Food delivery apps are a lifeline for restaurants during the pandemic, but at a high cost

Third-party apps like DoorDash expand restaurants’ geographic reach and customer base, but service fees cut too deeply into their bottom line, say some East Bay businesses.

Sean Hagler with a to-go order at Smoke Berkeley. Hagler has signed on with three food delivery apps, Grubhub, DoorDash and Uber Eats. Hagler says that while it does keep his kitchen busy, Smoke has to pay each service 20% of each order made through the respective service. Photo: Pete Rosos

When Michael “Sean” Hagler first partnered his Texas-style barbecue with on-demand delivery apps DoorDash, Grubhub and UberEats, he saw it as an easy, low-stress way to make income on the side. “It was like being open eight days a week,” said Hagler, pitmaster and general manager of Smoke Berkeley, a business he runs with chef-owner, and his mother, Tina Fergusson-Riffe.

Readers may know Smoke from when it was at its old location at 2434 San Pablo Ave. It moved inside Spats in downtown Berkeley in August 2019. “We’re known for serving our food with a lot of Texas hospitality, being very aware of the community, and that everyone has a place,” said Hagler. “We want everyone to feel comfortable.”

Pre-pandemic, Smoke had been doing around $1,200 a week in sales via third-party delivery apps, paying around $400 in commission, and netting around $800 for the business. Roughly the equivalent of an extra Monday’s worth of business. “We weren’t focused on [apps] saving our business, just looking to enhance our existing one,” said Hagler.

But since the coming of coronavirus, orders coming from third-party delivery apps have gone from a modest 15% at Smoke to nearly 80%. The jump has been jarring for the business.


For one, Texas-style barbecue runs low and slow. It takes Hagler 13 1/2 hours to smoke a brisket, which makes for a limited supply. But none of the delivery apps are very good at traffic control, allowing customers to order items after Hagler has sold out for the night. “When I run out of brisket, I can’t just pop a new one in the microwave,” he said.

The situation can sometimes lead to frustrated customers, who then call him to complain because third-party services have incorrectly estimated the size of his business. “They’re thinking we’re the Cheesecake Factory with 60 people in the kitchen,” said Hagler. But that inconvenience is minor compared to the costs of conducting business almost entirely over third-party apps.

A Smoke Berkeley to-go order waiting to be picked up. Photo: Pete Rosos

Say a customer’s order total at Smoke comes to $44. Apply Berkeley’s 9.25% sales tax on top, and the new total is $48.07. So far, that cost is the same for in-house diners as it is for customers who call in the order themselves and do their own curbside pickup. Perhaps even leaving an optional tip for Smoke’s four employees.

But for customers who hire a third-party delivery app, their total cost must also include a service fee (around $4.30) and a delivery fee (roughly $3.99) for a total of $56.36. (These are rough figures as customer distance and demand can affect both service and delivery fees.) Customers using DoorDash also have the option of leaving a tip for the courier. Say $9, for a new total of $65.36.

Now, here’s how that money breaks down. Of that hypothetical $65.36 paid by the customer, $44 will go to Smoke, $4.07 will go in taxes to the city and state, $8.29 goes to DoorDash, and the entirety of the tip, $9, goes to the courier.

But what many customers may not be aware of is that third-party delivery apps also charge restaurants a combination of service fees. These fees include delivery, commission and marketing, though marketing is typically an optional, additional expense. Said another way, the restaurant also has to pay for the order.

Pre-pandemic, those service fees could total as high as 30% of menu price. However, since July, Berkeley and Oakland have capped service fees that third-party apps can charge. In Berkeley, service fees can be no more than 20% (up to 15% for delivery, and up to 5% commission). In Oakland, total combined service fees, including commission, charges and fees, are capped at 15%.

So, to continue the scenario, while the customer pays Smoke $44 for their order, Smoke will also then pay DoorDash $6.60 for delivering their product, and $2.20 for brokering the sale. Adjusted, the restaurant comes away with $35.20 on the order, and DoorDash makes $17.09 in total.

AppDeliveryCharges

Restaurants were already running on slim margins before COVID-19, and barbecue is no exception. It is time and labor intensive, the meat is expensive, the energy bills run high, and Hagler doesn’t have another 15%-30% percent to cut off his bottom line.

“When I tell people that we’re being charged so much they’re all ‘Oh my God, I didn’t know,’” said Hagler. “Meanwhile DoorDash is crowing about all they’re doing for small business.”

When contacted for comment, DoorDash replied that fees are a way to assure quality customer service, pay couriers meaningful wages and drive business to restaurants. According to a provided statement, DoorDash believes price controls could negatively impact businesses by causing owners to restrict menus only to those items that make most financial sense, and could also discourage customers.

Hagler doesn’t feel the quality customer service is there. Though the majority of interactions are uneventful, the service incentivizes actions that might make good financial sense for the courier, but can be harmful for the business. For example, couriers might wait on multiple orders at once to save on driving. But this can result in cold or stale delivery for whichever customer comes last in the queue.

This has been a frequent problem for Hagler. Since he is located near several other eateries, couriers will collect from nearby restaurants, stacking orders, before driving to the delivery area. When customers then receive cold or late food, they call Hagler to complain. “It probably happens at least once a day,” he said.

Smoke Berkeley owner Sean Hagler behind the counter at Smoke Berkeley, which operates inside Spats. Photo: Pete Rosos

Still, he would rather opt-in than out. Third-party apps are too big to ignore. As Smoke is unable to afford to hire its own fleet of delivery drivers, there is a big market benefit to work with them. They broaden Smoke’s geographic reach, expand its customer base and keep the restaurant visible. And in 2020, they’ve been the biggest lifeline keeping Smoke open. Hagler can’t afford to lose the service. As costly as it can be to run a restaurant off third-party delivery apps, it would be even costlier to drop them.

But the operating risks are unevenly distributed. A poor customer experience reflects worse on Hagler than it does on the delivery service. A dissatisfied customer is more likely to stop buying from Smoke than to stop using an app. According to Hagler, restaurants are more responsive to customer concerns. That may very well be because so many independent restaurants can’t afford to lose any customers, and so are more willing to listen to a customer problem and to try to resolve it in a way that large national apps may be less inclined to.

Asked if he felt that apps like DoorDash and UberEats are gambling with his restaurant’s reputation, Hagler had a ready response: “Absolutely,” he said.

Finding workarounds to delivery app fees

Even though apps like DoorDash and UberEats have yet to turn a profit, they can both lose money and have their income refreshed through investment. (And the recent passing of Proposition 22 is also a boon, as it allows ride-hailing and food-delivery businesses to continue treating their drivers as independent contractors rather than full-time employees.) This option is not available to small businesses. When they lose revenue they close.

“You don’t go into this wanting to lose money, but you know you’re not opening a tech company,” said Greg Poulios, owner of two-year-old Cal-Italian restaurant Creekwood, located at 3121 Sacramento St. in Berkeley.

Until recently, Creekwood, like most restaurants, was operating solely with takeout and outdoor dining on the sidewalk and at the patio. “I can say that sales percentage-wise, we are about a third of where we used to be,” he said. “What we would do in a week now is what we used to do in a Saturday.” (Creekwood reopened indoors at 25% capacity on Oct. 23, when Alameda County restaurants were given the green light from county and Berkeley health officials.)

Creekwood owner Greg Poulios sits at a table in the restaurant with a to-go order in front of him. Photo: Pete Rosos

Like Hagler, Poulios has had to make a hard pivot to delivery with a comparable amount of business — roughly 80% — now being done through third-party apps. “We use Caviar and DoorDash,” said Poulios. (DoorDash acquired Caviar this past August, but still maintains a separate platform for the app.)

But where Poulios differs is in how he connects to DoorDash. Poulios prefers customers use the Toast ordering system. Customers who use Toast to order from Creekwood have the option to pick up their order in person, or to have the order delivered with DoorDash. Customers who select the first incur no additional fees. Customers who select the second, have the usual service and delivery fees associated with DoorDash. So, Creekwood partners with Toast, and Toast partners with DoorDash.

That may sound like a more complicated arrangement, but it’s actually simpler for Poulios and saves him money.

Creekwood line cook Morse Solorzano fries potato gnocchi while chef Mark McGrath finishes a pear tartine. Creekwood uses Toast for orders, which gives customers the chance to tip restaurants staff when they place their orders. Photo: Pete Rosos

When a customer chooses to have their order delivered with DoorDash, Toast charges Poulios a flat service fee of $7 and gives him the option to pass that fee along to the customer. “It’s allowed us to quickly transition into a pickup and delivery restaurant,” said Poulios.

Also, Toast gives customers the chance to tip Creekwood staff when they place their orders, and to tip their DoorDash courier separately.

For Poulios, the preference is clear, and he would prefer that all customers place their order via Toast. “But we’re not shutting out the regular DoorDash because we’re not going to shut out the opportunity to do more business,” he said.

A restaurant partners with DoorDash

Services like DoorDash like to point to how they enable independent businesses to remain open, potentially even increase earnings, during the pandemic. “The odds of staying open are six times better for merchants on DoorDash than those who aren’t,” said a DoorDash spokesperson via email, “and nearly two-thirds of merchants say they were able to increase profits during COVID-19 because of DoorDash.”

To that end, DoorDash has invested in its first eatery. The service has joined with Burma Inc., the company behind Burma Superstar, to co-launch Burma Bites, a quick-service restaurant custom-built for delivery via DoorDash and Caviar. The brick-and-mortar opened at the end of October at 4911 Telegraph Ave. in Temescal, just up the street from the Burma Superstar Oakland restaurant.

The limited menu at Burma Bites includes many of the popular items from the Burma Inc. empire (such as tea leaf salad, garlic noodles and fiery braised tofu) and some exclusive items, unique to Burma Bites, such as Mohinga wings (baked chicken wings tossed with lemongrass, ginger, and turmeric) and sweet platha and creme (a crepe-style dessert with coconut creme, strawberries, crushed peanuts, and mint). Customers can order via the DoorDash app or website, or the Caviar app, for delivery in a radius of three to five miles from the Temescal location, which includes portions of Berkeley and Alameda, as well as Oakland.

In a pandemic year, the decision to open a takeout only restaurant, co-launched with a dedicated delivery service, made good economic sense to Burma Inc. owner Desmond Tan.

“Through our partnership with DoorDash, we are rethinking the possibilities of our founding vision through our first delivery-only restaurant,” Tan wrote in a press release. “At such an uncertain time, we’re excited to introduce this new model that enables us to continue to bring Burmese food and culture to the community in a safe and accessible way.” (Berkeleyside reached out to Tan multiple times for an interview but did not receive comment by the time of publication)

Although Burma Bites was launched specifically with delivery in mind, it is still possible for customers to order in person and pick up their takeout themselves. The same option is also available at Smoke — a restaurant that was not built for mass orders and quick turn delivery — as pitmaster Sean Hagler would like to remind readers.

“We don’t find ourselves to be backwards thinkers. We recognize that technology is destined to enter any business,” said Hagler. “I just wish that before one of our future customers, or our old customers, before they click ‘send’ on the computer, I wish they could just think, ‘I’m only a mile away.’”

Hagler hopes that customers will consider going the semi-old fashioned route of telephoning in their order and then doing their own pickup curbside. “I’ll even give them 10% off their entire order if they do it that way,” said Hagler.

Customers would save money, and it would be less costly for Smoke as well. A 10% discount is, after all, still less than any delivery fee.