You’ve probably noticed that your food delivery receipts are getting much longer. Extra charges for small orders, the driver’s fuel or delivery in a busy area, when combined with a tip (you should always tip!), can quickly turn your $6 coffee and bagel into a $14 order.
It’s frustrating for sure, but also an annoyance consumers can’t dodge in a delivery industry that has rapidly consolidated. The question is how long customers will take excessively high fees before ditching the apps. A run through this month’s earnings updates from industry leader DoorDash and next-in-line Uber Eats, part of Uber Technologies, shows the answer is not anytime soon. DoorDash beat Wall Street’s expectations for orders placed and value of orders, and Uber Chief Executive Officer Dara Khosrowshahi assured investors that elevated inflation was not impacting consumer spending. “They’re spending their money on experiences and food is a part of that,” he said.
Delivery used to be cheap, but that was when these companies were focused on acquiring customers in the start-up phase and not worried about the cost of doing so. The result was that we soon became addicted to the ease of having prepared meals delivered to our doors in the burgeoning convenience economy, as it has come to be known. Think, for instance, of store returns. Thanks to Amazon.com we’ve become accustomed to buying cheap goods online and returning them for free. But that’s now changing. Companies - from Amazon to grocery chain Kroger and DoorDash and its peers - are starting to put a price on convenience, confident it has become a habit we just can’t break. The good old days of convenience for free, or close to it, are fading away.
Delivery companies as publicly listed entities are under pressure to churn out profits. And there’s very little competition. Consolidation, particularly since that start of the pandemic, has left three dominant players in the U.S. DoorDash had 65% of food delivery sales as of April, including those from its Caviar unit, according to Bloomberg Second Measure, a provider of transaction data analytics. Uber Eats has a 25% share, aided by its 2020 acquisition of Postmates. Grubhub - which has over the years absorbed Seamless, Eat24, and Tapingo before being acquired by Just Eat Takeaway.com - has 9%.
The platforms now have greater pricing power both with consumers and restaurants. A McKinsey report in 2021 estimated that diners end up paying a 40% percent premium on the menu price once the delivery fee, tip and platform service fee is included, while eateries shell out between 15% to 30% of the price of the meal as commission fees. Some restaurants try to recoup the fees with differential pricing for eat-in and delivery menus, or raising prices across the board. One way for consumers to lower those bills is to stay loyal to a single platform. A $10 monthly fee gets you unlimited free delivery through DoorDash’s DashPass, Uber’s Eat pass or Grubhub+ through Grubhub. The cost makes sense if you order at least twice a month, though some restaurants don’t advertise across platforms so your choices might be limited. To make their offers more compelling and leverage their networks, companies are bundling in other kinds of delivery such as groceries or alcohol. A couple of delivery companies have tried partnerships to reduce marketing costs such as Amazon offering Prime members a free year of Grubhub+, or JPMorgan Chase giving Chase Sapphire members a free year of DashPass.
The math is different for restaurants. McKinsey put their traditional profit margins at between 7% to 22%, making the commissions charged unviable as delivery generates more business. The industry’s exorbitant fees became an urgent economic issue at the height of the pandemic as small restaurants buckled under lockdowns. Cities including New York and San Francisco put a temporary cap on delivery fees, with some as low as 10%. Restaurants welcomed the move, but food delivery companies aggressively lobbied to have them dropped, saying they prevented restaurants from paying more to advertise and market their businesses. A few cities have since let the laws lapse and more will likely follow.
There is no question that the food delivery market is here to stay. Home delivery sales of limited-service restaurants more than doubled since 2017 to 18% of restaurant sales, or a $61.8 billion industry last year, according to Euromonitor International. Globally, sales doubled to 25% of restaurant sales, or $222 billion, it added. With the big three of food delivery controlling 99% of the market, consumers have little choice than to pay high fees for the foreseeable future or settle for one of the membership plans. Sure, we’ll gripe, but we’ve become a society that is hooked on convenience - and such is the cost of convenience.
Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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