Making Money in Food Delivery Just Got Even More Complicated

The business of delivering restaurant meals has always been a saga of competing interests... There has always been a tension between restaurants – especially the independently owned ones – and delivery apps. Restaurants benefit from the reach that delivery apps offer, but they have often paid dearly for that access to consumers. The high fees […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Making Money in Food Delivery Just Got Even More Complicated By Berna Barshay The business of delivering restaurant meals has always been a saga of competing interests... There has always been a tension between restaurants – especially the independently owned ones – and delivery apps. Restaurants benefit from the reach that delivery apps offer, but they have often paid dearly for that access to consumers. The high fees charged by delivery apps were a dirty little secret known mostly by industry insiders, until last spring's pandemic-induced lockdowns put restaurants under big pressure. Paying as much as 30% to a delivery app was always a lot, but it started pushing operators to the brink when their ability to seat diners indoors was taken away or limited. The pandemic also shed a light on the struggles of the gig workers who make deliveries for these companies but aren't employees and thus do not get benefits or much in the way of a minimum income guarantee when times are slow. The crisis ratcheted up demand for delivery apps like DoorDash (DASH), Uber's (UBER) Uber Eats and Postmates, and Just Eat Takeaway's (GRUB) Grubhub, so keeping busy was no longer a problem for gig workers... but getting paid fairly per delivery was still an issue, as was personal safety. Tensions between the apps and their gig workers escalated during the pandemic, as workers increasingly sought guarantees of higher incomes. Various legal efforts both [here]( and [abroad]( have sought to make the apps reclassify workers as employees and not contractors... with [mixed success](. But even as contractors, drivers have been pushing back for minimum pay. On July 31, a viral internet movement urged Dashers – the contractors who deliver for DoorDash – to go on strike and drive instead for Uber Eats for that day. The job action was meant to advocate for a minimum "base pay" of $4.50 per order. Base pay for Dashers varies but can be as low as $2 to $3 per order, before tip. Dashers also want to know what their tips will be before accepting orders, given tips can be such a large percentage of a driver's compensation. So the delivery apps were already putting out fires when it came to both their key partner contingents – the restaurants who supply the goods they deliver as well as the contract workers who supply the labor to get the job done. But now local governments have popped up as another adversary for the delivery apps... On July 29, the New York City Council passed five bills regulating food delivery apps. Some of the measures were relatively benign, like requiring apps to show users a restaurant's direct phone number – presumably making it easier to directly order with them. Another bill required delivery apps to relay end customer data on request to restaurants... which does pose some threat of enabling the most popular restaurants to market directly to customers and subsequently disintermediate the apps with direct ordering and an in-house delivery team. But the most controversial rule – and the one potentially most damaging to the apps' bottom lines – was an extension of the temporary 15% commission cap that was imposed during the pandemic, which will now stay in place until February 17, 2022. As City Council member Francisco Moya, the sponsor of the bill, commented... To allow the temporary cap to expire would completely handicap the recovery of so many businesses that are just starting to get back on their feet. The measure was extremely popular with restaurants, and local news site Gothamist notes that Andrew Rigle, executive director of the NYC Hospitality Alliance... ... praised the council for reining in what he called "the exploitative business practices of certain, mega size third-party delivery companies" despite "misleading statements" from the industry. Those are charged words. But as much as the delivery apps oppose these caps, they – as multibillion-dollar public companies – make unsympathetic victims when the opposing side comprises small, mostly mom-and-pop businesses that have been in the fight of their lives to survive the past year. Adding insult to injury, the city council scheduled hearings for later this month to consider making the commission cap permanent. Tech site Protocol summed up the situation well... The love triangle between the companies, restaurants, and drivers was already complicated – then the government intervened. This isn't just a headache for the delivery apps in New York City... Back in June, San Francisco passed a permanent 15% cap on delivery commissions, becoming the first city to make caps permanent. The move prompted lawsuits from DoorDash and Grubhub. San Francisco Supervisor Aaron Peskin justified the cap by explaining this is not only a matter of pandemic survival for restaurants, but also a broader issue of fairness... The reality is, emergency or not, we really have an imperative to protect independent restaurants from the exploitative and predatory practices of third-party food delivery apps that seek to extract wealth from our local economy, harming our commercial corridors, and harming workers throughout the Bay Area. Commission caps – mostly temporary emergency members – exist in several other large metro areas. This will be a city-by-city problem for the delivery apps. But a quick look at where the delivery apps are most used shows a high correlation with some of America's most politically progressive cities... Source: Wall Street Journal This regulatory problem is unlikely to go away anytime soon. And it is costing the apps. In April, a DoorDash blog post said that commission caps were having a "tangible impact" on the business. Uber Eats has said that commission caps have so far cost the business more than $60 million in revenues in New York City. --------------------------------------------------------------- Recommended Links: [Why TaaS can make you rich]( My team and I have found what we believe will be the next big tech trend that will make investors rich. Over the next few years, it will change the way you eat, shop, work, and travel. Along the way, it could make you a small fortune. [Get my No. 1 TaaS pick for free here](. --------------------------------------------------------------- [A massive wave of bankruptcies is coming]( A major shock is coming to the U.S. financial system. Months of stock gains could go up in smoke. But there's an easy way to make sure your money and prospective gains are legally protected. The last time something similar happened you could have seen 772% gains. A real reader explains how he does it, in plain English, [right here](. --------------------------------------------------------------- The apps are passing the costs of the caps to the customer... This is creating a losing situation all around. In order to keep their revenue per order steady, apps are offsetting the commission caps with new fees. Protocol explains... On May 7, Jersey City capped delivery app fees charged to restaurants at 10%, instead of the typical 15% to 30% many such platforms take. The next day, Uber Eats added a $3 delivery fee to local orders for customers and reduced the delivery radius of Jersey City's restaurants. Users are showing price elasticity. As the apps layer on extra fees to make up for what they aren't earning from the restaurants in commission, the cost of that burrito or pizza is going up for the customer... and they are ordering less frequently. It's a real-life example of that "[millennial lifestyle subsidy]( slipping away, right before our eyes. Folks are also switching from services that have surcharges to the ones that don't, shifting market share to the services that are willing to accept lower margins. However, those lower margins may not be sustainable on a long-term basis... These apps were marginally profitable at best before the commission caps started hitting. The underlying tension here is that the amount that customers are willing to pay on average to get a meal delivered likely doesn't support the margins that delivery apps have targeted for themselves unless the apps can squeeze drivers and restaurants – but both of these groups are pushing back. Many restaurants can't afford the higher commissions now... but in truth, they never really could. Meanwhile, the pressure on labor costs continues to rise for the apps... which would make it challenging to keep the cost to the customer steady while maintaining margins, even if commissions weren't coming down, as they have in key markets. It had looked like the food delivery market was going to get a lot more lucrative... The pandemic brought these apps lots of new customers. And the consolidation of the number of major players in the market to just three made it look like after years of investment, a windfall was going to finally come. But the combination of labor pressures and now regulation make it look like this industry might snatch defeat from the jaws of victory. We've already gotten quarterly results from Uber Eats. Delivery bookings held up surprisingly well given the tough comp to last year's pandemic locked down quarter. Delivery gross bookings were up 85%, an incredible result given they were up 106% in last year's second quarter. But all this growth still isn't translating into making money. Uber Eats lost $161 million on an earnings before interest, taxes, depreciation, and amortization ("EBITDA") basis in the second quarter, an improvement from last year's $232 million loss. But a revenue increase at Uber Eats of $1.1 billion over the prior year only translated to an EBITDA improvement of $71 million. The EBITDA margin on those incremental sales was only around 7%... nothing to get excited about. For all the lawsuits and furor over commission caps, the take rate at Uber Eats – the percentage of every order that it keeps as revenues – actually went up from 12.7% in last year's second quarter to 15.2% this year. So, while the company is protesting regulation, it seems like the cost side – driver compensation, marketing, and overhead – is hurting it more than the revenue side, where the revenue growth rate is healthy and the take rate is actually up. DoorDash will report Thursday night. Expectations may be tempered since we already saw the cost pressures play out at Uber Eats. But new customer growth will be incrementally harder to come by given the banner 2020, plus the fact that labor cost pressures aren't going anywhere and the commission cap issue looms large. Stepping back and looking at the bigger picture, these delivery apps seem to have nailed their revenue models but have yet to figure out a way to leverage that demand meaningfully and sustainably into a profitable business. They're my favorite examples of "[profitless prosperity](... and I would avoid DASH shares, as well as those of UBER and GRUB. In the mailbag, readers react to last week's essay on cryptocurrency and systemic risk... How much is too much of a surcharge to pay for having your meal delivered, remembering that you will still be paying a tip of 15% or more to your driver? Are you using these delivery services as much now that surcharges and fees are going up? Do you think local governments should be allowed to regulate these fees as they see fit to promote the local economy? Share your thoughts in an e-mail to feedback@empirefinanicalresearch.com. "Hi Berna, As a financial analyst myself, I am impressed with the quality of your work. "I have a question about stablecoins. You say they are backed by dollar assets. "If so, how can they offer yields of 8% or more. What dollar assets have yields in excess of 8% p.a. "Is it possible that these dollar assets are used to buy bitcoin, with the expectation of capital gains well in excess of 8%. "Until capital gains turn into capital losses? "Just curious. "Regards." – Alain S. Berna comment: Alain, my understanding is that the high yields on the crypto platforms are a derivative of the high rates that traders pay to borrow cryptocurrencies in order to short them. Brokers are paying a rebate of the borrow fees they are receiving back to customers. "Hi Berna, In your latest letter about cryptocurrency risk, you say 'the peg to the dollar means that stablecoins hold dollar-denominated assets.' Of course not. A peg, any peg, can be maintained by the issuer trading ANY asset on secondary markets against the pegged product that they issue, and then using those assets to market make the pegged product to stay at the peg. It works very well, until they run out of assets, which requires both large redemptions and asset prices going well below what they paid for (in pegged-unit terms). "In the case of Tether, the most likely scenario is that it's just backed by regular (unpegged) crypto. Crypto has been generally going up, and the crypto world has a huge need for tokenized dollars, thus asset base likely above 100% and low redemption pressure. It can last as long as there is no event that cause a *combined* crypto price crash and run on Tether. "It also means regulation is very different: if they owned 'dollar assets' these could be found and seized. It they own just crypto run from a few laptops from some rogue states, what can financial regulators do? Drone strikes? "Best." – Carlita M. "You said: "'Functioning short-term credit markets are crucial to the day-to-day functioning of the real economy of companies that make things and pay employees, as well as to Wall Street.' "As cryptocurrency holdings increase, aren't they performing the same function as short-term credit markets – but with much more volatility?" – Benjamin H. Berna comment: Benjamin, yes, I think you're right to some extent... except that the limited ability to exchange cryptocurrency for tangible goods and services – at least right now – means that they aren't really a perfect substitute for traditional short-term credit markets (at least not yet). Regards, Berna Barshay August 10, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](