy reported that GrubHub was buying up thousands of restaurant web addresses and publishing shadow pages that were in direct competition with a restaurant’s real website. One particular restaurateur, that did not want to use her name for fear of reprisal from GrubHub, stated that she didn’t know the company had bought her web domain, different versions of her restaurant’s name, until she went to beef up her own online presence.

These microsites can often not be distinguished from a restaurant’s “real site.” Orders placed through these sites, however, go directly to GrubHub and, though phone calls are forwarded to the restaurant, they are recorded by GrubHub and the restaurant receives a charge or commission fee for every order placed.

The problem, of course, is that customers are finding these microsites not knowing that they are not the restaurant’s “real” web page, and when they place their order through these sites, the restaurant is left paying often high delivery fees which, in the case of GrubHub, can be as much as 30 percent.

On the other hand, if they use GrubHub’s delivery service for food that the customer has purchased on a restaurant’s “real website,” the commission fee is less because the restaurant is bringing in the customer, not GrubHub. But wait, it gets even more complicated when you consider that GrubHub’s sites often outrank a restaurant’s real site.

GrubHub Responds

Five days later, the Los Angeles Times reported that Matt Maloney, Chief Executive of GrubHub, stated that the allegations were false and that all of their contracts explicitly state that they set up restaurant’s websites as a way to bring them more orders. He also said that, as of 2018, they stopped the practice of automatically setting up a restaurant’s website, and that the domains they once purchased were transferred to the restaurant upon request.  

He also stated that the charge for orders placed through microsites were substantially less than orders placed directly with GrubHub.

This, of course, is just the latest in a long array of criticisms aimed at third-party delivery providers.

Lawsuits

The beginning of 2019 saw GrubHub facing a class action lawsuit when Tiffin Indian Cuisine contended that GrubHub was charging commissions on phone calls that did not result in orders. These calls were causing lost profits of tens of thousands for restaurants that amounted to tens of millions of dollars across the country. Each individual call may cost a business anywhere from $5 to $9.

GrubHub responded by filing a motion to compel arbitration.  

The bottom line, it appears, there is a communication problem. Restaurateurs that may not read the fine print on their contracts with third-party vendors, and delivery services that fail to verbally disclose that bottom line.

Commission Fees

Restaurateurs are also complaining about the commission fees that seem to be inching up by these third-party vendors. New York City, apparently, listened.

On June 27, the New York City Council held a hearing regarding these high fees stating that the delivery apps’ fees are making it difficult for the small mom-and-pop shops to compete and keep their doors open.

Surprisingly, it was not the New York City Council that took action, but rather the New York State Liquor Authority (NYSLA) that, on August 20, issued an advisory to its leadership that calls for capping commissions paid by full-service restaurants to third-party deliverers. The suggested rate is 10 percent.

According to Restaurant Business, if passed, “the law would prohibit the licensed establishments from paying more than 10 percent.” This means that delivery companies could charge more, but that restaurants could only pay the 10 percent fee. A little confusing. It also means that only restaurants that have liquor licenses would be under this umbrella.

If the cap does come to fruition, it is likely that the city council will step in to provide a comprehensive solution for all establishments.

Some of the bigger chains have taken matter into their own hands by either working out a lower rate with their delivery partner or choosing to make their own deliveries and making this decision part of their marketing campaign. Many of you have probably seen Jimmy John’s commercials promising never to use third-party delivery so that they can ensure fast, quality service. Other big contenders that have stepped into the “We deliver our own food” ring is Dominos, Panera Bread, and Olive Garden.

Other restaurants have decided to charge more for delivery orders in order to offset the high cost. The Habit Burger Grill now charges 25 percent for delivery orders.

It’s still unclear just how the burgeoning delivery business will transform in the coming years, but change is definitely in the air.

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Topics: Technology, Capital, Food Delivery, off-premise, Restaurant Sales Strategy

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