Chicago Considers Capping Delivery App Fees for Restaurants at 5 Percent

Chicago’s City Council is considering an ordinance that would cap the fees that third-party delivery services, like Grubhub and DoorDash, charge restaurants. For the last two weeks, Mayor Lori Lightfoot’s staff has met with the Illinois Restaurant Association (and their counterparts in San Francisco), wanting to emulate an emergency executive order adopted earlier this month in the Bay Area. In San Francisco, delivery services must cap fees at 15 percent.

Ald. (32nd Ward) Scott Waguespack is the chief sponsor of the proposed ordinance. The Chicago version of the policy is tighter, restricting fees to 5 percent; typically, services like Grubhub charge restaurants 25 to 40 percent per order. While restaurant owners remain livid at delivery companies for what they perceive as price gouging, Chicago-based Grubhub maintains it’s being fair and needs the money to sustain its operations. Grubhub, which will announce its first quarter 2020 earnings next month, saw $1.6 billion in gross food sales in 2019, with $341 million in revenues, according to the company. A spokesperson declined comment in regard to the pending Chicago ordinance.

Violators would have seven days to refund fees that exceed 5 percent. If they don’t, or they continue to charge more than 5 percent, they could be fined $1,500 to $3,000 for a first offense. After the fifth offense in a 12-month period, violators could be fined $15,000 to $30,000, according to the proposed ordinance.

Third-party delivery companies’s fee structures aren’t new. There’s a 10-percent delivery fee, plus an additional marketing fee at Grubhub. Grubhub restaurants can also pay extra for more prominent placement on the platform. Restaurant owners have complained for years that the business practices border on predatory. Even before the COVID-19 public health crisis, which closed dining rooms and forced restaurants to depend on carryout and takeout orders, Chicago restaurant owners have asked to the city intervene. For restaurants (including those at food halls who already have to pay a percentage to landlords) online ordering and delivery hasn’t been a good business proposition because of the additional third-party fees. Even though customers’s desire for online order and delivery has grown in recent years, it’s rarely been a profitable addition to restaurants.

A recent TV ad campaign from Grubhub fuels additional anger. An open letter to Grubhub CEO and founder Matt Maloney slammed the company and the Santa Fe Reporter interviewed Erin Wade about her concerns. Grubhub’s ad, which contains language like “together we can save restaurants” didn’t strike the right chord with Wade, owner of Vinaigrette in Albuquerque, New Mexico. A Grubhub spokesperson said they will continue to advertise nationally.

Meanwhile, DoorDash — which also owns Caviar — issued a statement that called Chicago’s proposed ordinance unconstitutional. The release states the ordinance would “force food delivery in Chicago to a standstill.” DoorDash claims it will lead to higher costs for customers and lower earnings for its couriers. DoorDash claims the proposal is in violation of the state constitution and would be ripe to be challenged in court. The company agreed earlier this month agreed to temporarily decrease the fees it charges to restaurants. DoorDash believes it is acting in good faith.

In the middle of this is Lightfoot, who last month held a news conference at City Hall with Maloney. Together, they made an announcement that was supposed to serve as relief for restaurants coping with the pandemic after Gov. Pritzker closed dine-in restaurants and bars on March 17: Grubhub would be dropping commission fees to give restaurant owners a break. But that wasn’t the case. Grubhub, after the conference, clarified and announced they were deferring fees; essentially, it was more like a no-interest loan for restaurants which use their service.

Various restaurant owners tell Eater Chicago that they wondered about the clumsy rollout, as what was communicated between Grubhub and Lightfoot before the news conference didn’t seem to match what the company actually offered its clients.

Illinois Restaurant Association CEO and President Sam Toia was with Maloney and Lightfoot at the March news conference, and neither Toia nor the association have officially weighed in on newly proposed ordinance. The association is made up of a group of business owners with different political stances. There are those who are uneasy with the city restricting Grubhub, as they prefer government to stay out of business affairs; others want Grubhub checked and feel the city should adopt an ordinance that would help longterm, not one that just serves as a bandage during the pandemic.

At the same time, one restaurant owner — not active in the association — relayed a conversation with a key association member furious with Grubhub. He reportedly told the owner that Grubhub was “ruining the industry” and that he wanted to “punch Maloney in the face” for how the company handled the news conference.

Now weeks later, the ordinance introduced on Wednesday seemingly has the future beyond COVID-19 in mind, “to protect its vibrant restaurant community from excessive price gouging at all times.”

Crain’s first reported news of the ordinance on Tuesday.