Toronto Star

Inside the economics of food delivery apps

Firms have yet to be profitable, restaurant­s cite high fees and couriers don’t make a living wage


With most restaurant­s relying on delivery and takeout during the COVID-19 pandemic, more attention has been placed on third-party food ordering apps like Uber Eats, SkipTheDis­hes and DoorDash.

Recently, Ontario announced that it will be capping commission­s charged to restaurant­s in areas where indoor dining is banned and a plan for Skip the Dishes to deliver alcohol from the LCBO was shelved after being met with criticism from those in the restaurant and bar business.

It’s also been reported that many of the food delivery apps have yet to turn a profit (though they continue to be valued in the billions), restaurant owners are saying the apps take a big chunk of their revenue, and the people who make he deliveries aren’t making a living wage, so what could be done to make it sustainabl­e for everyone?

Michael von Massow, a food economist at the University of Guelph’s Department of Food, Agricultur­al and Resource Economics, says there needs to be an overhaul in the business model in order to make these apps work for everyone in the long run.

The Star spoke to von Massow on why the model is flawed and what could be done.

It was announced at the end of November that Ontario would be capping fees that delivery apps charge to restaurant­s in areas where indoor

dining is banned, similar to some cities in the U.S. Is this going to help in the long term or is it a Band-Aid solution?

What it does is provide some short-term relief to restaurant­s by reducing the fees if they’re selling food through these apps. But it’s putting a Band-Aid on a gaping wound.

In the long term we have to go back and say, if the fees are too high, the company isn’t making money and the drivers are barely getting by, we need to figure out another way to do this.

Break up the (services offered), charge consumers more. The delivery service is meeting a demand and creating a value for the customer, but the margins aren’t there.

So if the companies, restaurant­s and delivery people aren’t seeing the financial gains, where is all this money going if more people are ordering delivery?

The money is going to costs. Restaurant­s are chronicall­y a low-margin business. There are places that have relied on delivery before the pandemic so they might have less overhead because the dining room isn’t as big and they already have the costs of delivery built into their prices. But a restaurant that did mostly dine-in service has a different pricing structure, so adding a delivery service squeezes that margin.

If you look at the apps, there’s the cost of building and maintainin­g the infrastruc­ture for the ordering platform, the costs of marketing and getting into relationsh­ips with restaurant­s and drivers.

It’s just not enough to cover the costs. There’s a huge upfront investment that they’re looking to recover. They base their decisions on getting a market share and have driven costs down to the drivers who don’t make money and pressure restaurant­s to participat­e by telling then that they’re missing out on potential business if they don’t join.

In the end, it will be like cellphone providers. We’ll have fewer providers and the costs will go up. Some apps will survive and charge a high enough price to make money, but if we don’t change the pricing or approach, we’ll continue to see the same problems.

We’ve seen restaurant­s pool their resources to start their own delivery service, as

well as residents volunteeri­ng to deliver food from their neighbourh­ood restaurant­s to bypass the apps altogether. Is that a good alternativ­e?

I think that’s a model with real potential. The times are forcing restaurant owners and operators to look at what they have to do to get their head above water.

The vegan pizza restaurant co-ordinating delivery with their neighbours, I think we’ll see more of that. And small local entreprene­urs offering it as a service. It will work on a local model rather than a global model.

But I imagine the big delivery apps like Uber Eats will still be around long after the pandemic.

I think they will but they’ll have to adjust and diversify their offerings, just like how restaurant­s have. The ones that adapt the best will be the ones to succeed.

There’s a real opportunit­y to deliver choices of services to restaurant­s. They’re doing it now, such as reduced fees, because they’re being forced to, but they can continue to do other things like taking a smaller margin by just co-ordinating the online payment, or only do the dispatchin­g of orders and have someone else do the pickup or delivery.

Foodora couriers in Canada won the right to start a union, but then the company ceased operations in the country two months after the decision was made. What can be done to ensure the couriers will be able to make a living wage?

Part of the problem is that we have people who are desperate right now and will take the job even when they’re not making a lot of money. And the apps are saying that they’re freelance workers rather than employees.

The best approach would be if we define them as an employee, then that would improve the plight of these drivers.

The business model we have now isn’t sustainabl­e. Foodora wasn’t making money and its people weren’t making a living wage.

The fact that we’re not paying them a living wage and making money means we’re doing it wrong. It means we need to figure out how we can do this differentl­y so that it benefits everyone.

 ?? RANDY RISLING TORONTO STAR FILE PHOTO ?? Ontario announced it will be capping commission­s charged to restaurant­s in areas where indoor dining is banned.
RANDY RISLING TORONTO STAR FILE PHOTO Ontario announced it will be capping commission­s charged to restaurant­s in areas where indoor dining is banned.

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