Are GrubHub and DoorDash the Next Vertical Monopolists?

While much of the US economy limped through 2020, one sector saw enormous growth: food delivery apps, like Grubhub and DoorDash. Their premise is simple, in exchange for providing a payment platform and delivering the food, these delivery apps take a percentage of the revenue on every sale. Since the apps themselves can leverage an enormous fleet of contracted drivers paired with state-of-the-art algorithms optimizing delivery speed, they can deliver food faster and cheaper. In theory, this is a boon for the COVID-strained restaurant industry. In practice, the meteoric rise of these firms has dealt a major blow to their ‘partner’ restaurants, and their long-run plans for in-house delivery kitchens could finish the job, as Maureen “Moe” Tkacik   of the American Economic Liberties project outlines in Rescuing Restaurants: How to Protect Restaurants, Workers, and Communities from Predatory Delivery App Corporations.

As Tkacik explains, the growth of both Grubhub and DoorDash has been characterized by their willingness to use exploitative tactics to coerce restaurants to join and stay on the platform. Grubhub in particular has been accused of ‘cybersquatting’ – buying up URLs with very similar names to local restaurants’ real website URLs, and then leveraging search engine optimization to ensure Grubhub’s links appear first in search results. This ensures that they get a commission on every online order, take-out or delivery, rather than just in-app delivery orders. DoorDash, on the other hand, has been accused of web-scraping and trademark infringement to add menus of entirely unaffiliated restaurants to their service, even hiring call center employees to call in orders posing as customers and having drivers pick them up incognito.

One might think that, despite the unsavory tactics, an abundance of competing delivery services would create higher service standards and low commission fees. If one of the few delivery app options charged a higher fee or took longer to deliver an order, a restaurant could charge a higher price on that platform to compensate. Enter the ‘No-Price Competition Clause’ located in the fine print of these companies’ partnership agreements. This clause forces restaurants to price dishes uniformly on each platform, which has a chilling effect on restaurant owners’ autonomy. With the clause in place, the apps can compete using often mandatory coupons and loyalty programs that come directly out of restaurants’ pockets, instead of competing on the basis of commission costs. Combined with the apps’ unwillingness to reduce commission fees of up to 40%, even after fee caps are set by local ordinances, the power these apps wield over the food service economy is already apparent and growing with every delivery.

In addition to getting a piece of the cut on virtually every delivery and takeout order made online, both apps collect rich datasets on eating preferences and restaurant performance. Armed with the ability to forecast eating habits on an unprecedented scale, they have begun creating ‘ghost kitchens’ – unmarked industrial kitchens in low foot traffic areas, designed solely for delivery orders. Without the overhead of a traditional restaurant – higher rent in an urbanized area, front of house staff, maintenance costs of a dining area – these hyper-efficient mega-kitchens have the potential to cannibalize the app’s partner restaurants and ultimately could result in a vertically integrated oligopoly on food delivery. These ghost kitchens are distinct businesses for now, though the ties to the apps themselves are tight through executive leadership. Uber founder Travis Kalanick founded the biggest so far, CloudKitchens, and venture capital Softbank, the single biggest investor in DoorDash and Uber, is backing Reef Kitchens to doubt their practical independence. While Amazon has recently come under fire for replicating the products of third-party sellers on their platform, “the rise of [ghost] kitchens in the midst of an unprecedented restaurant industry bloodbath has attracted virtually no scrutiny” according to Tkacik.

Tkacik ends her piece by laying out potential avenues for restoring competition to the delivery app marketplace and creating a fair playing field for restaurateurs and shareholders alike:

Investigate and prohibit further ‘cyber-squatting’ and intellectual property theft by delivery apps.

Restaurant owners do not have the suite of data scientists and search engine optimization specialists that the apps themselves can employ to ensure their websites out-compete cyber-squatters, nor do they have lawyers on retainer to defend their intellectual property from trademark infringement. The apps ought to compete on the basis of commission costs for restaurants and delivery quality for consumers – and through investigation and prosecution by the FTC and/or state attorneys general, they could still do so.

Prohibit ‘No Price Competition Clauses’ in delivery app partnerships.

Price parity ensures that the apps do not have to compete on pricing. Similar FTC investigation and prosecution here should be as simple as reading the contracts themselves – and removing these clauses would force the apps to compete for low commissions and quality service, even with the restaurants themselves who may be willing to undercut the apps to entice in-person diners.

Disallow delivery apps from leveraging data collected on their services to create ‘ghost kitchens’ through ‘purpose limitations’ and prevention of vertical integration.

The apps themselves should not be able to use the data they obtained through coercive practices to competitively exclude their own partner restaurants. A purpose limitation akin to the Fair Credit Reporting Act, or FTC antitrust enforcement itself, could disallow the apps from using their collected data to create third party kitchens to compete in their own marketplace, either through in-house or contracted ghost kitchens. While such FTC action or legislation would likely be slow, the Department of Justice is already investigating a similar matter with Amazon’s in-house products, and a precedent set by antitrust enforcement there could engender political will to enforce similar rules here.

Already operating on razor-thin margins, restaurants simply do not have the resources to fight the corporate powers that have manipulated them during the COVID-19 pandemic. While the vertically integrated model of app-controlled ghost kitchens likely leads us to fast delivery at low prices, what does it mean for the 10.5 million employees across 670,000 restaurants that give the US service economy its character? Before these behemoths can dominate the service industry with ghost kitchens, there is still time to ensure that our favorite dives and eateries survive 2021 and beyond.