HomeMy WebLinkAboutItem 12c - Third-Party Food Delivery Commission Fees
DATE: April 6, 2021
TO: Honorable Mayor and City Council
FROM: Jason Kruckeberg, Assistant City Manager/Development Services Director
By: Tim Schwehr, Senior Management Analyst
SUBJECT: ORDINANCE NO. 2378 ESTABLISHING A TEMPORARY LIMIT ON THE
COMMISSION FEES CHARGED BY THIRD-PARTY FOOD DELIVERY
APPLICATIONS ON BUSINESSES IN ARCADIA
Recommendation: Adopt
SUMMARY
At its regular meeting on March 16, 2021, the City Council directed Staff to prepare an
ordinance for immediate adoption to establish a temporarily limit on the commission
fees charged by third-party food delivery applications on businesses in Arcadia. At a
special meeting on March 22, 2021, the City Council unanimously adopted Urgency
Ordinance No. 2377 and introduced Ordinance No. 2378, establishing certain temporary
limits and restrictions on third-party food delivery applications, including a maximum
limit of 20 percent on the commission fees charged by third-party food delivery
applications on businesses in Arcadia. Attached is a copy of Ordinance No. 2378,
Urgency Ordinance No. 2377, and the March 16, 2021, City Council staff report.
RECOMMENDEDATION
It is recommended that the City Council adopt Ordinance No. 2378 establishing a
temporary limit on the commission fees charged by third-party food delivery applications
on businesses in Arcadia.
Attachments: Ordinance No. 2378
Urgency Ordinance No. 2377
March 16, 2021, City Council Staff Report
ADOPTED
/s/ Roger Chandler
/s/ Gene Glasco
/s/ Gene Glasco
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
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March 16, 2021
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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
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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.
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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
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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.
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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.
Attachment A: City of Duarte Third-Party Food Delivery Service Fee Cap Comparison
Attachment B: Arcadia Restaurants Survey on Third-Party Food Delivery Services