It looks like food delivery apps, which had previously flown under the radar of scrutiny have overplayed their hands during the pandemic recession.
Food Apps Charge Restaurants Huge Fees
Restaurants are no strangers to the outrageous fees charged by delivery apps like Grubhub, UberEats, and Door Dash. Restaurant owners can be charged up to 30% of the price of the overall order. This is on top of the fee charged to the customer ordering food.
All three apps actively post a laughable “delivery fee.” This amount is displayed predominately and is typically a low number, like $2.99. Then, this fee is often “waived” as part of some sort of promotion, giving the impression that the customer is getting free delivery. The real fee charged for delivery, however, is hidden by combining it in a line called “taxes and fees.” Obviously, the apps hope people don’t pay too much attention to this line.
Pandemic Recession and Restaurant Survival
Before the pandemic recession hit, customers and lawmakers all had pretty much the same thoughts. If you want to use the delivery services to reach customers, then you have to choose to pay their rates, whatever they are. If the charges were too high, then just don’t use them.
However, with restaurants being closed by government order, things began to look different. Delivery and take out orders are one of the only ways restaurants can survive while dining in is closed. With zero time to create and launch a delivery service, many restaurants have no choice but to take orders via the delivery apps.
The delivery apps overplayed their hand by running commercials, promotions, and ads claiming that ordering through them was helping restaurants survive. Restaurants replied by reminding everyone that the fees charged by these apps were so high that ordering via them maybe wasn’t as helpful as it sounded.
Lawmakers Step In
While capitalism and many governments are content to let businesses fight it out, when one industry has a hand tied behind its back, especially one as sympathetic as shuttered restaurants, fairness starts to come into play. Several cities, most notably New York City, have stepped in to cap the fees charged to restaurants at 15%. This is up to a 50% cut in fees, and makes a very big difference to restaurant bottom lines.
The delivery apps could have avoided this by at least not positioning themselves as the savior of the industry. Cutting fees voluntarily, or not charging the absolute maximum they possibly could in the first place might have helped as well.
The worst part for the industry is that they have forced restaurants into finding other options. There are other, lesser known, apps out there that charge far lower fees. Here in Denver, some restaurants have flocked to the app Toast which charges far lower fees. Other restaurants offer sizable discounts, often as much as 25%, if you contact them directly without using the apps. Even after the coronavirus recession fades into the background, those restaurants won’t be coming back to the high-fee apps.
Long-term, restaurants that want to continue to offer delivery as part of their service, are learning that they need to build their own systems. Many restaurant websites barely show a menu, let alone offer online ordering. This situation has taught them that having their own website, with their own online ordering mechanism, with maybe their own delivery drivers are the solution to huge delivery fees. Each restaurant that goes down that path is one less customer for the delivery apps.
Lower Fees Are Permanent
What this all comes down to is that lower delivery fees are coming, and they will be permanent, whether from government regulation, or natural competition. For free-spending Silicon Valley startup like Uber, this is bad news. Even with the enormous fees they struggle with profitability, largely due to a focus on rapid expansion rather than profitability.
The technology used by these companies is no longer cutting edge, nor hard to develop meaning smaller, more focused apps will be able to deliver similar service, without the expense of trying to expand into India, or whatever.
Delivery App Company Stock
Here is where the rubber meets the road. Currently, delivery app company stocks are enjoying boosts based on increasing revenues from the increased usage during the Covid recession. However, things do not look good for them following the end of the recession.
Government regulation may become permanent. Restaurant backlash is almost guaranteed, with restaurateurs exclusively using their own systems, or cheaper competitors. And, obviously, once diners can go back into their favorite restaurants, they’ll use delivery apps less as well.
For long-term investors the boost these companies are getting from higher usage now, should be considered temporary at best. At worst, smart investors should be watching very carefully for lower demand, and lower per order revenues in the near future. For companies barely sliding by at today’s rates of revenue and usage, their financial future, and stock prices depend on rapidly adapting to a new reality. Investors that don’t see an attitude of change, should really consider their holdings in those company’s stocks.
As, always, long-term investors benefit from a well balanced portfolio tailored to their goals and risk tolerance.
This article is for informational purposes only and is not an offer to buy or sell stocks. The author is not a financial advisor and does not hold himself out to be one. For advice on your specific situation and investments, speak to your financial advisor and tax professional.
At the time of publication, the author did not hold any position in stocks mentioned in this article, however that may change at anytime. The author does have investments in mutual funds and ETFs that may have investments in the stocks mentioned in this article.