Tacoma targets third-party delivery to save restaurants as they turn to takeout, again

Tacoma has joined other U.S. cities imposing caps on commissions charged to restaurants for third-party delivery apps, including Grubhub, DoorDash and Uber Eats, and Pierce County could follow suit.

Mayor Victoria Woodards signed an emergency proclamation Sunday that limits the fees these companies can recoup from businesses using their services to 15 percent. The measure aims to buttress restaurants as Washington state enters a second round of partial lockdown to stem a surge of COVID-19 cases.

Under this rule, third-party delivery platforms cannot charge their restaurant clients more than 15 percent of a customer’s total purchase price, excluding tax, gratuity and other fees that an online order might entail.

In anticipation of potential backlash from these companies, which have fought legal battles against similar legislation in other cities, the order says that third-party platforms cannot reduce compensation rates for drivers or take tips as a result of this measure. They are also prohibited from cutting or modifying service areas because of it.

Violators will be subject to fines of up to $1,000, or imprisonment for up to 90 days.

The Pierce County Council will consider a similar emergency ordinance proposed by council member Marty Campbell at a special session Thursday. If accepted, the rule would also cap commission fees at 15 percent.

Major U.S. cities including Seattle, New York, San Francisco and the District of Columbia have enacted similar legislation when the coronavirus forced restaurants across the country to close their dining rooms earlier this year. New York went so far as to add a 5 percent cap on pickup orders that a customer places through one of the apps.

Tacoma city council member Robert Thoms, whose district includes a downtown dense with restaurants, spearheaded the idea of a fee cap early on in the pandemic. In talking with restaurant owners and the third-party companies, he learned that both businesses and consumers often were confused as to what exactly they were paying for and how much.

“My goal is to protect those business owners and the citizens for transparency and cost,” Thoms told The News Tribune Monday.

“We need to be doing everything we can to support an industry that in good times is really a challenge to sustain. It’s such a valuable service to the citizens who need food and want to be able to participate in eating out.”

The move is possible under current city emergency orders, which formally went into effect on March 12. It will last “while restaurants are unable to provide unrestricted dine-in service,” or the end of the broader public health emergency.

DOORDASH, GRUBHUB FIGHT DELIVERY FEE CAPS

In statements provided to The News Tribune, Grubhub and DoorDash said capping fees hurts businesses, customers and drivers. Neither Uber Eats nor Postmates responded to a request for comment.

DoorDash spokeswoman Campbell Matthews said fee caps inhibit businesses from being able to “opt-in to additional services to help their business.” She pointed to initiatives the company has offered in light of the pandemic, such as its “Storefront” portal, which helps restaurants build an online shop that integrates with their own website and point-of-sale system. DoorDash has waived setup, monthly software and transaction fees for this service through March 21, 2021.

Grubhub spokesperson Grant Klinzman similarly said that fee caps “limit how restaurants … can effectively market themselves to drive demand” and lower driver pay.

Pressed for details on why fee caps hurt businesses when they are intended to do the opposite, he insisted that smaller restaurants stand to lose the most. What the company calls a marketing fee usually lands around 10 to 15 percent, but the business also pays a 3 percent processing fee, plus an additional 10 percent for delivery orders, according to information provided by Grubhub.

Customers can choose to pick up orders placed through Grubhub or DoorDash. That option eliminates the delivery fee for the customer and business, but it does not free the restaurant from paying a transaction fee.

“Grubhub’s marketing engine is designed to help independent restaurants compete,” said Klinzman. “With fee caps, these restaurants see fewer orders because we are forced to purchase less advertising on their behalf. Less advertising means less business. Meanwhile, large restaurant brands and chains are better positioned to advertise.”

These are the “unintended consequences” of caps on its commission fees, according to the Chicago-based company.

Building and maintaining these platforms cost money, the companies said, and the average restaurant owner does not have the capacity to develop such intricate systems and hire insured drivers.

Extending its “logistics solution” approach to what the technology industry calls “last-mile delivery,” DoorDash this summer introduced Instacart-like online shopping from grocery and convenience stores. Fee caps would carry over into these services, too.

Matthews said DoorDash is “open to working with policymakers” on “better” solutions than fee caps. When asked for specifics, she pointed to the company’s five-year, $200 million “Main Street” support program, which includes new tools and information on a digital future, and its support of the RESTAURANTS Act — a relief package that has so far been stymied in Congress.

TACOMA DELIVERY FEE CAP IS A TEST

The Tacoma cap aims to fulfill the “fundamental government purpose of easing the financial burden on struggling restaurants … while not unduly burdening third-party, app-based delivery platforms,” the city’s proclamation reads.

Independently owned restaurants in particular “have limited bargaining power to negotiate lower commission fees,” it continues.

Council member Thoms sees a hint of predatory behavior on the part of the delivery companies.

“When you’re a minority player in the overall transaction, but you’re charging up to 40 percent, that doesn’t seem like a peripheral piece of it,” he said.

He praised the value of the technology and the service it provides — both to businesses and to consumers — but emphasized that especially now, with restaurants under a four-week mandate to keep their dining rooms closed, delivery becomes an outsize revenue channel.

“We don’t believe the model right now is working for our businesses and consumers,” he said.

Grubhub, which owns Seamless, was the pioneer of this food delivery model. Postmates launched in 2011, followed by DoorDash in 2013 and Uber Eats in 2014.

Though these companies do not reveal their exact commission structures, restaurants report yielding up to 30 percent of each sale — often surpassing the profit they would hope to make on that order.

Those already known for being delivery-friendly, such as pizza places, might have in-house drivers, but limits on capacity and indoor dining have convinced many others to work with third-party apps, often for the first time.

“The pandemic continues to be extremely hard on the restaurants that add vitality and character to Tacoma,” said Tacoma mayor Woodards in a release Sunday.

On top of fees, these apps sometimes prohibit businesses from changing their menu prices on their platforms, a one-two punch that has been “crippling,” she said.

How the cap will be enforced remains unclear, according to Thoms. The emergency order will provide data for potential permanent legislation in the future. Other cities, for instance, have learned that the companies were flouting similar rules, citing “confusion” over the details.

Customers and restaurants can help by taking note of the fees being charged.

This story was originally published November 18, 2020 at 5:00 AM.