The Grubhub conundrum: Restaurants wrestle with the high costs of third-party delivery services

Andy Downing
Pierogi Mountain founder Matt Majesky

In late April, Pierogi Mountain announced it would temporarily close, citing the frequency of shopping trips, which had started to feel like a growing hazard amid the looming threat of the novel coronavirus, as well as the service fees charged by delivery services like Grubhub, Uber Eats, Postmates and the like, which “were eating us alive,” the eatery wrote, particularly as more customers turned to third-party delivery during Ohio's ongoing “stay at home” orders.

“We’re a small-batch company … so we were having to go to the grocery store way too much,” said Pierogi Mountain founder Matt Majesky in an early May phone interview, citing both his history as a smoker and business partner Charlie Greene’s asthma as further reasons for wanting to limit public exposure. “And the other end of it is financial. Right now, everything for us has to be filtered through the delivery services. Under normal operating procedures, where we’re only doing so much business through the delivery services, the 30 percent that they’re taking doesn’t feel like a lot, because most of the money is coming through dine-in and [in-person] carry-out. But when you switch to a model that is almost 100 percent [third-party delivery], it becomes more of a challenge. … Say we do a $4,000 week. We’re losing 30 percent of that [to the delivery apps]. … And we’re already dealing with small margins as is.”

All of the restaurant owners interviewed cited a 30 percent commission charged by delivery services, a total that includes delivery fees and associated processing and marketing costs. With Grubhub, for example, the delivery fee is 10 percent and the remainder of the total comes from processing fees and marketing commissions, which vary per business and are affected by everything from location to the restaurant density of the surrounding neighborhood. In an emailed statement, a Grubhub spokesperson said these marketing fees typically average around 15 percent, although “restaurants can choose to spend more if they believe it will drive more orders to them.”

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Depending on a number of factors, commission rates for a non-sponsored listing, meaning that your restaurant will appear on Grubhub and customers will be able to place orders digitally, can range up to 15 percent. But sponsored listings that prioritize your restaurant, meaning it will show up earlier in the search results, can include commission fees of 20 percent or more. Recently,Giuseppe Badalamenti, the owner of Chicago Pizza Boss,posted his most recent Grubhub statement on Facebook. A photo included with the post, which has since gone viral, shows the restaurant’s Grubhub bill, including $1,042.63 in orders from which the restaurant made $376.54 after fees.

Owing to these practices, some cities have recently capped the commissions charged by third-party delivery services. Emergency orders passed in Aprilin Seattle and San Francisco limited fees charged by these delivery services to 15 percent, and similar legislation has been debated in places such as Cincinnati, New York, Los Angeles and Washington, D.C., among other cities.

Regardless, for many local restaurants these third-party delivery services have become a necessary part of doing business in the current COVID-19 dining landscape, both in terms of the services rendered (most eateries were not equipped with delivery drivers or the associated insurance when the shutdown hit) and in getting their name in front of diners, who have increasingly turned to delivery apps to find those restaurants that have remained open for business.

“Certainly a lot of guests like these services and have benefited from them because you can get food delivered to your door from a number of places,” said Kevin Malhame, co-owner of Northstar Cafe, Brassica and Third and Hollywood. “But ultimately it’s not a very cost-effective thing.”

Malhame said his restaurant group turned to delivery services as the pandemic unfolded out of necessity. Prior to the shutdown, carry-out generated 20 percent of its business. “And when you think of losing 80 percent of your business, that need becomes pretty immediate,” Malhame said, describing recent weeks as a trial run during which the eateries have struggled with everything from costs associated with the service to the reliability of the drivers to the inability to control the flow of orders coming into the kitchen. With much of the business for Northstar and Brassica locations coming from curbside pickup, there are times the restaurants will shut down the third-party delivery option, since the kitchens are too busy to handle the additional orders and maintain a standard of quality.

In the coming weeks, Malhame said the group's restaurants will stop using these delivery platforms (Northstar has recently included flyers touting its own curbside service and online ordering app along with orders placed via third-party delivery outlets) and instead will hire its own delivery drivers.

“We’ve realized if we’re going to offer delivery, we should be doing it ourselves, and doing it at a high level with friendly, trustworthy service,” Malhame said, acknowledging that not only were coronavirus-driven restaurant disruptions likely to linger, but that customer expectations for delivery had shifted. “Delivery is something that people appreciate, and technology has made it simple. Even the concept of delivery [has grown beyond] pizza and Chinese food, which is the old model. … So we’ve been talking about launching our own delivery for a long time, but this just seems like the right time to experiment and see how it goes.”

Some mom-and-pop establishments don’t have the same financial flexibility to add drivers, though. Baba’s co-owner Caroline Kraus, for one, said the restaurant has maintained a needed but uncomfortable relationship with third-party services, navigating unreliable equipment and complex, fine-print-laden marketing deals in order to offer customers the option of delivery.

“There was one time we got caught up running a special, and I didn’t realize until the back end that we were having to pay for that special up front,” Kraus said. “We’re coming to a point where we’re having to face these things that are becoming necessary evils that our industry has never had to deal with, like these delivery fees and these point-of-sale systems that want everything to be automated through your website, and all of these big, flashing screens that do everything for you.

“But then you’re paying for those screens and the printers, the printer tape, the wires. And then you’re paying a monthly subscription fee, and processing fees, and before you know it you’re looking at your already thin margins and going, ‘Well, I guess we’re not going to hire anybody else this year.’”

Even some of the restaurants more traditionally aligned with the delivery model have struggled with the associated costs of doing business with third-party delivery services. Due to insurance reasons, Yellow Brick Pizza currently doesn’t offer its own delivery at its King Street location, which has forced the pizzeria to rely on DoorDash, a service that currently accounts for half of the sales coming into the shop. “And they’re taking 30 percent, meaning that on a given day DoorDash can take anywhere from 15 to 20 percent of our net sales,” said Yellow Brick co-owner Faith Pierce. “And right now it’s a necessary component of doing business. I don’t think we’d be able to stay open at King Avenue without DoorDash, because even that money we do keep off of sales is important to keeping the lights on.”

Prior to the pandemic, Service Bar did not offer carry-out, so when it made the pivot in order to remain open, chef Avishar Barua said the restaurant needed to be up on third-party delivery sites as a means of advertising its existence to potential customers. “In a normal business expansion, would we have planned for these [added costs]? Correct. But for a lot of the restaurants now … we’re caught in a weird position where, if it’s working, do I risk [dropping the services and] it not working?” said Barua, adding that he would prefer to invest the 30 percent going to delivery apps into better ingredients or larger portions. “You don’t have the time to research, ‘What can I do to solve these problems?’ Every cycle matters, and every day’s sales can determine if a restaurant closes or stays open.”

For Pierogi Mountain, these calculations eventually tipped the scales, with Majesky opting to hit pause on the business to take stock and plan for an eventual relaunch. (Prior to the pandemic, Pierogi Mountain, which had been operating out of Cafe Bourbon St., was close to signing a lease on its own brick-and-mortar location.) And while the break is certainly frustrating, Majesky remains optimistic about future prospects.

“I was in the kitchen making a bunch of pierogies, and I had this thought that [when the Spanish flu hit] back in 1918, my grandmother was doing the exact same thing during that global pandemic,” Majesky said. “And she was probably in the same boat, not knowing what was going to happen, or how things could go on. And, you know, life kept going, and now here I am 100 years later doing the same things. People find a way of continuing, one way or another.”