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Home My WebLink AboutItem 13b - Third-Party Food Delivery Commission Fees DATE: March 16, 2021 TO: Honorable Mayor and City Council FROM: Jason Kruckeberg, Assistant City Manager/Development Services Director By: Tim Schwehr, Senior Management Analyst Alana Bautista, Management Aide SUBJECT: IMPOSING A LIMIT ON THE COMMISSION FEES CHARGED BY THIRD-PARTY FOOD DELIVERY APPLICATIONS ON BUSINESSES IN ARCADIA Recommendation: Provide Direction SUMMARY At the February 2, 2021, City Council meeting, the City Council requested a discussion item concerning the regulation of commission fees charged by third-party food delivery applications on businesses in Arcadia. Research has been conducted on this topic, and a survey of other jurisdictions who have adopted measures to regulate commission fees has been completed. It is recommended that the City Council provide direction on whether to adopt a local ordinance regulating commission fees charged by third-party food delivery applications. BACKGROUND A practice that has become critical to restaurants being able to conduct business during the Stay-at-Home Orders issued around the country is food delivery through third-party companies that provide this service. The issue revolves around the total fees a restaurant or customer pays to a service to have food delivered. Depending on the agreement placed between the third-party food delivery applications and restaurants, delivery companies can charge restaurants anywhere between 12%-30% of the final check on each order. A standard fee structure for most restaurants is a 10%-15% fee for marketing and listing of the business on the app, and an additional 15% fee for delivery orders. In addition to the fees charged to restaurants, the third-party apps also charge customers separate fees typically ranging from 10%-30% of the total order. The most popular third-party delivery apps are Uber Eats, DoorDash, GrubHub, and Postmates. Throughout the COVID-19 pandemic, municipalities around the country have implemented new legislation limiting the percentage of commission fees third-party food delivery services can charge restaurants. These new ordinances are being adopted to Third-Party Food Delivery Application Commission Fees March 16, 2021 Page 2 of 6 better protect businesses from fees that have the effect of substantially cutting into the profit margins. The vast majority of these ordinances have been adopted during the pandemic, and most of them are written to terminate once the Stay-at-Home Orders (or similar restrictions on dining) have been lifted. Third-party food delivery companies, on the other hand, argue that restricting the percentage they charge restaurants leads to unintended consequences, including higher customer fees, decreased orders, and reduced wages for delivery workers in areas with fee caps in place. DISCUSSION There are various fees associated with using a food delivery app. Some of the fees are paid by the restaurant, others paid directly by the customer, and gratuities are typically in addition to the fees charged. These fees are applied in combination with each other depending on certain circumstances such as whether the sale is generated by the service provider’s app or if the service provider is just acting as a delivery service and all other promotion and transactions are controlled by the restaurant. Every third-party food delivery app has a slightly different model for how they structure their fees, but as a typical example they include a 10-15% marketing fee and a 15% delivery fee. The marketing fee pays for listing of the restaurant on the app and the ability of customers to order and pay through the app. For take-out orders, this is typically the only fee that is paid by the restaurant. The delivery fee pays for all costs associated with delivery of the item to the customer. Restaurants typically have the option to either allow delivery through the app or only authorize take-out. Additionally, some apps appear willing to negotiate reduced fees with individual restaurants owners who contact them to engage in discussions. This can sometimes include entering a mutually-exclusive contract, or priority contract, with a particular app. In addition to the fees charged to restaurants, the third-party apps also charge customers a service fee and delivery fee typically ranging from 10%-30%. Two of the apps, Grubhub and Uber Eats, also charge customers a “California Driver Benefits” fee ranging from $1 to $4 per order. The table below shows a typical example of the fees charged on a $20 delivery order, excluding any customer gratuity, which goes directly to the delivery driver. Restaurant Customer Total 3rd-Party Collected Marketing Fee $3.00 (15%) -- $3.00 Delivery Fee $3.00 (15%) $1.00 (5%) $4.00 Service Fee -- $2.00 (10%) $2.00 CA Drivers Benefits Fee -- $1.00 (5%) $1.00 Total Fees $6.00 $4.00 $10.00 Gross Earnings/Cost $14.00 (-$24.00) order + fees $10.00 Third-Party Food Delivery Application Commission Fees March 16, 2021 Page 3 of 6 As mentioned above, throughout the pandemic many local cities and municipalities have enacted ordinances on this issue. A list of some of our neighboring jurrisdictions is provided below, including information on the cap on fees and commissions they have adopted as well as additional details. A more comprehensive table, compiled by the City of Duarte as part of their work on this issue, is included as Attachment A. City Cap Percentage/Restriction Effective Date and Term City of Alhambra • Any combination of fees, commissions or costs that total more than 20% of the purchase price of each online order. Fees, commissions or costs includes a delivery fee. • A delivery fee that totals more than 15% of the purchase price of an online order. • Any fee, commission, or cost other than as permitted in the previous two subdivisions above is prohibited. • 100% of any tip or gratuity to be paid to the person delivering the food or beverages. Went into effect December 17, 2020, and is effective during the COVD-19 epidemic and for 90 days after the State/County order prohibiting on-premises dining is lifted. City of Glendale • Establishment fees including a delivery fee, service fees, and other processing fees, that total more than 15% of the purchase price of an online order. Went into effect June 3, 2020, and is in effect at such time as the City of Glendale State of Emergency related to COVID-19 terminated. City of Los Angeles • A delivery fee that totals more than 15% of the purchase price of each online order. • Any amount designated as a delivery fee for an online order that does not involve the delivery of food or beverages. • Any combination of fees, commissions, or costs that is greater than 5% of the purchase price of each online order. Fees, commissions, or costs do not include delivery Went into effect June 10, 2020, for a duration throughout the COVID-19 epidemic and for 90 days after the City’s Order prohibiting on-premises dining is lifted. Third-Party Food Delivery Application Commission Fees March 16, 2021 Page 4 of 6 fee. • 100% of delivery tips from customers go to the drivers. City of Pasadena • Any combination of fees, commissions or costs that total more than 20% of the purchase price of each online order. Fees, commissions, or costs includes a delivery fee • A delivery fee that totals more than 15% of the purchase price of an online order. • Any fee, commission, or cost other than as permitted in the subdivisions above is prohibited. Went into effect July 20, 2020, and shall terminate 90 days after the Pasadena Health Officer allows restaurants to offer dine-in service, without limitation, or upon termination of the COVID-19 local emergency, whichever comes first. South Pasadena • A 15% cap on delivery fee. • Total fees cannot exceed 20%. Went into effect August 5, 2020, and effective throughout Proclamation of Local Emergency. West Hollywood • No more than 15% of the purchase price per order for delivery fees. • No more than 10% of the purchase price per order for all other fees. Amended to 5% in February 2021. Went into effect June 15, 2020, for the duration of state of declared local emergency, and for 90 days after. In addition to these cities, both Duarte and Temple City are considering regulations at this time. Temple City has just begun their work on the topic. At their February 9, 2021, City Council meeting, the Duarte City Council considered an urgency ordinance that would cap third-party delivery app fees at 20%, consisting of a maximum cap of 15% on delivery fees and 5% on marketing and all other fees (similar to Pasadena and Glendale). However, the Duarte City Council tabled the item to allow for further surveying of restaurants and staff analysis on the issue, and directed the staff to bring back the item as a non-urgency ordinance at a future City Council meeting. Attachment A shows a more complete list of cities that have adopted such measures, and includes whether or not the ordinances were formally codified or just adopted as interim urgency ordinances. All of the 25 adopted ordinances listed will sunset following the lifting of restrictions due to the pandemic. All of the work completed by cities on this topic has resulted in statewide review of this issue as well. In January 2021, California State Assemblywoman Lorena Gonzalez (D- San Diego) introduced Assembly Bill AB 286, which proposes a maximum 15% cap statewide, inclusive of all fees charged to a restaurant. This measure differs from those Third-Party Food Delivery Application Commission Fees March 16, 2021 Page 5 of 6 passed at the city level as the announced bill seeks to impose a permanent limitation on third-party fees, whereas the city actions to date have been adopted as a temporary COVID-19 measure. To get a sense of the situation with local restaurants, the Development Services Department engaged the Arcadia Chamber of Commerce to assist with outreach to local restaurants about this issue. The Arcadia Chamber surveyed their restaurant members in early February 2021 regarding use of these apps, fees currently being charged, and their opinion on a potential fee cap ordinance. Survey responses were received from nine Arcadia restaurants including Matt Denny’s, The Derby, and Haidilao, among others. The results of the survey indicate that most Arcadia restaurants are using one or more of the major third-party apps with restaurant-charged fees ranging from 10% with no delivery to up to 30% with delivery included. The majority of respondents said they would be in favor of a fee cap of some sort either at the City, County, or State level. Two restaurant owners indicated that the fee structure is best left to the private sector and for individual businesses to negotiate. One of the respondents also indicated they would only be in favor of a fee cap if it did not result in increased customer prices or otherwise negatively impact their order volume. A summary of the survey responses is included as Attachment B. Third-party app companies have typically responded to the restarurant-paid fee cap ordinances in other cities by increasing customer-paid fees in those areas. However, a comparison of the customer-paid fees currently being charged across the four apps shows no noticeable difference when ordering from restaurants in Arcadia versus those in Pasadena. It appears that following adoption of fee cap ordinances by the City of Los Angeles and other municipalities in the region, customer-paid fees were increased across the board for all cities in Los Angeles County. As a result, adopting a fee cap ordinance in Arcadia may not result in an increase in customer-paid fees in Arcadia restaurants as would typically follow such an action. In summary, a fee cap is likely to have a mix of positive and negative impacts to Arcadia restaurants. However, the full impacts of these types of fee caps are not completely understood, and there is justifiable concern that adoption of a fee cap by the City would result in a net loss to a restaurant’s bottom line. To address this concern, some fee cap ordinances have included a provision that allows for individual restaurants to opt-out of the fee cap if they believe it will negatively impact their business. As restaurants begin reopening for more in-person dining in the coming months, they will also be less reliant on third-party delivery apps for customer orders. The majority of the adopted ordinances from other jurisdictions will also begin to sunset when indoor dining resumes in full. Finally, a bill by the California legislature has also been recently introduced that could potentially impose a permanent statewide cap on third-party fees. Due to the complexity of the issue and unknown impacts of fee cap ordinances, legislating this issue at the state level with input from restaurant trade groups, third-party app providers, and other key stakeholders may be a preferable way of addressing the concerns of restaurant owners. Third-Party Food Delivery Application Commission Fees March 16, 2021 Page 6 of 6 The following are options for the City Council to consider: 1) Since the pandemic is winding down and most ordinances will sunset, the City Council could direct staff to continue to monitor the issue with the Chamber of Commerce and local restaurants and track State Assembly Bill 286 as it progresses. 2) Determine that an ordinance is needed and direct staff to return to the City Council with either an urgency ordinance or permanent ordinance to provide a cap on commissions and fees. An ordinance would be brought back to the Council that provided the parameters of such a cap based on the City Council’s determination. 3) Take no action on this issue at this time. ENVIRONMENTAL ANALYSIS The proposed action does not constitute a project under the California Environmental Quality Act ("CEQA"), and it can be seen with certainty that it will have no impact on the environment. Thus, this matter is exempt under CEQA per Section 15061(b)(3). FISCAL IMPACT There is no direct anticipated fiscal impact as a result implementing such a measure. RECOMMENDATION It is recommended that the City Council determine that this action does not constitute a project and is therefore, exempt under, the California Environmental Quality Act (“CEQA”); and review and consider the information provided and provide direction on whether to adopt a local ordinance regulating commission fees charged by third-party food delivery applications. 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