Food delivery apps stung by New York City cap on commissions

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Shares in Just Eat Takeaway, the owner of Grubhub, one of New York’s biggest food delivery apps, fell more than 4 per cent on Friday after the city voted to cap the commission rates that food delivery services could charge.

A number of US cities capped how much the likes of Grubhub, DoorDash and Uber could charge restaurants for deliveries during the coronavirus pandemic, collectively costing them hundreds of millions of dollars.

The companies assumed it would only be a temporary measure but now both New York and San Francisco have moved to make the change permanent, severely denting the future profitability of the apps, and other major cities are likely to follow suit.

On Thursday, New York’s city council voted to approve legislation that makes permanent a commission cap of 23 per cent, broken down into 15 per cent for delivery services, 5 per cent for add-ons such as marketing and 3 per cent to cover transaction fees.

“We are not here to enable billion-dollar companies and their investors to get richer at the expense of restaurants,” said council member Francisco Moya.

Previously, the delivery apps had been known to charge as much as 30 per cent. Shares of DoorDash and Uber were broadly flat in pre-market trading on Friday.

“This permanent price control is flagrantly unconstitutional and will hurt local restaurants, delivery workers and diners across NYC,” said Grubhub. “We will vigorously fight this illegal action.”

Wedbush analyst Dan Ives predicted that the permanent cap in New York would mean a “10 per cent headwind” on growth for all of the players in the market.

It is particularly damaging for Grubhub, which counts the city as its crown jewel and was a significant part of its attractiveness to Just Eat Takeaway, which acquired it earlier this year in a deal worth $7.3bn after talks with Uber fell through.

Ives said companies should be bracing themselves. “We expect this to become a major trend heading into 2022 which will pose a challenge to sector growth,” he said.

San Francisco voted in June to keep a 15 per cent ceiling in place, which had originally been set to expire 60 days after the city declared restaurants could fully reopen.

“We really have an imperative to protect independent restaurants from the exploitive and predatory practices of third-party food delivery apps that seek to extract wealth from our local economy,” said San Francisco supervisor Aaron Peskin during the voting session.

The companies have responded with a legal challenge in San Francisco and are likely to do the same in New York, according to two people familiar with their plans.

Meanwhile, other cities with temporary caps, such as Los Angeles, Seattle, Chicago, Washington DC and Las Vegas, are looking on as they consider whether to make them permanent.

“The outcome of the legal battles in NYC and San Francisco will probably determine if other cities attempt to impose fee caps,” said Robert Mollins, of Gordon Haskett Research Advisors, in a note to investors. “We believe other cities will wait to see the end legal outcome before making a decision to impose permanent fee caps.”

For Grubhub, the commission caps are currently what stands between it and ebitda profitability, its European parent company Just Eat Takeaway said in a recent presentation to investors. It stated that in the first half of the year, Grubhub suffered an €88m impact from commission caps. Without it, Grubhub would have achieved ebitda earnings of €63m — instead, it posted a €25m loss.

The picture is similar at DoorDash, which said commission caps cost it $26m in this year’s second quarter. DoorDash said: “We believe this legislation and any similar legislation is unnecessary in light of the range of choices available to merchants; harmful to consumers, [couriers], and the restaurants these policies are intended to help; and unconstitutional.”

Uber has not disclosed its own comparable figures. It did not respond to a request for comment on the New York City measures.

Over the past year, both DoorDash and Uber began offering pricing structures that would reduce their reliance on per-order commission in favour of restaurants paying set fees for added services, such as more prominent ranking within the app.

Those changes signal a shifting view in the delivery sector, including among grocery apps such as Instacart and Gopuff, that selling the “shop window” space within their crowded apps could prove a more lucrative and sustainable business model in the long term — as well as capitalising on the reams of data on consumer buying habits.