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Consequences of capping food delivery commissions

Interest in food delivery heightened since the pandemic broke out last year: an army of pink, green, orange, red and blue-attired riders, the bulk on small-capacity motorcycles, crisscross our streets to deliver packs and packs of freshly-cooked food to hungry consumers stuck at home.

Since lockdowns were enforced in March last year, industry players, clear beneficiaries of the new normal, have unwittingly been the target of some derision, criticised for somehow “preying” on the F&B industry.

The criticisms were compounded by politicians, pressured by the affected, to “intervene” by capping commissions charged on restaurants by food delivery platforms.

Commissions are charged anything between 25% and 35%, but while these figures look as if the food platforms are reaping robust revenues, it unfortunately does not necessarily translate to profitability.

Take for example UberEats and DoorDash: Despite a 2020 revenue growth, both companies are still struggling to find a sustainable business model.

This is because these companies operate at negative margins: revenue earned is channelled immediately as costs to delivery partners (and insurance), marketing, customer acquisition, salaries, product development and other variables.

These platforms are constantly battling to manage its “unit economics” to ensure that the business remains viable.

First, the charge: Will capping commissions boost a restaurant’s profits?

When US regulators imposed a commission cap, the industry was forced to react by increasing delivery fees that immediately imposed additional surcharges and reducing delivery coverage.

The industry was forced to find alternative sources of revenue, which ultimately impacted the very ecosystem that regulators intended to protect.

While restaurants’ margins may improve by commission reduction in the long term, it led to an unintended consequence: decrease in orders due to price hikes, coverage reduction and, unfortunately, less work (and pay) for delivery riders.

Nevertheless, why then do restaurants opt to “onboard” the delivery platforms despite the substantial costs in commissions?

Here’s why: the delivery platforms offer a readily available and practical delivery service, and help engage the crucial “last-mile” delivery to hand over food to customers, even at odd hours.

But here’s also why many restaurants bear the commissions charged by delivery platforms like Foodpanda and Grab. The two players:

  • Establish an edge providing greater reach to and for restaurants,
  • Offer last-mile delivery solutions that restaurants can’t create yet badly need,
  • Increase visibility and a wider consumer base,
  • Help supplement restaurants’ income traditionally earned through dine-ins, and
  • Increase visibility through digital marketing services.

What should the government do? In a nutshell, they should engage and consult industry players to gain a better understanding of the food delivery industry and its business model.

The government should also refrain from simply “assuming” how the business model functions.

It’s vital that regulators and the industry collaborate to produce a solution that helps the intended demographics – restaurants, riders and, yes, the delivery companies too.

Although the intention to cap commissions – on the outside – may seem plausible, it cannot help but lead to a “zero-sum game” with the unintended consequences that rippled through the US.

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