CapitalOperations

State Senate Soon to Vote on Legislation Requiring Third-Party Delivery Companies to Disclose Fees

Third-party food delivery companies have experienced their fair share of court proceedings, regulatory interventions, and accusations from the restaurants they serve. From lawsuits regarding worker classification to allegations of monopolistic behavior, listing restaurants without their consent, withholding tips, and cybersquatting, their team of lawyers definitely do not sit idle.

On June 22, another bill is set to hit the floor of California’s State Senate. Measure AB-286 will require third-party delivery services to provide a clear, itemized cost breakdown of each transaction to restaurants and customers.

Assemblywoman Lorena Gonzalez (D-San Diego) introduced the bill, which passed California’s State Assembly on May 13, receiving bipartisan support with a 55 to 8 vote. The bill provides transparency to customers and restaurants by letting them know how charges are incurred, including commission, delivery, and promotional fees. AB-286 would also prohibit third-party food delivery services from charging higher food prices than the restaurants charge their guests.

The legislation also addresses delivery driver gratuities. In 2020, DoorDash settled a $2.5 million lawsuit that accused the company of keeping tips intended for drivers. AB-286 states that the delivery drivers are entitled to all tips and gratuities.

Assemblywoman Gonzalez had this to say regarding the bill, “Delivery apps are keeping restaurant owners in the dark about the fees they’re charging, while these small business owners are already operating on razor-thin margins. Meanwhile, delivery app workers believe they’ve been cheated out of their hard-earned tips. AB-286 makes sure restaurants and customers can understand exactly how much they are being charged for these services and guarantees that customers’ tips are paid to the workers.”

The measure is expected to pass the State Senate.

The Ramifications of Measure AB-286

California is not the first state to address what many in the industry see as questionable business practices. Several cities temporarily capped delivery fees as the pandemic left restaurants with few income-producing options. Some delivery services responded by adding a “regulatory response fee.”

Despite these restrictions, the Nation’s top four delivery apps—DoorDash, Grubhub, Uber Eats, and Postmates—raked in about $5.5 billion in combined revenue from April through September 2020. According to Market Watch, this amounts to more than double their earnings of $2.5 billion from the same period last year. At the end of 2020, Uber purchased Postmates for $2.65 billion in an all-stock deal.

Despite experiencing a delivery boom, both DoorDash and Grubhub reported losses for 2020, coming in at $155.9 million and $145 million, respectively. Of course, this is nothing new for the big delivery game where venture capitalists throw in billions based on growth, projected stock prices, and not-so-much profits.

It’s not clear how these regulations will affect restaurant delivery companies or the restaurants they serve. What is certain is that all eyes will be on California as other states consider adopting similar measures.

Consumers’ Response to Rising Delivery Rates

Restaurant customers have witnessed escalating prices when using delivery services. When the Wall Street Journal purchased three identical restaurant meals, one in 2019 and the other in 2021, they found that food and service fees had risen substantially. For example, three harvest bowls from Sweetgreen ordered from Postmates saw a $15 increase due to a $10 rise in food costs and a service fee that jumped from $4.84 to $8.10.

Restaurants are also increasing the price of delivery orders due to high commission fees. Chipotle charges about 17% more for a delivered meal. A Family Feast value meal from Panda Express costs up to $8 more for just the meal when you order from a delivery service. The New York Times found that, with added fees, a family value meal could end up costing customers up to 49% more than if they’d chosen dine-in or pickup.

The question on everyone’s mind is how consumers will respond when they see how much money they’re spending on food compared to fees. Will they start calling the restaurant directly or head to the new-and-improved curbside pickup? Even before these regulations, consumers were leaning toward ordering directly from restaurants.

According to the National Restaurant Association’s 2021 State of the Restaurant Industry report, 53% of adults said purchasing food for takeout or delivery is essential to their way of life. Another 64% said they would prefer to order for delivery directly through the restaurant, while only 18% prefer ordering through a third-party delivery service.

Additional Third-Party Delivery App Regulations Across the Nation

Grub Street reported on several additional regulations facing these delivery companies.

  • California has made it illegal for foodservice delivery companies to list a restaurant without the owner’s consent. At least one delivery company has been known to create websites that look like a restaurant’s and then list the delivery company’s phone number as the contact.
  • The Fair Food Delivery Act in Illinois would also make this practice illegal, fining companies $1,000 per violation per day. Similar legislation in New York would give delivery apps five days to remove a restaurant that requested it from its platform before being fined $500 per day.
  • New York City introduced legislation that would mandate delivery apps allow drivers to set limits on routes and distances and establish a minimum payment per delivery.
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