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Food-Delivery Platforms Are Getting Hit With an Antitrust Lawsuit

By Evan Niu, CFA – Apr 15, 2020 at 8:30AM

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Some tech companies charge a fee of as much as 40% on restaurant orders.

Ordering food online for delivery is one of the few remaining strongholds of the restaurant industry, as consumers stay at home and many governments have banned in-person dining in order to prevent the spread of COVID-19. But now a handful of consumers allege that the most dominant online delivery platforms -- Grubhub (GRUB), Postmates, Uber (UBER -0.03%) Eats, and DoorDash -- are abusing their market dominance and violating antitrust laws.

DoorDash and Postmates are privately held but Grubhub and Uber are publicly traded. Here's what investors need to know.

Food in takeout boxes

Image source: Getty Images.

Higher fees translate into higher prices

The consumers, which are seeking class action status, argue that the tech companies continue to charge "exorbitant fees" for delivery orders, according to Reuters. The small restaurants are then often faced with little choice but to pass along those fees in the form of higher prices to consumers. The net result is "restricting price competition," according to the lawsuit filed this week, as restaurants are not permitted to charge different prices for delivery compared to dine-in even as delivery orders carry lower costs to fulfill.

The fees that the platforms impose can range anywhere from around 10% to a whopping 40% of the transaction total. Grubhub came under fire last summer over questionable business practices of setting up phone numbers and websites that redirect to local restaurants, a process seemingly designed to jack up commission and referral fees even further. In some cases, Grubhub would bill restaurant owners for a cut of nonexistent phone orders even when customers were just calling for information or directions, according to Vice.

Earlier this week, Grubhub withdrew its 2020 guidance and provided some commentary on how the COVID-19 crisis has been affecting its business. The company committed to reinvesting some of its profits into "programs that directly drive more business to our restaurant partners." That support will include "reduced or eliminated diner delivery fees."

Uber hosted a call last month to reassure investors that it could "weather this crisis," pointing to its highly variable cost structure and roughly $10 billion in unrestricted cash it had at the end of February. Drivers have been shifting from the core ridesharing business to the Uber Eats food delivery segment. CEO Dara Khosrowshahi noted, "Our Eats business is an important resource right now, especially for restaurants that have been hurt by containment policies."

As one might expect, ride-hailing demand is getting demolished. For instance, venture capitalist Teddy Citrin shared this chart on social media, citing data from mobile analytics specialist Second Measure.

The lawsuit comes as ridesharing companies have been potentially flirting with illegal price fixing as part of a broad effort to "rationalize" the market.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

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