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Business of Food: Eating at You

Desert Companion

Some restaurant owners are asking whether food delivery apps are friend or foe

Imagine you and a friend go out to eat at your favorite restaurant and the tab is $100. How much do you think the restaurant pockets, after stocking its pantry, paying its staff, keeping the lights on, and so on? If you guessed $5, you’re right. The industry-wide profit margin averages 5 percent, according to the National Restaurant Association.

Now, imagine that you ordered that same meal through a third-party food delivery app such as DoorDash, Grubhub, Postmates, or Uber Eats, the top four. These apps can take as much as $30 out of that $100 for their services (on top of any fees they charge you). That means your favorite restaurant now has $70 left to cover its other expenses as opposed to $100. 

Finally, imagine that no one’s allowed to dine in groups outside their homes, so your favorite restaurant is reliant on pick-up and delivery for 100 percent of its revenue. And four out of 10 customers are using third-party apps, rather than the restaurant’s own app or website, to place their delivery orders.  

This is the picture Tacotarian cofounder Kristen Corral likes to paint when she’s speaking to fellow restaurant owners, government officials, and the public about the harm she says third-party food delivery apps are inflicting on the very businesses they say they support.  

Support comes from

 “When the pandemic started, people were scared to leave their house,” Corral says. “Now, I think people are just very used to getting things on demand. It’s easy; you click a button, and you don’t think about it. And because the apps aren’t transparent about who’s paying what, the customers don’t know we’re paying 30 percent.” 

“Our goal is to support restaurants, and Grubhub’s marketplace allows independent restaurants to compete against larger enterprise brands and chains for diners,” a Grubhub spokesman says. “This has never been more important than now, as we all work to support restaurants during the COVID-19 pandemic.” 

 

Average per-person spend

Amount of delivery or takeout(estimated)

Current revenue compared to pre-pandemic

Apps using

Commiussions paying

Big B's Texas BBQ

$15

30%

Down 20%

Door Dash Grubhub Postmates

20%, 27.5%/33.5% 20%

Lotus of Siam

$55

30%

Down 60%

ChowNow

None

Sparrow + Wolf

$52

5%

Down 50%

None

None

Corral’s not buying it. Amid the economic wreckage of the shutdown, she and some restaurant-industry peers started lobbying local governments for a limit on the apps’ fees. Clark County passed an emergency ordinance capping fees at 15 percent beginning August 4.

But the law didn’t solve the problem. For one thing, it doesn’t apply outside Clark County; the Tacotarian in Spring Valley may benefit, but for the one Downtown to do so, it would need a similar ordinance in the City of Las Vegas, which says it can’t impose such a law, because it doesn’t have jurisdiction over the delivery app companies to which it hasn’t issued business licenses. (Henderson said it’s in a similar quandary; North Las Vegas didn’t reply to Desert Companion’s inquiry about the matter.)

Additionally, within a month after the Clark County ordinance passed, restaurants began reporting that some of the apps were either unaware of it, refusing to comply, or exploiting a loophole to shift their fees from delivery to marketing (thus keeping the total fees as high as they were pre-cap). In early October, the county commission proposed a fix that was scheduled for public discussion on October 20, as this story went to press. Meanwhile, Las Vegas and Henderson said their city councils were investigating the licensing issue.

“My hat’s off to Kristen (Corral),” Natalia Badzjo, co-owner of Big B’s Texas BBQ says. “It’s something that the restaurant community has been crying over for years, and she got it done. Standing ovation to her.” 

But, as Badzjo’s own experience illustrates, the problems with the apps go beyond their fees. From data hoarding to copyright theft, Corral and others say, the apps’ practices are hurting more than they help. The following examples show three ways restaurant owners have chosen to navigate the turbulent waters of an industry disrupted.

 

* * *

Big B’s never closed, technically. Between Governor Steve Sisolak’s March 17 nonessential business closure and his May 9 limited reopening of dining rooms, Big B’s was open for takeout and delivery. Badzjo says staff handles large deliveries, such as to events, and a small percentage is takeout, but third-party delivery companies handle the majority of the to-go business.

Early on, she says, she and her husband, Brian Buechner — co-owner, chef, and namesake of Big B’s — didn’t think the restaurant would make it. But they’d already paid rent through the end of March, so they figured they may as well stay open. As Las Vegans ventured out, they found the few places that were open, including Big B’s.

“From March to May, we didn’t really make a lot of revenue, but we got a lot of new customers,” Badzjo says.

This is one reason restaurateurs sign up with third-party apps (and why the apps say their fees are justified): to reach a demographic that wouldn’t find them otherwise. Another reason: “I’m not in the delivery business,” Badzjo says. “I’m in the food business.”

Most orders come in rushes — 60 or more between 5 and 7 p.m. at Big B’s on a busy night. No restaurant keeps enough drivers on staff to handle that volume. And some delivery customers are so far away that in-house staff wouldn’t drive to them anyway. This is a benefit of outsourcing the service to a specialist.

Third-party apps make sense, Badzjo says, when their commissions are reasonable (15 percent, in her opinion), and the slice of the overall business they’re taking is small. The problem comes when both their commissions and their slice of the business get so big that they eat into profits. She says she looked into Uber Eats during the pandemic, but they wouldn’t give her a rate of less than 30 percent. She declined. (Uber did not respond to Desert Companion’s emails.)

And about those new customers Badzjo reaches through the apps: How does she persuade them to switch to the more profitable options of dining in or ordering directly from her? The app operators own all the data they gather on Big B’s customers. And they’re not sharing it.

 

* * *

Lotus of Siam’s longstanding reputation as one of the top Thai restaurants in Las Vegas (if not the U.S.) gives it a huge advantage in any situation. But it’s had its share of adversity recently, too, such as the 2017 roof collapse that suddenly shut down its original Commercial Center location and the mid-March 2020 rain damage that shuttered its Flamingo location as well. Reopening both sites has come in fits and starts, because of the pandemic and remodeling. But, as of this writing, the Commercial Center location was open and the Flamingo location was set to do so in November.

Thank goodness, co-owner Penny Chutima says, for takeout and delivery in the interim.

“When we weren’t able to seat inside, the to-go was doing really well,” she says. “Then, when we implemented the delivery, it was even better.”

A staunch opponent of third-party delivery apps that charge commissions, Chutima took an alternate route: ChowNow. This developer charges restaurants a flat rate ($499 in Lotus of Siam’s case) to develop a to-go app, and then a fixed monthly fee ($99) for marketing and ordering services, and, in limited instances, delivery. Lotus of Siam had been using the app for takeout a little less than a year when the pandemic hit, and then quickly enlisted the company to customize a delivery option.

Now, if a customer downloads the Lotus of Siam app (and opens a ChowNow account), they can place an order that goes straight to the restaurant for either pickup or delivery. DoorDash (through its contract with ChowNow) delivers orders placed within a five-mile radius, and Lotus staff handle the rest. It’s a manageable volume, Chutima says. “In one day, we may have 20 to-go orders, and of those, maybe five are for in-house delivery.”

The restaurant did have to make cutbacks during the business closure; still, she’s glad she resisted the big-name apps.

“To me, as a businesswoman, it’s a wrong move,” she says. “With a company like Grubhub, they’re a huge corporation. Putting myself in their perspective, they have expenses, too. As a small-business owner, you can negotiate your credit card processing rates. They won’t do that. They charge for marketing, drivers, legal fees.”

Despite this sympathy, Chutima finds the delivery app companies frustrating. For instance, she says, customers will call to complain about an order. When she asks what phone number they used to place it, they’ll give one not belonging to Lotus but to a delivery app — despite her having no contracts with any of them. As this story was being reported, Postmates had an active Lotus of Siam page on its website. (Postmates did not respond to Desert Companion’s e-mails seeking comment.)

The American Economic Liberties Project found this problem to be widespread. In a September white paper, the organization describes how app companies hire call centers to take orders for non-contracted restaurants. A call center worker will then place the order directly with the restaurant, send a driver posing as the customer to the restaurant to pick up the order, and deliver it to the actual customer.

Why engage in such a high-hassle (and presumably, low-profit) way of doing business? The report asserts it’s because the companies’ main goal is gaining market share. As evidence, it says their public financial reports show they’re unprofitable, yet they continue to receive huge investments. At the same time, the industry is in a consolidation race: “Grubhub and DoorDash alone comprise more than 20 companies that once competed with one another,” the paper says.

According to data analytics firm Second Measure, the big-four companies control 90 percent of the consumer meal delivery market. And Uber is currently in talks to acquire Postmates.

 

* * *

Sparrow + Wolf co-owner Brian Howard says the restaurant’s staff considered all its options during the pandemic closure and declined to do any delivery or takeout at all.

“We felt like the hustle that would go into chasing the dollars would be more stressful than coming out of it having planned and prepared for what would be next,” Howard says.

They decided instead to focus on connecting to their community. They opened a pantry where people could pick up artisan bread, hard-to-find ingredients such as oysters or spices, and recipes for dishes they could make at home. They ran cocktail-mixing competitions on social media platforms. They participated in charity food drives. When Sparrow + Wolf opened at half-capacity on June 1, Howard says, its friends and fans were ready and waiting.

About 20 percent of the restaurant’s business is still from the pantry, which now offers items such as burger kits for outdoor grilling. And, Howard concedes, they do some takeout on a very limited basis.

“We’ve always done carryout,” he says. “If people want something to take home, we’ll do it. But I believe food’s meant to be eaten in a restaurant, especially the way we cook it.”

Most of his peers would prefer dine-in, of course, but the delivery app genie is out of the bottle now. And, particularly for more casual restaurants than Sparrow + Wolf, opting out of delivery may not be possible — or even desirable. There will always be potential enthusiasts who won’t come in, or can’t, as in the pandemic.

The solution, Corral of Tacotarian believes, is for restaurant owners to create their own delivery system —something akin to Chomp, a co-op of sorts developed by Iowa City, Iowa, locals to compete with Grubhub. This would allow independent businesses to control their own data, menus, and prices, and give them the opportunity to build community among all their customers, not just the ones they see in person.

 

* * *

No one is more worried about the state of the local restaurant industry than Alexandria Dazlich, the Nevada Restaurant Association’s director of government affairs. She notes that her organization’s research indicates 15 percent of restaurants have closed because of the pandemic, and that Open Table predicts one in four will never reopen.

“We’re trying to do what we can to save the restaurant industry,” she says. “The Clark County action was an emergency ordinance for a reason. Restaurants are fighting for their lives.”

That temporary delivery fee cap expires in February. Corral and Dazlich see it as an opportunity to work toward a better permanent solution.

“In the future, we hope to address billing transparency and less-than-savory practices,” Dazlich says. “Call fees, bag fees, taking menus without consent, listing restaurants that have actively declined to be a part of it. … We want to encourage business-friendly practices, but we don’t endorse practices that exploit our businesses. There are a few really big food delivery providers, and right now, they remain pretty unregulated. They’re here to stay, and we want to make sure it’s a good partnership.”

That partnership may not come without a struggle. The app companies have spent millions fighting fee caps in other jurisdictions where they’ve been imposed, and Dazlich says her understanding is that they’ve already contested the proposed amendment to the Clark County ordinance.

Both DoorDash and Grubhub tell Desert Companion they believe fee caps are bad for business, and tend to hurt smaller, less profitable restaurants the most. Grubhub says its research suggests restaurants affected by the fee cap saw orders decline by 20 percent compared to those not affected by the cap. The company also says the cap forces delivery companies to charge diners higher fees to cover their losses.

Furthermore, the companies argue, they came to restaurant owners’ rescue during the pandemic. DoorDash cites results of a study it commissioned Technomic to conduct as evidence it has helped its clients in the U.S., Canada, and Australia save $120 million from mid-March through May, and that merchants on its app had a six times greater chance of staying in business during the pandemic than those off it.

If Corral and Dazlich get their way, Southern Nevadans will get to hear both sides of the issue in public hearings about proposed legislation over the coming months. Meanwhile, people who love restaurant food have another complication to factor into their choice to dine out or eat in.

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