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Uber, Grubhub, and DoorDash Under Scrutiny as the Industry Consolidates

By Rich Duprey – Oct 29, 2020 at 7:25AM

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The third-party delivery services helped restaurants survive, but also did themselves no favors.

Uber Technologies (UBER -2.59%) is buying Postmates and the ride-hailing businesses of BMW and Daimler, while Just Eat is buying Grubhub (GRUB). DoorDash previously acquired Caviar.

Yet as the third-party delivery and ridesharing industry consolidates, it is coming under closer scrutiny from politicians who view its practices as harmful to consumers and the restaurants they serve. More regulation of these businesses may be forthcoming.

Food delivery scooter rider

Image source: Getty Images.

Lining up against delivery

California just banned the practice of adding restaurants to third-party delivery apps that the services don't have a relationship with. Restaurants that didn't offer their own delivery service as a means of controlling the quality of their food were still finding their menus listed with the likes of DoorDash, Grubhub, or Uber anyway.

The services argued they were introducing new potential customers to the restaurants, but last month, Gov. Gavin Newsom of California signed into law the Fair Food Delivery Act prohibiting the tactic. 

More recently, three congresswomen asked the Federal Trade Commission (FTC) to investigate third-party delivery operators and their fees, in addition to dubious practices like creating fake websites and phone numbers for restaurants to take orders for them without their consent. 

While the companies have defended their fees as necessary for covering their expenses and marketing, cities are starting to impose caps. Philadelphia restricted fees charged for delivery at 15% while New York City limited delivery fees to 20% and 5% for pickup.

Adding restaurants to an app without consent seems sketchy, and the practice will probably be one of the first to go under any new regulations imposed at the state or federal level. Even some of the companies agree with the practice being banned, saying they only did it to remain competitive.

Paying for convenience

Restaurants are under no obligation to use the delivery services, so while they may complain about fees that can run as high as 30% to 40% of the order, a bitter pill to swallow when they're operating on margins of 2% to 7%, they're under no obligation to remain with them. 

Offering their own delivery option would likely be more expensive, so they are getting convenience and simplicity for the cost.

Although the politicians portray the delivery services as predatory, even the restaurants that complain see them as invaluable. A recent survey by DoorDash found 67% of its restaurant customers saw its delivery service as "crucial to their business during COVID-19." Another 65% said DoorDash allowed them to increase profits during the crisis.

Money-losing proposition

The pandemic-driven delivery boom, however, has not helped any of the delivery companies turn a profit. Grubhub reported a loss of $45 million in the second quarter, or $0.49 per share, compared with a profit of $1.2 million, or a penny per share, last year. Uber remains unprofitable, with the Postmates acquisition maybe not delivering the profits that were expected.

Lyft (LYFT -2.34%), which is newer to the food delivery game, has halved its losses, but still has a substantial $835 million year-to-date net loss.

The three congresswomen tasking the FTC with investigating the delivery companies say the losses being generated despite their high fees suggests their business models may not be sustainable. So despite DoorDash, Uber Eats, and Grubhub owning 98% of the food delivery market, the congresswomen argue, consolidation will cause prices to rise even higher: "We are very concerned that these firms' paths to profitability will likely come from eliminating competition, charging higher fees to restaurants and consumers, and misclassifying and undercompensating the workers who perform the labor of delivering the food."

A necessary outcome

Yet the wave of consolidation is necessary to ensure that the remaining delivery companies have a chance at profitability. Sacrificing profits now for their base to gain critical mass is a valid strategy, and more often than not leads to cheaper pricing in the future.

Uber, Grubhub, DoorDash, and others do themselves no favors when they use tactics like adding restaurants to their service without authorization, or creating spoof sites to route calls to their businesses instead of to the restaurant.

The gig economy is already under pressure from states like California that are requiring companies to classify drivers as employees, an outcome that could wreck their businesses. It only serves to undermine the valuable and necessary services that even their restaurant partners agree has allowed them to survive.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends BMW and Uber Technologies. The Motley Fool has a disclosure policy.

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