Regulators across the US are targeting the food delivery industry

Regulators are coming for the food delivery companies.

Recently, New York City and San Francisco placed permanent fee caps over how much third-party delivery services could charge restaurants. The companies were charging as much as 30% per order until various cities cracked down on them during the pandemic and capped how much they could charge. Other markets like Las Vegas and Seattle that instituted temporary caps could also make them permanent.

The food delivery companies have attracted antitrust scrutiny as well. The US Federal Trade Commission is reportedly investigating two of Uber’s deals made earlier this year, including the acquisition of Drizly, an alcohol delivery service, and an exclusive partnership with GoPuff, a convenience food delivery service, reflecting concerns over Uber’s increasing market power.

As regulatory interest in food delivery companies heats up, it could complicate their goal of reaching profitability. The margins on food delivery are already thin.

“Pre-pandemic, the food delivery companies really enjoyed a very light kind of regulatory kind of enforcement or oversight,” says Tom White, an analyst at DA Davidson, a financial firm. But during the pandemic, restaurants, a key component of local economies, were under a lot of pressure, leading politicians and regulators to take a much closer look at the delivery market. “We’re likely to see a period of increasing scrutiny…and oversight of these companies,” he says.

The evolving regulatory market

The fact that food delivery companies has caught the attention of regulators highlights how rapidly the food delivery market has grown from its pizza and Chinese food delivery days. The service is dominated by just a handful of food delivery apps—DoorDash, Grubhub, UberEats—all of which have been fueled by venture capital.

Uber’s attempt to acquire Grubhub, which would have made Uber the biggest US delivery player, in June 2020 fell through reportedly due to antitrust concerns.

In August, New York City Council passed a bill requiring food delivery companies to share customer data—including names, phone numbers, mailing addresses, and purchase histories—with restaurants upon request. California lawmakers passed a bill recently requiring food delivery companies to provide customers with breakdowns of third-party fees and commissions charged on each transaction.

Restaurants don’t have a ton of insight into customers ordering delivery unlike the delivery apps. So having that information could lead to restaurants turning off the app and marketing directly to its customers, says White.

Food delivery companies are fighting back. In the lawsuit against New York, DoorDash, Grubhub, and UberEats said the fee cap legislation is “unconstitutional, harmful, and unnecessary.”

What’s next for food delivery

To be sure, Uber is familiar with regulatory battles given its fights with taxi commissions. “Our experience on the mobility side really prepares us uniquely to make sure that we enter constructive dialogue on the delivery side,”  said Dara Khosrowshahi, Uber’s CEO, during the company’s quarterly earnings call in May. “And usually, we already have relationships with local governments and local regulators to begin with. So we welcome the dialogue.”

But, unlike ride-hailing, where opposition was made up of independent contractors with varying priorities and preferences, “the restaurant industry is entirely different—well organized, have trade associations that have resources at their disposal, and relationships with politicians,” says White. “That’s going to be something that will make it a little bit harder for the food delivery platforms to navigate.”

“More than anything, this speaks to the power of constituents that have a voice,” says Sucharita Kodali, an analyst at Forrester, a market research company.  Restaurants “are a powerful lobby and there are great case studies on how they have suffered. These restaurant delivery companies have made enemies of restaurants.”

With restaurants fighting back on delivery fees, this week, Uber Eats and Postmates rolled out tiered commission pricing models, similar to the one DoorDash announced in April.

Due to the increased regulation, the food delivery companies have passed on the fees to customers in the form of costs. They are also seeking other sources of revenue, moving into delivering household items and alcohol.

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