Fed up with fees: Restaurants, lawmakers, startups serve up different solutions to delivery apps

William Muirhead said he will not work with third-party delivery companies at his deli — even during the coronavirus pandemic.

He is one of a growing number of small restaurant owners that have expressed discontent with the way national delivery companies, such as Grubhub and DoorDash, charge for their services. The issue has prompted officials in cities all over the U.S., including St. Louis, to consider putting caps on the amount of sales these companies can take from restaurants, and it has led to a crop of upstarts looking to offer an alternative to existing options.

Lee Street Deli, the restaurant Muirhead owns, is a small shop that has operated in Columbia for more than 90 years, though Muirhead has only owned it for five. It sells everything from sandwiches to hot dogs to Frito pie in a bag, primarily to students that live in the neighborhood.

The owner of Columbia’s Lee Street Deli is among the Missouri restaurant operators who refuse to work with third-party delivery services. | Casey Murray/Missouri Business Alert

He said the rate delivery companies charge is not the only reason he will not work with them, but it is the biggest one, even when the restaurant business has shifted to rely almost exclusively on takeout and delivery.

“They want 30% of the sale, and that’s practically my profit margin on a lot of my items,” Muirhead said. “And I just decided I don’t want anything to do with them.”

Muirhead said he thinks delivery companies can set their rates at the level they do because large chain restaurants make enough that they can afford to lose 30% on a portion of their orders, but that it is a very different story for small businesses.

Legislating a solution

In St. Louis, the Board of Aldermen has unanimously approved a bill that would limit the fees delivery companies can charge to 5% of a restaurant’s sale, among other provisions. The bill now awaits a decision from Mayor Lyda Krewson.

While many other cities, such as Boston and Chicago, are considering similar measures, not everyone is on board. In Los Angeles, over 20 restaurants signed a petition against putting a cap on fees from delivery services, because they feared it would ultimately hurt their businesses, the Los Angeles Times reports.

Delivery companies have warned that such legislation could force them to cut down on their services, lower their drivers’ pay or increase fees paid by customers. Grubhub is the only delivery service that responded to Missouri Business Alert’s request for comment, and it echoed that sentiment.

“Any arbitrary cap – regardless of the duration – will lower order volume to locally-owned restaurants, increase costs for small business owners, and raise costs on customers,” a Grubhub spokesperson said in an email. “Delivery workers would have fewer work opportunities and lower earnings. We also believe that any cap on fees represents an overstep by local officials and would not withstand a legal challenge.”

Muirhead agreed that a cap on delivery fees would be unfair. To him, businesses have enough other options that limiting the amount delivery services charge is not necessary.

“They have a right to do it,” Muirhead said. “I don’t see why you wouldn’t be able to hire delivery drivers for the same cost, if not cheaper.”

Letting the market decide

Richard Walls, owner of The Heidelberg in downtown Columbia, is one local restaurant owner that chooses to work with some delivery companies. The restaurant works with Postmates as well as ChowNow, a company that partners with DoorDash.

The Heidelberg has been a staple of Columbia since the 1960s, and the restaurant-bar is frequented by students during the school year. The establishment is, as Walls put it, “landlocked,” and does not have much of its own parking.

For this reason, Walls thought it would be easier to work with third-party delivery providers. These providers also offer advertising opportunities that he wanted to take advantage of.

The Heidelberg, a bar and restaurant in downtown Columbia, partners with some third-party delivery providers and tries to negotiate more favorable rates. | Casey Murray/Missouri Business Alert

Walls said that while some of the rates delivery companies advertise are high, businesses can negotiate with them for better deals, and there is a lot of competition among different platforms. For this reason, he did not see a need for a delivery cap.

“You need to allow the market to take care of what people can afford to pay for a delivery, unless it’s a monopoly,” Walls said.

He also mentioned that many delivery companies will put restaurants on their apps and websites even if the restaurants don’t partner with the services. When users order from these non-partner restaurants, the services call in orders for pickup as if they were normal customer orders, and then delivery drivers retriever the orders. In this case, restaurants get their food delivered without paying the fees, though this is not something all restaurants want.

Walls said that he raises the prices for food ordered through some delivery companies in order to make up for lost revenue. Then, if customers want to pay the higher price for delivery, they can.

Delivering new options

The solution to problems these small businesses are facing might come not from national corporations or delivery caps, but from other local small businesses.

James Bates started what became KnockKnock KC in March as a way to keep his kids employed during the pandemic, but it has grown quickly out of restaurant owners’ discontent with national delivery options. The company will soon be partnering with eight restaurants.

Bates said he believes KnockKnock KC can help drivers make more money and restaurants save more money, but that is not the main motivation for the company.

James Bates | Courtesy of Bates

“It’s all about getting money back in the hands of the local economy, and keeping that money in Kansas City and not having to go out to these big national companies that don’t have a care in the world for restaurants,” Bates said.

The way KnockKnock KC works is that it serves as the agency for drivers, and restaurants submit hours that they would like a delivery person provided. Drivers are known as “brand ambassadors,” and wear the restaurant’s uniform while they work, but are paid by KnockKnock KC instead of the restaurants. KnockKnock KC then bills the restaurants for the hours it provided delivery personnel.

Bates said this works because his company handles all the stress and hassle of hiring, managing and paying in-house delivery personnel, while costing less than other third-party options.

“If they’re averaging two deliveries an hour, they’ve pretty much got a zero-cost delivery model,” Bates said.

Though the company is still new, Bates said if business continues, they would consider franchising in other cities, so those communities could keep revenue within the area as well.

“This is what’s really important,” Bates said. “This is kind of what the whole mission is, is to give back to the restaurants all those delivery fees and costs they lose when they use national, or when customers use those national third-party delivery companies.”

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