[DongleDongle] "40% Extra Charge on Food Delivery"... US Delivery Apps Struggle with Merchant Overcharging

US Restaurants Raise Food Prices for Delivery
Charge Over 40% More Than In-Store Prices
Platforms Impose Penalties Like Service Exposure Limits
Analysis Suggests Failure to Encourage Price Competition

Editor's NoteWe bring you entertaining stories about money circulating around the world. From nearby Japan to distant Europe, explore what is happening in each country's market and how money flows through friendly economic articles.

The COVID-19 pandemic made delivery applications (hereafter apps) an indispensable part of our lives. With the emergence of delivery platforms, we can now easily compare and order from hundreds of menus without flipping through restaurant booklets. However, it is still true that many hesitate several times before pressing the delivery button due to expensive delivery fees.

Americans also hesitate to place delivery orders because of high costs. But unlike Korea, the problem in the U.S. is not the expensive delivery fees but the excessive profiteering by restaurants. Recently, there has been a growing practice in the U.S. where restaurants inflate food prices for delivery orders. Delivery platforms are devising measures to curb such behavior by restaurants. Today, we will look into the controversy spreading in the U.S. delivery industry due to restaurants' profiteering.

DoorDash Delivery Driver
Photo by Reuters Yonhap News

Delivery Intermediaries Penalize Excessive Profiteering with Reduced Platform Exposure

Recently, The Wall Street Journal (WSJ) reported that DoorDash, the No.1 delivery platform in the U.S., sent warning messages to restaurants charging at least 20% more for delivery orders compared to in-store prices.

A bar in the suburbs of Pennsylvania was warned by DoorDash after charging delivery customers prices 40% higher than in-store prices. DoorDash notified the owner that if prices were not corrected, the restaurant’s listing on the delivery platform would be canceled. Another restaurant owner received a warning email stating that if they refused to adjust prices, the platform would take measures to make the restaurant less visible to customers.

DoorDash [Image source AP Yonhap News]

Since the second half of last year, DoorDash has introduced a feature that penalizes restaurants engaging in profiteering by reducing their visibility on the platform. In March last year, they also began testing special labels for restaurants whose delivery prices matched their in-store prices.

Additionally, DoorDash distributed research results to partner restaurants showing that excessive profiteering on delivery orders actually harms restaurant sales. Essentially, they applied silent pressure by implying that raising food prices only damages the restaurant.

Competitor Uber Eats has also taken steps to curb restaurants’ tricks. Uber Eats introduced a notice in some cities at the bottom of the order screen indicating that the restaurant’s food prices may be higher than in-store prices, allowing consumers to recognize the price difference.

However, restaurants have largely ignored these measures by delivery apps. The National Restaurant Association officially expressed dissatisfaction with the delivery apps’ actions and lodged a formal protest with DoorDash in May.

Instead of accepting requests to lower prices, some restaurants have engaged in a standoff by suspending their use of the service. WSJ reported that some restaurants warned by DoorDash have disabled location settings so their stores do not appear on the platform, directing customers to order through their own websites instead.

Food Service Industry Claims "No Profit Left After Fees"... Criticism of Delivery Apps’ Failure to Control Prices

So why do U.S. restaurants inflate food prices significantly for delivery orders? They claim that with soaring inflation, combined with delivery platform fees, they cannot make a profit. Restaurants using DoorDash pay service fees ranging from at least 15% to up to 30%, depending on marketing benefits, per order. Delivery fees are paid by customers.

An Uber Eats delivery person is taking out the food to be delivered from the bag.
[Photo by Reuters Yonhap News]

Korean delivery platforms charge fees ranging from a minimum of 6.8% to a maximum of 12.5%. Comparing fees alone, U.S. delivery app commission rates are higher. However, in Korea, restaurants sometimes pay part of the delivery fee depending on the delivery service type, so the burden is not insignificant.

Considering these commission rates, U.S. restaurants argue they have no choice but to raise food prices for delivery. According to research firm Gordon Hasket, McDonald's delivery orders are 45% more expensive than in-store orders. Half of this 45% price difference is attributed to delivery platform fees. The food service industry’s claim that fees drive up delivery food prices is not entirely unfounded.

On the other hand, some point to the incompetence of delivery platforms as the root cause. They argue that platforms have failed to encourage price competition in the food service industry. Amazon, the largest e-commerce platform in the U.S., charges a 15% commission but maintains lower prices than delivery apps. This is because Amazon has focused on fostering seller competition and introducing private brands to secure price competitiveness. Delivery platforms, however, have neglected such efforts and failed to rein in restaurants’ profiteering.

The delivery industry is working on self-help measures such as platform exposure penalties and persuading the food service industry. DoorDash stated it is investing part of its profits to reduce commission fees. It also emphasized the importance of lowering prices by sharing results showing that restaurants raising delivery prices experienced up to a 37% drop in sales and up to a 78% decrease in reorder rates.

In Korea, the cost issues surrounding delivery apps are also a frequent topic. Unlike the U.S., where restaurants raise food prices to offset delivery commission burdens, Korean restaurants seem to have accepted a structure where they absorb losses. It is not reasonable to consider shifting cost burdens to small business owners as a rational phenomenon. At the same time, the U.S. situation, where food prices are raised by over 40% and consumers are exploited, cannot be justified either. As the delivery intermediary service market is expected to grow, finding an appropriate service fee range between small business owners and intermediary platforms will likely be a key challenge for the industry.