WEBVTT - Who Profits from Food Delivery Apps? 0:00:01.920 --> 0:00:06.920 Welcome to Brainstuff production of I Heart Radio, Hey brain 0:00:06.960 --> 0:00:10.760 Stuff Lauren Vogebaum here. During the early days of the 0:00:10.760 --> 0:00:14.160 COVID pandemic, when in person dining was shut down in 0:00:14.200 --> 0:00:18.640 most states, both restaurants and consumers turned to food delivery 0:00:18.680 --> 0:00:23.280 apps as a lifeline. These apps, like door Dash, Uber Eats, 0:00:23.320 --> 0:00:28.200 and grub Hub, exploded in popularity. From January through September 0:00:28.240 --> 0:00:32.600 of door Dash alone recorded five hundred and forty three 0:00:32.640 --> 0:00:35.559 million orders, compared to just a hundred and eighty one 0:00:35.600 --> 0:00:40.600 million orders during the same period in twenty nineteen. For restaurants, 0:00:40.600 --> 0:00:43.760 the popularity and convenience of food delivery apps provided a 0:00:43.880 --> 0:00:46.640 much needed revenue source to keep the lights on until 0:00:46.640 --> 0:00:50.240 the lockdown orders were lifted. And for workers who lost 0:00:50.360 --> 0:00:52.760 jobs during the shutdown and students who were sent home 0:00:52.760 --> 0:00:55.320 from college, a part time job as a food delivery 0:00:55.400 --> 0:00:59.320 driver was a flexible way to earn some extra cash. 0:00:59.800 --> 0:01:04.120 But now lots of folks, including economists, investors, and workers 0:01:04.240 --> 0:01:07.679 rights advocates, are questioning the viability and ethics of the 0:01:07.680 --> 0:01:11.959 food delivery business model. Sure, consumers are hooked, but is 0:01:12.040 --> 0:01:15.600 anybody in the food delivery business, from restaurants to drivers 0:01:15.680 --> 0:01:19.240 to the app companies themselves actually making money on this. 0:01:21.280 --> 0:01:24.760 Before the pandemic, food delivery apps were niche services that 0:01:24.800 --> 0:01:28.280 were mostly popular in big cities. But during the lockdown 0:01:28.360 --> 0:01:31.520 and after door dash and uber eats were downloaded by 0:01:31.520 --> 0:01:35.759 the millions and delivery service expanded into suburbia. The two 0:01:35.800 --> 0:01:38.720 apps now control eighty five percent of the US food 0:01:38.760 --> 0:01:43.280 delivery market. Both of these apps earned staggering amounts of money. 0:01:43.319 --> 0:01:47.960 In one Uber Eats clocked four point eight billion in 0:01:48.040 --> 0:01:54.560 revenue infty increase over twenty nineteen. Meanwhile, door Dash's revenue 0:01:54.640 --> 0:01:57.320 jumped two hundred and sixty eight percent from twenty nine 0:01:58.560 --> 0:02:02.200 and continued to generate one point to eight billion dollars 0:02:02.280 --> 0:02:07.720 in quarterly earnings, which is why it's so shocking to 0:02:07.800 --> 0:02:11.000 learn that neither of these companies has turned a profit. 0:02:11.760 --> 0:02:14.080 For the article, this episode is based on How's to 0:02:14.200 --> 0:02:17.360 Work spoke with Daniel McCarthy, a marketing professor at Emory 0:02:17.440 --> 0:02:21.520 University's go Sweata School of Business. He explained that delivery 0:02:21.560 --> 0:02:24.280 apps only pocket a small slice of the cost of 0:02:24.320 --> 0:02:27.360 each food order, and they've been spending a lot more 0:02:27.440 --> 0:02:31.000 on advertising their services and improving their technology than they've 0:02:31.000 --> 0:02:34.440 been earning from food deliveries. The delivery apps make what 0:02:34.560 --> 0:02:37.760 little money they pocket by charging restaurants a commission for 0:02:37.919 --> 0:02:41.200 each order placed through the app. The standard commission is 0:02:41.280 --> 0:02:45.200 though door Dash has also introduced a tiered commission structure. 0:02:46.040 --> 0:02:48.880 The apps also charge a smaller service fee to the customer. 0:02:50.120 --> 0:02:53.400 According to an analysis by Deutsche Bank, the average door 0:02:53.440 --> 0:02:56.280 dash order during the pandemic has been worth about thirty 0:02:56.280 --> 0:03:01.239 six dollars. If door Dash pocketed, the company earned ten 0:03:01.280 --> 0:03:03.920 dollars and eighty cents, plus another two or so for 0:03:04.040 --> 0:03:07.520 the service fee. That might sound like a lot per order, 0:03:07.720 --> 0:03:10.799 especially when it's multiplied by hundreds of millions of orders, 0:03:11.400 --> 0:03:14.600 but that twelve dollars and eighty cents is gross revenue. 0:03:15.040 --> 0:03:17.639 You still have to subtract the costs of doing business. 0:03:18.840 --> 0:03:21.440 The biggest expense for these apps is paying the drivers. 0:03:21.960 --> 0:03:26.519 Next are advertising and marketing costs, including those free promotional 0:03:26.520 --> 0:03:30.120 campaigns to attract new customers. And then there are returns 0:03:30.120 --> 0:03:33.919 and refunds, which really eat into the bottom line. When 0:03:33.960 --> 0:03:36.680 all those costs are taken into account, a dootche Bank 0:03:36.720 --> 0:03:39.600 and other analysts have calculated that door Dash is left 0:03:39.640 --> 0:03:42.360 with net earnings of two point five to three per 0:03:42.360 --> 0:03:45.680 cent of the customers overall bill or for that average 0:03:45.720 --> 0:03:49.760 thirty six dollar order, just ninety cents to a buck twenty. 0:03:50.520 --> 0:03:53.600 So far, that slim margin hasn't been enough to propel 0:03:53.680 --> 0:03:58.200 the apps into profitability, even as they taken billions in revenue. 0:03:58.880 --> 0:04:01.920 But what about the restaurant to use the apps. Let's 0:04:02.000 --> 0:04:04.840 take the case of Philip Fosse, a chef and owner 0:04:04.880 --> 0:04:07.800 of to Chicago restaurants, one Michelin starred and the other 0:04:07.840 --> 0:04:11.440 a casual barbecue joint. When the pandemic hit and in 0:04:11.480 --> 0:04:14.960 person dining was shut down, Fosse and his staff scrambled 0:04:14.960 --> 0:04:18.839 to offer curbside pickup and delivery. For a while, the 0:04:18.880 --> 0:04:22.640 delivery apps seemed like a godsend, allowing restaurants like Fosces 0:04:22.640 --> 0:04:25.920 to eke out some earnings until customers were allowed back. 0:04:26.640 --> 0:04:30.359 But even when in person dining reopened, many consumers remained 0:04:30.360 --> 0:04:35.200 hooked on the apps. Foss wrote an eater in January, 0:04:35.960 --> 0:04:39.560 delivery apps are destroying restaurants, from mom and pop places 0:04:39.640 --> 0:04:43.640 to chefs with Michelin stars. They're a terrible deal. Fosse's 0:04:43.720 --> 0:04:47.960 complaint came down to simple economics. If customers choose delivery 0:04:48.120 --> 0:04:51.440 over in person dining restaurants lose way too much money 0:04:51.480 --> 0:04:54.240 to the commissions charged by door Dash and Uber eats. 0:04:54.920 --> 0:04:57.640 Even when the apps commission was capped by lawmakers at 0:04:58.600 --> 0:05:01.880 or fifteen percent during to the pandemic, it's still left 0:05:01.920 --> 0:05:06.000 restaurants struggling to turn a profit on each order. A 0:05:06.080 --> 0:05:09.279 Foss used the example of a thirty dollar delivery order 0:05:09.360 --> 0:05:12.320 of smoked ribs, sides and a dessert from his barbecue joint. 0:05:13.080 --> 0:05:16.520 Even with commission capped at fifteen percent in Chicago, that 0:05:16.600 --> 0:05:19.360 took four dollars and fifty cents off the top. Now, 0:05:19.360 --> 0:05:22.720 when he calculated the food and labor costs plus occupancy 0:05:22.760 --> 0:05:26.320 costs like rent, utilities, and waste removal, Foss was left 0:05:26.360 --> 0:05:29.400 with five percent profit or a dollar fifty on a 0:05:29.440 --> 0:05:33.599 thirty dollar sale. A Foss understands the attraction of food 0:05:33.640 --> 0:05:37.040 delivery apps for both customers and restaurant owners, but says 0:05:37.120 --> 0:05:40.480 the economics are unsustainable, especially if the apps go back 0:05:40.520 --> 0:05:45.239 to charging pre pandemic commissions. Of He wrote, the restaurant 0:05:45.279 --> 0:05:49.000 industry has been cannibalizing itself by joining delivery services like 0:05:49.040 --> 0:05:53.599 grub hub, door Dash, and Uber eats. Okay, but how 0:05:53.640 --> 0:05:56.800 are the driver's faring. Let's look at the case of 0:05:56.839 --> 0:05:59.640 Mike Hayes, who worked as a chef for seventeen years 0:05:59.680 --> 0:06:02.040 before where he was laid off in March of at 0:06:02.040 --> 0:06:05.279 the start of the pandemic. He started driving for door Dash, 0:06:05.360 --> 0:06:08.240 attracted by the flexibility of the working hours and door 0:06:08.320 --> 0:06:11.160 Dash's claimed that drivers earned an average of twenty five 0:06:11.200 --> 0:06:15.200 dollars an hour, But Hayes's experience was different, as he 0:06:15.279 --> 0:06:20.520 explained to Business Insider in March. But based in Portland, Oregon, 0:06:20.680 --> 0:06:23.920 a hot spot for food delivery, has logged forty five 0:06:23.920 --> 0:06:27.240 hours a week driving full time for door Dash. His 0:06:27.320 --> 0:06:29.960 earnings ranged from a good week in which he made 0:06:30.000 --> 0:06:33.039 eight hundred dollars that's seventeen dollars and seventy seven cents 0:06:33.040 --> 0:06:35.680 an hour, to a bad week in which he made 0:06:35.720 --> 0:06:38.520 just two hundred dollars or four dollars and forty four 0:06:38.520 --> 0:06:42.560 cents an hour. And according to the website rides sharing 0:06:42.640 --> 0:06:48.040 driver Haze's experience is typical. There are occasional unicorn orders 0:06:48.080 --> 0:06:51.120 that generate a big payoff, but there are also plenty 0:06:51.120 --> 0:06:53.919 of ten mile trips with long waits the restaurant for 0:06:53.960 --> 0:06:57.480 a three dollars score. The average pay the website said 0:06:57.640 --> 0:07:01.719 was fifteen dollars an hour A Dashers make money in 0:07:01.839 --> 0:07:04.880 two ways. The app guarantees them a base pay for 0:07:04.920 --> 0:07:07.480 each delivery based on the total cost of the order. 0:07:08.160 --> 0:07:10.400 On top of that base pay, dashers also make money 0:07:10.440 --> 0:07:13.680 on customer tips. The more orders you complete in an hour, 0:07:13.960 --> 0:07:17.040 and the bigger those individual orders and tips, the more 0:07:17.080 --> 0:07:21.280 money you make a while delivery app drivers can improve 0:07:21.400 --> 0:07:24.600 their earning potential by working during peak hours lunch and 0:07:24.600 --> 0:07:28.400 dinner rush in geographic hotspots, there are still plenty of 0:07:28.480 --> 0:07:31.680 variables that are out of their control. A restaurant can 0:07:31.720 --> 0:07:34.200 get busy, forcing the driver to spend an hour on 0:07:34.240 --> 0:07:37.240 a small order, and people can be cheap with their tips, 0:07:37.480 --> 0:07:40.200 and gas prices can go up. All of that eats 0:07:40.200 --> 0:07:44.960 into the driver's earnings. Driving for these app companies might 0:07:45.000 --> 0:07:47.320 make sense as a part time gig for college students 0:07:47.360 --> 0:07:50.280 or retirees, but it's hard to make a living doing 0:07:50.320 --> 0:07:54.680 it full time, and since app companies consider drivers contractors 0:07:54.760 --> 0:07:58.120 and not employees, they don't offer benefits like health insurance, 0:07:58.160 --> 0:08:03.880 retirement savings accounts, or worker compensation. So from the restaurants 0:08:03.920 --> 0:08:07.240 to the drivers to the app companies themselves, the math 0:08:07.320 --> 0:08:10.640 of food delivery doesn't seem to add up. When the 0:08:10.840 --> 0:08:13.840 pie of a thirty six dollar order is divided among 0:08:13.920 --> 0:08:17.640 these three entities, all of them leave the table hungry. 0:08:18.240 --> 0:08:21.160 But is there a way to make food delivery profitable? 0:08:21.960 --> 0:08:25.239 Matt Maloney doesn't think so, and he should know. He's 0:08:25.280 --> 0:08:28.240 the CEO of greb hub, formerly the biggest name in 0:08:28.280 --> 0:08:31.720 the food delivery business. He told The Wall Street Journal 0:08:31.720 --> 0:08:35.880 in May food delivery is and always will be a 0:08:35.920 --> 0:08:40.440 crummy business. He said that no amount of technological upgrades 0:08:40.520 --> 0:08:43.319 or logistical tweaks will make it profitable, which is why 0:08:43.480 --> 0:08:46.760 greb Hub pivoted to becoming an online marketing partner for 0:08:46.800 --> 0:08:51.920 restaurants instead. McCarthy at Emory isn't as down on delivery apps. 0:08:52.520 --> 0:08:56.600 His research specialty is measuring consumer engagement with products and services, 0:08:57.040 --> 0:08:59.600 and the data from these companies show that app users 0:08:59.720 --> 0:09:04.079 aren't backing off. He said that's the one very favorable 0:09:04.160 --> 0:09:07.360 dynamic going on for the category as a whole. When 0:09:07.400 --> 0:09:09.600 people start to use a delivery app, they tend to 0:09:09.679 --> 0:09:12.520 use it more and more. Over time, the apps start 0:09:12.559 --> 0:09:17.000 consuming more and more of their food budget. He explained 0:09:17.080 --> 0:09:19.160 that one way for everyone to make more money and 0:09:19.160 --> 0:09:23.000 food delivery is simply to charge consumers more for the convenience. 0:09:23.720 --> 0:09:27.400 That's what Chipotle is doing. In the popular tex Mex 0:09:27.440 --> 0:09:30.800 food chains sold nearly half of all food orders via delivery, 0:09:31.040 --> 0:09:34.680 up from just eleven percent in twenty nineteen. To recoup 0:09:34.720 --> 0:09:38.360 the cost of commissions to Potley now charges sevent more 0:09:38.480 --> 0:09:42.600 for delivery compared with in store purchases. These apps are 0:09:42.600 --> 0:09:46.400 also expanding into other delivery sectors like groceries, drug stores, 0:09:46.440 --> 0:09:50.080 and alcohol. McCarthy said, I think this is the real 0:09:50.240 --> 0:09:53.880 key to unlocking the potential profitability of the model. You 0:09:53.920 --> 0:09:56.240 can have the same driver for filling many orders on 0:09:56.280 --> 0:10:00.720 the same run without having to wait, and Uber Eats 0:10:00.840 --> 0:10:04.000 is capitalizing on its double identity as a ride sharing app. 0:10:04.400 --> 0:10:06.840 A new feature on the Uber app allows writers to 0:10:07.000 --> 0:10:09.440 order and pick up a meal during their drive, or 0:10:09.520 --> 0:10:17.360 to have a meal delivered to their destination. Today's episode 0:10:17.400 --> 0:10:20.080 is based on the article who if Anyone makes money 0:10:20.160 --> 0:10:22.720 off food delivery apps like Uber Eats on how stuff 0:10:22.720 --> 0:10:25.480 works dot Com written by Dave Rouse. Brain Stuff is 0:10:25.480 --> 0:10:27.600 production of by Heart Radio in partnership with how stuff 0:10:27.600 --> 0:10:29.520 works dot Com, and its produced by Tyler Clang with 0:10:29.559 --> 0:10:33.000 assistance from Ramsey Young, four more podcasts, My Heart Radio, 0:10:33.160 --> 0:10:35.840 visit the heart Radio app, Apple podcasts, or wherever you 0:10:35.880 --> 0:10:37.160 listen to your favorite shows.