Food Delivery Companies In NYC Face Permanent Commission Cap

The gig economy is slowly but steadily becoming a nationwide battleground. Uber and Lyft, two of the industry's power players, made headlines last month when a number of their drivers across the country took to the streets in protest, bringing national attention to what the protesters consider low wages and lack of protections for the workers. 

After the rideshare companies suffered a blow on the West Coast last week with the striking down of California's Proposition 22 on worker classification, food delivery companies are facing pressure on the East Coast this week. The New York City Council approved a cap on the commissions they can take from partnering restaurants. Shares of Grubhub owner Just Eat Takeaway.com GRUB and DoorDash DASH are down following the news.

The bill, which Mayor Bill de Blasio has 30 days to sign, caps commissions for food delivery services at 15%, with all nondelivery services, like advertising, capped at 5%. It also limits transaction fees to no more than 3%. Normally, companies like DoorDash and Grubhub could charge commissions as high as 30% of an order's total, according to Restaurant Business. A separate measure, which would require delivery providers to obtain a license from the city to do business, was also introduced.

"We are not here to enable billion-dollar companies and their investors to get rich at the expense of restaurants," said the bill's sponsor, Councilmember Francisco Moya, during the council's meeting Thursday afternoon.

A Sign Of Things To Come

New York City isn't the first domino to fall, and it almost certainly won't be the last. In June, San Francisco became the first U.S. city to pass a permanent cap on delivery app fees when it enacted a 15% maximum cap on commissions, and analyst Dan Ives of Wedbush thinks that commission caps will "become a major trend heading into 2022" — so much so that he foresees a 10% headwind on growth for food delivery companies. Temporary commission caps are already in place in other major U.S. cities like Los Angeles, Seattle, Chicago, Washington, and Las Vegas.

Unsurprisingly, Grubhub, DoorDash, and Uber Eats UBER are unhappy with the prospective law. The companies share the New York City food delivery market relatively equally, but all three could see their revenue take a hit if de Blasio signs off on the bill. In the first half of 2020, Grubhub says it posted earnings before interest, taxes, depreciation, and amortization loss of nearly $30 million that would have been a gain of $70 million had it not been for temporary commission caps in major cities. DoorDash, meanwhile, says the caps cost it about $26 million in Q2. For food delivery companies, caps are yet another hurdle in the quest for profitability, and they aren't afraid to make their grievances public.

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"New York's restaurants need choice more than ever, and this dangerous government overreach will severely limit the options small businesses rely on every day to succeed," a DoorDash spokesperson said in an email.

According to the delivery apps, capping commissions will translate to increased delivery fees, costs that would ultimately be passed on to end consumers and that could reduce delivery demand for local restaurants.

"This permanent price control is flagrantly unconstitutional and will hurt local restaurants, delivery workers, and diners across NYC," said a Grubhub spokesperson. "We will vigorously fight this illegal action."

Gig companies have shown no hesitation to spend massive amounts of money on legislation they oppose — Uber, Lyft, DoorDash, and others spent a combined $200 million on the passage of Prop 22. DoorDash and Grubhub are already taking legal action in San Francisco. They're suing the city over its cap, calling it unconstitutional, and according to a report in the Financial Times, the companies are likely to do the same in New York.

Less attention has been paid to the licensing measure introduced alongside the commission caps, but that too could have a profound impact on food delivery companies. Under the new provisions, the companies would need to renew their licenses every other year, and they could have their delivery permissions revoked for listing restaurants without their permission, failing to display their direct phone number on the listing or refusing to share customer data. Both the commission cap bill and the licensing measure passed the council by a margin of 39-3.

"These first-in-the-nation bills are common sense and widely supported because they create a more equitable marketplace for local businesses and rein in certain billion-dollar corporations that have hurt New York City's restaurants and workers for too long," said Andrew Rigie, executive director of the New York City Hospitality Alliance, in a statement. "We urge Mayor de Blasio to sign them into law immediately."

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Image by Rudy and Peter Skitterians from Pixabay