DoorDash, Grubhub, Others Could Face Pared-Down Menu -- Heard on the Street
December 17 2020 - 7:29AM
Dow Jones News
By Laura Forman
Investors bidding up newly public shares of DoorDash and its
competitors shouldn't take for granted the historically fragile
relationship between food-delivery platforms and the restaurants
they serve.
While it is unclear just how sticky eaters' business will be on
delivery apps once the coronavirus pandemic ends, their loyalty
could in many cases depend upon whether their favorite restaurants
stay around. That is hardly a guarantee.
Delivery platforms have been essential to the survival of many
restaurants this year, bringing them business even while their
dining rooms have remained closed down. In addition to offering
grants and relaxed delivery fees in some cases, the platforms have
been working to use the pandemic as an opportunity to prove their
long-term value to restaurants, many of which had once scorned
their services because of high commissions or questionable business
practices.
There is no question delivery players have won over lots of new
restaurants for now. This is evidenced by big increases across
platforms in partnered restaurants, or those with which platforms
have an agreement to offer their goods to consumers. In the first
nine months of the year, for example, regulatory filings show
Grubhub added approximately 90,000 partnered restaurants, or 37% of
the total number it had as of Sept. 30. Uber Technologies said in
its third-quarter report that Uber Eats grew active partnered
restaurants by 70% year over year.
DoorDash similarly seems to have added something like 50,000
merchants in the several months before its initial public offering
filing alone. And although its early growth may have been in part
fueled by facilitating deliveries without prior consent of
restaurants, according to D.A. Davidson analyst Tom White, DoorDash
now says partner merchants account for nearly all the platform's
gross order value.
But attrition could be coming. Some of this year's restaurant
growth seems to have come courtesy of local regulators, who have
enacted temporary caps in many geographies on commissions that
platforms can charge for their services. Some caps, including those
in major cities such as New York City and San Francisco, are well
known by investors, but the details of each individual regulation
are more esoteric. Philadelphia's ordinance, for example, is
particularly tough on delivery platforms, capping delivery fees at
10% of the purchase price of an online order.
Also underappreciated are caps in smaller metro areas and
suburbs, which have increasingly popped up. Earlier this month,
Berkeley, Calif., for example, lowered its commission cap on
delivery fees to 10% from a previous cap of 15%. Before the
pandemic, delivery platforms frequently charged restaurants up to
25% or more in total fees.
These caps are set to expire at various times once restaurants
reopen and the pandemic has eased. At that point, it is likely that
delivery platforms, which haven't put up consistent profits this
year, will hike commissions back up. In urban areas, where
discovery and delivery may be less necessary, the additional fees
could cause restaurants to rethink the value each platform
provides. That could put platforms such as Grubhub and Uber Eats,
which have a stronger presence in Tier 1 cities, at greater
risk.
DoorDash's Chief Financial Officer Prabir Adarkar said he
believes its platform has demonstrated its worth to merchants amid
the pandemic, acting as a lifeline to many of them, and therefore
expects them to remain on board even after the pandemic ends.
But once all restrictions on in-person dining are lifted, the
balance of power could shift. Big national chains in particular
won't need as much help from online platforms in a more normal
world. This matters because, according to Grubhub's 2020 "Year in
Food" report, all of the top 10 trending dishes this year are items
commonly ordered from big household chains, such as a spicy chicken
sandwich or a chicken burrito bowl.
Is an iced latte 157% more popular on Grubhub this year because
the app featured a previously unknown cafe, or simply because fewer
people walked by a Starbucks? Investors awaiting the delivery of
their own daily caffeine fix need to be asking themselves this very
question.
Write to Laura Forman at laura.forman@wsj.com
(END) Dow Jones Newswires
December 17, 2020 07:14 ET (12:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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