Why Price Controls Are Bad For Restaurants
Posted on 07/16/2021
Updated on 8/27/2021
Grubhub was founded in Chicago in 2004 to help restaurants grow. Since then, we have worked hard to build a business that generates more orders for restaurants at a low cost to them, helping make even the smallest independent restaurant competitive with much larger establishments that have enormous marketing budgets.
While the general idea behind price controls is that they enable restaurants to access delivery, marketing and other services at artificially low prices, the actual impact is far different. Price controls create strict limits on what local restaurants can do to promote their business, find new diners, engage regular customers and send more orders out their doors.
That is why we will vigorously fight price controls. We complied with them during the pandemic, effectively conveying more than $100 million to restaurants as they were forced to close their doors to dine-in customers. However, some cities are now introducing permanent price controls or continuing to extend “temporary” ones to create de facto permanent price controls when many restrictions for dining have been lifted.
Grubhub provides delivery services to restaurants that opt to use them, but the heart of Grubhub’s business — and the value we bring to restaurants — is the marketing support and visibility we provide to increase orders for restaurants. And that is how our fees are structured — to give restaurant partners options so they can find what works best for their particular business.
- Restaurant partners that use Grubhub Direct or our Direct Order Toolkit products have powerful tools to grow their businesses without any marketing fees.
- Restaurant partners that opt to use the Grubhub Marketplace to generate orders from our network of more than 30 million diners select a negotiable marketing package that generally ranges from 5-15 percent per order based on the level of marketing and support that makes sense for their business.
- Restaurant partners that choose to use Grubhub’s drivers (vs. their own, in-house delivery staff) to complete orders pay Grubhub a market standard delivery fee.
These fees closely reflect the direct cost of providing the services we do on behalf of restaurants. We spend hundreds of millions of dollars in marketing annually to generate orders for our restaurant partners. When all of the costs and expenses of running our business are accounted for, we typically make only 1 percent of total food sales as profit — and that was before temporary price controls reduced that percentage to zero or less.
The services Grubhub provides are akin to what companies like Google offer to promote small businesses on the internet. Or at a more basic level, we are similar to a company that sells billboard space to the local hardware store. Grubhub gives independent restaurants access to promotional ability that was previously unavailable to them because of the expertise and scale required.
To support all restaurants that partner with Grubhub, we recently announced the Grubhub Guarantee, which promises diners on-time delivery and the lowest price relative to competitors, or Grubhub will make it right with Grubhub Perks for free food. With the Grubhub Guarantee, Grubhub is standing behind on-time delivery and lowest price in order to facilitate a great diner experience and protect restaurants’ reputations.
Price controls severely impact the ability of Grubhub to offer its suite of services to support restaurants and generate orders since they don’t impact the hard costs we incur to provide support restaurants, like advertising, search engine optimization and promotions. A permanent price control would eliminate our ability to offer many of these services to restaurants, and as a result their ability to generate orders would be adversely impacted.
Price controls also hurt restaurants’ order volume by impacting diner costs. While we haven’t implemented standalone diner fees in response to price controls like others, the impact is still clear. We have looked at this issue throughout the pandemic while emergency price controls have been in place, and found that restaurants in municipalities with price controls see decreased order volume relative to unrestricted neighbors. A permanent price control in a city like New York or San Francisco for example, would make this negative effect permanent.
Beyond the significant impacts on restaurants, price controls also violate a variety of state and federal laws. Price controls shift revenues from one class of businesses to another, invalidate lawful contracts between private businesses, and favor local businesses over out-of-state businesses, violating the U.S. Constitution’s Contracts, Due Process, Equal Protection, Takings and Dormant Commerce Clauses. Depending on the city or state, they also violate a number of additional constitutional provisions and exceed police power because these unlawful price controls do not promote the welfare of the general public.
Ultimately, arbitrary price controls are exactly the wrong thing to do when restaurants need more support, visibility and order volume than ever. A permanent cap would result in unprecedented, damaging and persistent consequences for locally-owned businesses, delivery workers, diners and the local economy.
Grubhub serves restaurants, and we will always stand up for them and work hard to protect their ability to grow and thrive.