Food-Delivery Platforms Serve Up Empty Calories

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    Food-Delivery Platforms Serve Up Empty Calories

    After a very hard year for U.S. restaurants, food-delivery platforms appear to be giving them a break. They aren’t expecting to make any less money, though.

    Last month, DoorDash DASH 1.73% publicly introduced a three-tiered commission structure for U.S. restaurant partners. And while it hasn’t made a formal announcement, Uber Technologies UBER 0.81% ’ Uber Eats also has been experimenting with similar tiered structures domestically for months.

    Delivery platforms say tiered plans are meant to give restaurants more options. They could use the goodwill. Having long argued against steep fees, regulators have implemented temporary commission caps across many urban and suburban areas over the past year. Data show food-delivery platforms added fewer restaurants between April and December last year amid the pandemic than they did during the same months in 2019.

    Some of that has to do with restaurants’ pinched budgets. But it is also likely because the common practice of adding restaurants to platforms without explicit agreements has fallen out of favor. In California, platforms now need agreements in place with restaurants to deliver their food. Delivery workers often showed up and crowded kitchens unexpectedly, while delivery platforms received orders for items restaurants no longer served. This was a problem more broadly last year when restaurants unexpectedly closed to cut costs, unbeknown to delivery platforms still listing their menus.

    The bet on tiered pricing has to be that options are more palatable for restaurants initially, opening the door for an upsell down the road. DoorDash’s new tiers start as low as 15% of the order—a far cry from the 30%-plus that some restaurants have reported paying for services in the past. But for a restaurant looking for a plan that includes comprehensive discovery and delivery services, not all options make sense. DoorDash itself has said it expects most restaurants to opt for its most expensive tier.

    That isn’t by chance: DoorDash’s lowest tier includes a smaller delivery radius and offers marketing only at an added cost. It also excludes a restaurant from participating in its eater loyalty program, rendering the restaurant less appealing to many of the platforms’ high-value eaters.

    Uber Eats is still testing out various pricing equations, but the lesser tiers also don’t appear to be any more attractive. In one such test reviewed by The Wall Street Journal, there are just two options for delivery. The lower-priced 5% commission with a fixed $1.99 fee means eaters only can find a restaurant on the platform when they explicitly search for it. It isn’t even that cheap: On a $30 order, the math works out to a total payment of nearly 12% of the food sold. A restaurant’s only other option is to effectively pay a total of nearly 27% on the same $30 food order—likely still not enough to spare eaters from paying sizable delivery fees outside of Uber’s own loyalty program.

    The reality is that no one has much choice. Delivery platforms need to charge high commissions to show their investors attractive returns in the presence of fierce competition. Uber, for example, is determined to be profitable by the end of the year. Its Eats business lost hundreds of millions of dollars in the first quarter. Profitability starts to look like more of a stretch if commissions broadly decline. Delivery players have been explicit that they will upcharge delivery fees to eaters when restaurants select lower-tier plans.

    Investors hoping a post-pandemic world finally looks more economical for restaurants should remember that, when it comes to delivery, someone always picks up the tab.

    Write to Laura Forman at [email protected]

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    Published at Mon, 10 May 2021 11:33:00 +0000

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