Why Price Controls Are Bad For Restaurants
Originally Posted on 07/16/2021
Updated on 8/24/2022 to include data showing depressed growth for restaurants impacted by price controls
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 continue to fight price controls in court. We complied with them during the pandemic, effectively conveying hundreds of millions of dollars to restaurants as they were forced to close their doors to dine-in customers. Now, many cities, including Philadelphia, Seattle and Minneapolis, are shifting toward reasonable compromises: in San Francisco, we recently withdrew our litigation after the city passed an amendment to its cap allowing restaurants to opt into rates higher than 15 percent if they chose additional services. Unfortunately, others – including New York City – have so far let strict permanent caps remain in place.
Understanding How Grubhub Helps Restaurants Grow
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 32 million diners select a negotiable marketing package that generally ranges from 5 to 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.
We spend hundreds of millions of dollars in marketing annually to generate orders for our restaurant partners. In fact, in New York City prior to the pandemic, thousands of restaurant partners opted into some of these services that offered them more marketing options—with many of them opting to pay Grubhub more than 15 percent of the order price. When all of the costs and expenses of running our business are accounted for, we make approximately 1 percent of total food sales as profit — and that was before temporary price controls significantly impacted our ability to operate a profitable business.
The services Grubhub provides are akin to what companies like Google offer to promote small businesses. 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.
Permanent price controls eliminate our ability to offer many of these services to restaurants, because the cost to our business would become too high.
Restaurants Impacted by Price Controls Are Getting Left Behind
In June 2021, one year after New York City first implemented a cap on commissions for third-party delivery apps, Grubhub’s data showed that restaurants impacted by that policy were not participating in the city’s post-pandemic economic recovery at the same rate as other businesses.
In fact, restaurants impacted by the cap – in other words, those whose contracted rates with Grubhub were adjusted down in order to adhere to the new regulation – saw their order volumes grow at just 6 percent over that year. Meanwhile, restaurants not impacted by the price control, or those whose contracted rates were already at or below the 15 percent threshold, saw their orders grow nearly 75 percent faster, at a rate of almost 80 percent.
While surely an unintended consequence of its legislation, the New York City Council’s choice to make price controls permanent has hurt the very restaurants, including small and family-owned restaurants, that it intended to protect. That’s because independent restaurants, unlike large chain restaurants which have their own resources, often rely on platforms like Grubhub for marketing and promotions. Price controls have limited the accessibility of those services.
The effects of the price control trickled down to hurt both Grubhub’s drivers and restaurants’ own drivers, as well. While tips for restaurants and drivers grew by nearly 60 percent between June 2020 and 2021, restaurants that were impacted by the cap and drivers who deliver from these restaurants saw no significant growth in tips, likely because orders to those restaurants grew just slightly.
Ultimately, price controls are exactly the wrong thing to do when restaurants need more support, visibility and order volume than ever. Grubhub serves restaurants, and we will always stand up for them and work hard to protect their ability to grow and thrive.