Last week, San Francisco’s Board of Supervisors unanimously approved a permanent cap on fees that third-party delivery services can charge restaurants. Originally enacted as an emergency order by Mayor London Breed in April 2020, San Francisco’s fee cap is the first in the nation to become permanent. Proponents of the policy claim that the caps are vital to protect businesses from exorbitant fees, which on occasion can be 30% of each order. In reality, the fees are a necessity for delivery services and capping them leads the costs to be passed on to consumers.
Amidst the Covid-19 pandemic, meal delivery became essential to the survival of restaurants. With customers unable to eat in restaurants due to local laws, and many fearful that going out to pick food up from an establishment would expose them to the virus, touchless delivery became the preferred method of ordering food among consumers.
Similarly, as millions of people lost their jobs due to the pandemic-induced economic downturn, the “gig economy” became crucial for individuals looking to earn some extra money. With flexible hours and a simple application process, driving for a delivery service is incredibly appealing for many people. Unfortunately, as anyone who understands basic economics knows, increased prices often lead to a decrease in consumption. Fee caps generate price hikes on customers, driving down demand for delivery and reducing the ability of drivers to supplement their main source of income. In fact, the implementation of fee caps in multiple states and dozens of localities has caused companies to introduce “regulatory response fees”.
In Portland, Oregon, the City Council approved a 10% cap on service fees, the lowest in the nation. Functioning as a government mandated price control, the cap forced delivery services to raise prices on consumers to recoup lost revenue. As a direct result of the fee cap, consumers in Portland are now charged an additional $3 on all UberEats orders.
In more than a dozen other cities, including Boston, Chicago, Seattle, Philadelphia, and Denver, similar fees are added when ordering food delivery. On average, consumers in cities where fee caps have been implemented are charged an additional $2 for each order.
Even though delivery services such as UberEats, Grubhub, and Postmates had their most successful year to date in 2020, not a single delivery app is profitable. DoorDash, the most popular delivery app, is the only service to make a profit, doing so for only one quarter. Over the course of 2020, DoorDash lost $461 million dollars even with a profitable quarter. Grubhub lost $156 million in 2020 and UberEats suffered losses estimated at $873 million.
Opponents of fee caps argue that it is counterproductive for state governments to intervene in the food delivery market because the fees that restaurants pay are voluntary and contractually agreed to by both parties. Delivery companies are providing a service to these restaurants and reserve the right to charge whatever fees are necessary to cover their costs. Likewise, restaurants have the right to decline the service and offer their own food delivery or pick up options to avoid paying fees to a third party.
Additionally, there are concerns that blanket caps on fees remove the ability of entrepreneurs to promote their business. Most delivery services have optional fees that restaurants can pay to be promoted on apps through ads, sponsored listings, and exclusive deals.
While many restaurants are in favor of fee cap legislation, it is highly likely that they are advocating against their own interests. During the pandemic, customers often begrudgingly accepted the regulatory response fees and ordered through delivery apps anyways. For many, the extra few dollars were worth avoiding infection.
Now, with vaccines widely available and low infection rates nationwide, fewer patrons will be willing to pay extra, ultimately leading to lower demand for deliveries and therefore fewer delivery drivers. With less drivers comes less access to goods, and eventually a depletion in customers.
Food delivery services have revolutionized the industry by providing workers with flexible employment and competitive wages. If these companies are unable to make consistent profits, it is only a matter of time before they cease operations, dealing a potentially fatal blow to restaurants that rely on delivery to sustain their business. It is imperative that efforts to impose permanent caps are rejected by state and local governments.