Are food delivery apps raising prices in restaurants?
The antitrust case against Grubhub and Uber Eats
We talked last week about the antitrust complaint filed in June by three California ride-hail drivers against Uber and Lyft, which attempts to break new ground in the legal battle between gig workers and companies. This week I wanted to dig into another antitrust complaint against the gig economy that has gotten less attention but which survived a motion to dismiss back in March.
This case was filed in July 2020 in U.S. District Court (SDNY) by four New York residents and food delivery app users against Grubhub, Uber, and Postmates. (Uber now owns Postmates, a transaction it announced days after this suit was filed and completed in December 2020.) The complaint alleges that the commissions charged by food delivery apps force restaurants to charge higher prices to avoid losing money, which in turn drives up prices for in-restaurant diners as well because of contractual terms the platforms impose on restaurants. These agreements “prevent both restaurants and other platforms from competing with Defendants and thus force all consumers to pay supracompetitive prices,” the complaint argues.
Could apps like Grubhub and Uber Eats actually be driving up prices not just for delivery users but for all diners? A judge found the allegations compelling enough that he declined to dismiss the case earlier this year. In this subscriber-only edition of Oversharing, we dive into the complaint, the “most-favored nation” concept, and why food delivery middlemen might have a hand in rising prices across the dining sector.
Food delivery 101
Platforms like Uber Eats and Grubhub are middlemen that sit between restaurants and consumers and take a cut from each party on every order to make money. When you order from a food delivery platform, the platform typically charges a commission to the restaurant as a share of the order value. This is often 30% when the platform provides delivery and 15% if the platform generates the order but the restaurant fulfills delivery itself. The platform charges the consumer fees that usually include some form of service fee (often 5-10% of the order value) plus an additional percentage or flat rate for delivery.
Restaurants have famously thin margins and have long said that food delivery platform commissions squeeze them even thinner. Platforms have contended that they increase sales for restaurants, so thinner margins can be made up at scale. Whether this is actually the case is less clear. A report from the New York City Hospitality Alliance found that, in 2019, 64% of restaurants either raised menu prices or considered raising them to offset Grubhub fees. In August 2019, the New York Times reported that the owner of a small pizza chain in San Francisco had been forced to close two locations after the rise of food delivery apps and their associated commissions turned profits to losses.
Most-favored nation provisions
The problem is not just that restaurants have thin margins and may struggle to pay the commissions charged by delivery platforms. At the center of this complaint are the restrictive agreements that Uber, Grubhub, and Postmates allegedly impose on restaurants that do business through their platforms. The complaint calls these “most-favored nation provisions” (MFNs). The term comes from international trade provisions requiring a country extending a concession to one trade partner to provide the same treatment to all and is a founding principle of the World Trade Organization.
The MFNs at issue in the complaint prohibit restaurants from charging lower prices when they sell through channels other than that platform. Postmates uses what the complaint terms a “narrow” MFN, which states that “Pricing shall be consistent with Merchant’s in-store pricing.” In other words, the menu prices you pay when you order from Postmates have to be the same as if you ordered directly from the restaurant. Grubhub and Uber have “wide” MFNs that bar restaurants from charging lower prices on sales made anywhere else—whether in-store, directly through their website, or through another third-party platform.
You can start to see the logic here. If restaurants that participate on Uber, Grubhub, and Postmates find themselves having to raise prices to afford the commissions charged by these services, and the terms of their agreements state that they can’t charge higher prices to food delivery platform consumers than to anyone else, then any increase in menu prices made in response to food delivery commissions will also necessarily increase prices everywhere else that restaurant does business, including for diners eating at the restaurant. Or, as the complaint puts it: “Defendants’ MFNs have forced consumers who purchase from restaurants directly or from other Restaurant Platforms to pay supracompetitive prices.”
“The platforms’ reach is hard to overstate”
If food delivery commissions are so unsustainable, why do restaurants agree to work with these companies? The argument is that their dominance makes them hard for restaurants to avoid. Uber, DoorDash, Grubhub, and Postmates (now also Uber) control nearly all food delivery platform sales in the U.S., and an estimated 80% of all online orders for food delivery. The complaint puts their collective market share at 98%; more recent analysis from Bloomberg Second Measure gave them 99% as of May. DoorDash is the clear national leader though local market shares and dominance vary. As the judge wrote in his March order, “The platforms’ reach is hard to overstate.”
Because the platforms are so dominant, and because their MFNs have broad implications for menu prices, including for consumers who don’t actually use food delivery platforms, the complaint asserts that three different markets are at issue here:
Restaurant Platform Market: Takeout and delivery searches and orders that happen on a food delivery platform.
Direct Takeout and Delivery: Orders for takeout and delivery placed directly with a restaurant, for instance, by calling the restaurant’s phone number or visiting its website.
Dine-In Market: Orders placed and consumed in a dining establishment.
For each of these markets, the plaintiffs also claim a class of consumers is being harmed by the delivery cos. policies: the direct takeout and delivery class, the dine-in class, and the restaurant platform class.
The anticompetitive argument
The complaint argues that Grubhub’s and Uber’s MFNs limit price competition among food delivery platforms; prevent restaurants from competing on price with food delivery companies in takeout and delivery; and also control prices in the dine-in market. If you read my write up of the ride-hail antitrust case, you might remember that part of the argument there was that Uber and Lyft harm competition by setting ride prices. That case claims that if ride-hail drivers were able to set their own fares, they would offer lower prices to whichever platform compensated them better, which would in turn drive more business to that platform and benefit both riders and drivers. The food delivery complaint makes a similar claim, which is that MFNs prevent restaurants from offering lower prices on competing platforms that might charge lower commissions or to customers who purchase directly from the restaurant. This keeps prices high for consumers and costs high for the restaurant, all so food delivery platforms can maximize their own cut.
In the March opinion letting the case proceed, the judge wrote that complaint “alleges plausibly that restaurants cannot feasibly avoid doing business with Defendants” and that the MFNs “explicitly prevent restaurants from selling their goods at lower prices through ‘distribution systems with lower cost structures’” such as to dine-in customers. “All of this, together with Plaintiffs’ well-pleaded allegation that Defendants’ commission rates match or exceed most restaurants’ profit margins, supports the reasonable inference that restaurants—being foreclosed from lowering prices in the direct markets to attract sales—have had no choice but to raise prices in both the platform and direct markets,” the judge wrote. So yes, it’s possible that food delivery apps are making meals in restaurants more expensive. And for now, this antitrust complaint stands.
In the future, I suggest you distinguish gross from net profits when writing on this topic. Your article (and many others on this subject) make statements like "restaurants have famously thin margins" (typically on the order of 3%-5%). But this statement refers to net profit margins, after accounting for all fixed costs (which are considerable). If you're wondering restaurants can afford to pay 30% commissions to DoorDash when their margins are low single digit, you're comparing apples to oranges. The more relevant comparison to understand food delivery economics is what a restaurant's GROSS margin is. If you assume (as the delivery platforms want you to) that platform delivery orders are purely incremental demand (you already have the kitchen and staff in place), the ONLY expense to fulfill an online order are the costs of ingredients and packaging used for the meal, yielding incremental gross margins in excess of 50+%.
But in reality, kitchen operations are more messy than depicted above. During peak dining hours, it's not as if kitchen personnel are sitting around with lots of spare time to serve online orders that come through the delivery platforms. Trying to juggle orders from dine-in patrons (which can be predictably staggered by reservations and seating capacity constraints) alongside online orders which are stochastically highly variable is an operational nightmare. As a result, there is significant service degradation for ALL classes of diners, over and above potential price escalation impacts.
The platform delivery companies are bolting an inefficient, expensive convenience service onto a business category (restaurants) that was never designed to accommodate multi-channel operations. The predictable result is degraded service, higher prices and poor economics for all stakeholders.