Philadelphia, PA - Since the start of the pandemic, restaurants of every shape and size have been forced to make Sophie’s choice—either sign up with these platforms that take your profits and customers or shut down completely. Whether take-out and dine-in, all restaurants now understand that these tech companies offer only the mirage of a lifeline.
Calls on Philadelphia Permanently Cap 3rd Party Commissions
While the COVID-19 pandemic decimated our vibrant Philadelphia metro area restaurant community due to closures and other safety restrictions, it also brought to light a serious problem afflicting our restaurants: multibillion-dollar tech companies are driving local restaurants out of business.
Multi-Billion dollar tech companies have become the gatekeeper between local restaurants and local diners, forcing restaurants to pay onerous 25-30% fees to access their own local customer base. Meanwhile, many restaurants struggle to meet their overhead costs (rent, wages, food, supplies, and other expenses) on such slim margins. Indeed, no restaurant can be profitable if it is required to give away a quarter to a third of its revenues to a tech company.
Why do restaurants continue doing business with these food ordering tech companies? The answer is simple— they are trapped. As one former Grubhub executive explained: “COVID-19 is exposing the fact that delivery platforms are not actually in the business of delivery. They are in the business of finance. In many ways, they are like payday lenders for restaurants and drivers.
They give you the sensation of cash-flow, but at the expense of your long term future and financial stability . . . . In the case of restaurants, these platforms slowly siphon off your customers and then charge you to have access to them. They are simultaneously selling these same customers to your competitor across the street, but, don’t worry, they are also selling their customers to you . . . . In this industry, the delivery platforms have found unsuspecting victims in restaurants.
When they first sign up, restaurants doing business with these platforms receive an infusion of revenue, getting hooked in like a victim to a payday lender scheme. But the cost of these higher sales revenues is too high as these orders are filled at a financial loss. As a result, the restaurants become trapped in a vicious cycle, chasing desperately needed revenue while filling these orders at a loss, slowly pushing the restaurant deeper and deeper into the red until shutting down is the only option.
Restaurants need immediate action to survive. Last summer, the City of Philadelphia, led by Mayor Kenney and City Council, joined with other major cities across the country to address this obvious problem by passing Bill No. 200344. This law imposes a 15% commission cap on all online ordering and delivery services for the duration of the current public health crisis. While this cap has certainly helped struggling restaurants, a 15% commission cap effectively means that restaurants that work incredibly long hours under intense pressure are just barely surviving.
Meanwhile, restaurants have been fighting to keep their staff employed and have done so at personal expense for the greater good. As a result, restaurants have been struggling to maintain pre-pandemic wages while operating on vastly reduced incomes.
As the Covid-19 threat has eased labor shortages, spiraling food costs, and, in many cases, additional debt burdens are already stacked against hard-working, independent restaurant operators. The restoration of the outrageous 20% - 30% commissions and all the deceptive and predatory additional fees is just another slap in the face to business owners who have endured so much!
A complete recovery to pre-COVID levels will take years. Hundreds of restaurants will never reopen, unemployment in the hospitality industry will continue to rise, and complementary industries will all suffer unless our local government takes action today. Philadelphia should follow other major cities like New York, Seattle, Washington DC, and San Francisco by capping the commissions of online ordering and miscellaneous fees.
By taking action now, Philadelphia will ensure that its restaurants survive and have a fighting chance to rebuild, tens of thousands of jobs will return to the City, and the City’s tax revenue gap will be filled. Our economy will feel the failure to take action now for decades to come.
Author Munish Narula - As a Wharton MBA in Finance and an Investment Baker for Credit Suisse, and the owner of 9 restaurants doing 167,000 takeout and delivery orders a year, is in the unique position to warn restaurant operators and consumers.
