Who Profits from Food Delivery Apps?

million orders during the same period in twenty nineteen. For restaurants, the popularity and convenience of food delivery apps provided a much needed revenue source to keep the lights on until the lockdown orders were lifted. And for workers who lost jobs during the shutdown and students who were sent home from college, a part time job as a food delivery driver was a flexible way to earn some extra cash.

But now lots of folks, including economists, investors, and workers rights advocates, are questioning the viability and ethics of the food delivery business model. Sure, consumers are hooked, but is anybody in the food delivery business, from restaurants to drivers to the app companies themselves actually making money on this. Before the pandemic, food delivery apps were niche services that

were mostly popular in big cities. But during the lockdown and after door dash and uber eats were downloaded by the millions and delivery service expanded into suburbia. The two apps now control eighty five percent of the US food delivery market. Both of these apps earned staggering amounts of money. In one Uber Eats clocked four point eight billion in

revenue infty increase over twenty nineteen. Meanwhile, door Dash's revenue jumped two hundred and sixty eight percent from twenty nine and continued to generate one point to eight billion dollars in quarterly earnings, which is why it's so shocking to learn that neither of these companies has turned a profit. For the article, this episode is based on How's to Work spoke with Daniel McCarthy, a marketing professor at Emory

University's go Sweata School of Business. He explained that delivery apps only pocket a small slice of the cost of each food order, and they've been spending a lot more on advertising their services and improving their technology than they've been earning from food deliveries. The delivery apps make what little money they pocket by charging restaurants a commission for

each order placed through the app. The standard commission is though door Dash has also introduced a tiered commission structure. The apps also charge a smaller service fee to the customer. According to an analysis by Deutsche Bank, the average door dash order during the pandemic has been worth about thirty six dollars. If door Dash pocketed, the company earned ten dollars and eighty cents, plus another two or so for

the service fee. That might sound like a lot per order, especially when it's multiplied by hundreds of millions of orders, but that twelve dollars and eighty cents is gross revenue. You still have to subtract the costs of doing business. The biggest expense for these apps is paying the drivers. Next are advertising and marketing costs, including those free promotional campaigns to attract new customers. And then there are returns

and refunds, which really eat into the bottom line. When all those costs are taken into account, a dootche Bank and other analysts have calculated that door Dash is left with net earnings of two point five to three per cent of the customers overall bill or for that average thirty six dollar order, just ninety cents to a buck twenty. So far, that slim margin hasn't been enough to propel the apps into profitability, even as they taken billions in revenue.

But what about the restaurant to use the apps. Let's take the case of Philip Fosse, a chef and owner of to Chicago restaurants, one Michelin starred and the other a casual barbecue joint. When the pandemic hit and in person dining was shut down, Fosse and his staff scrambled to offer curbside pickup and delivery. For a while, the delivery apps seemed like a godsend, allowing restaurants like Fosces to eke out some earnings until customers were allowed back.

But even when in person dining reopened, many consumers remained hooked on the apps. Foss wrote an eater in January, delivery apps are destroying restaurants, from mom and pop places to chefs with Michelin stars. They're a terrible deal. Fosse's complaint came down to simple economics. If customers choose delivery over in person dining restaurants lose way too much money to the commissions charged by door Dash and Uber eats.

Even when the apps commission was capped by lawmakers at or fifteen percent during to the pandemic, it's still left restaurants struggling to turn a profit on each order. A Foss used the example of a thirty dollar delivery order of smoked ribs, sides and a dessert from his barbecue joint. Even with commission capped at fifteen percent in Chicago, that

took four dollars and fifty cents off the top. Now, when he calculated the food and labor costs plus occupancy costs like rent, utilities, and waste removal, Foss was left with five percent profit or a dollar fifty on a thirty dollar sale. A Foss understands the attraction of food delivery apps for both customers and restaurant owners, but says the economics are unsustainable, especially if the apps go back

to charging pre pandemic commissions. Of He wrote, the restaurant industry has been cannibalizing itself by joining delivery services like grub hub, door Dash, and Uber eats. Okay, but how are the driver's faring. Let's look at the case of Mike Hayes, who worked as a chef for seventeen years before where he was laid off in March of at

the start of the pandemic. He started driving for door Dash, attracted by the flexibility of the working hours and door Dash's claimed that drivers earned an average of twenty five dollars an hour, But Hayes's experience was different, as he explained to Business Insider in March. But based in Portland, Oregon, a hot spot for food delivery, has logged forty five

hours a week driving full time for door Dash. His earnings ranged from a good week in which he made eight hundred dollars that's seventeen dollars and seventy seven cents an hour, to a bad week in which he made just two hundred dollars or four dollars and forty four cents an hour. And according to the website rides sharing

driver Haze's experience is typical. There are occasional unicorn orders that generate a big payoff, but there are also plenty of ten mile trips with long waits the restaurant for a three dollars score. The average pay the website said was fifteen dollars an hour A Dashers make money in two ways. The app guarantees them a base pay for each delivery based on the total cost of the order. On top of that base pay, dashers also make money

on customer tips. The more orders you complete in an hour, and the bigger those individual orders and tips, the more money you make a while delivery app drivers can improve their earning potential by working during peak hours lunch and dinner rush in geographic hotspots, there are still plenty of variables that are out of their control. A restaurant can get busy, forcing the driver to spend an hour on a small order, and people can be cheap with their tips,

and gas prices can go up. All of that eats into the driver's earnings. Driving for these app companies might make sense as a part time gig for college students or retirees, but it's hard to make a living doing it full time, and since app companies consider drivers contractors and not employees, they don't offer benefits like health insurance, retirement savings accounts, or worker compensation. So from the restaurants to the drivers to the app companies themselves, the math

of food delivery doesn't seem to add up. When the pie of a thirty six dollar order is divided among these three entities, all of them leave the table hungry. But is there a way to make food delivery profitable? Matt Maloney doesn't think so, and he should know. He's the CEO of greb hub, formerly the biggest name in the food delivery business. He told The Wall Street Journal in May food delivery is and always will be a

crummy business. He said that no amount of technological upgrades or logistical tweaks will make it profitable, which is why greb Hub pivoted to becoming an online marketing partner for restaurants instead. McCarthy at Emory isn't as down on delivery apps. His research specialty is measuring consumer engagement with products and services, and the data from these companies show that app users aren't backing off. He said that's the one very favorable

dynamic going on for the category as a whole. When people start to use a delivery app, they tend to use it more and more. Over time, the apps start consuming more and more of their food budget. He explained that one way for everyone to make more money and food delivery is simply to charge consumers more for the convenience. That's what Chipotle is doing. In the popular tex Mex food chains sold nearly half of all food orders via delivery,

up from just eleven percent in twenty nineteen. To recoup the cost of commissions to Potley now charges sevent more for delivery compared with in store purchases. These apps are also expanding into other delivery sectors like groceries, drug stores, and alcohol. McCarthy said, I think this is the real

key to unlocking the potential profitability of the model. You can have the same driver for filling many orders on the same run without having to wait, and Uber Eats is capitalizing on its double identity as a ride sharing app. A new feature on the Uber app allows writers to order and pick up a meal during their drive, or to have a meal delivered to their destination. Today's episode is based on the article who if Anyone makes money off food delivery apps like Uber Eats on how stuff

works dot Com written by Dave Rouse. Brain Stuff is production of by Heart Radio in partnership with how stuff works dot Com, and its produced by Tyler Clang with assistance from Ramsey Young, four more podcasts, My Heart Radio, visit the heart Radio app, Apple podcasts, or wherever you listen to your favorite shows.