The Cost of Convenience 

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Four earnest guys are crammed onto a couch, practically sitting in each other's laps. Here are a mix of undergrads and grad students at Stanford. This may sound like a college presentation, but it's actually a pitch for the chance to attract millions of dollars in investments. These guys are trying to get into why combinator. That's the Harvard of Silicon Valley startup accelerators. It's where the most ambitious entrepreneurs go for early funding and coaching in return for a cut of their startups. So it turns out restaurants in Palato don't deliver even though they really want to. This is Tony Schoo. He's smiling sort of nervously and it kind of seems like he's reading rehearsed lines off of cue cars. But their consumers are craving for it, but the places that the consumers love just can't deliver. Tony is the guy they have lined up to fire off the fastball. And we also found out about these delivery drivers who had a ton of spare time and they all wanted an extra cash during that downtime. That's the pitch, why not connect all those workers who apparently had a lot of free time with the restaurants in Palo Alto that wanted to offer delivery. And that's what we're building at DoorDash. The video worked. Why combinator accepted Tony Schoo and the guys into its exclusive program. And in a matter of just a few years, that company, pitch from a couch near Stanford, became a major player in the business of restaurant delivery. Now the biggest meal delivery services in the United States are DoorDash, Uber Eats, and GrubHub. Taken together, the companies that own those platforms are valued at more than $130 billion. That's bigger than Chipotle, Pizza Hut, Taco Bell, KFC, and the Olive Garden combined. Today, the Palo Alto that Tony Schoo described in his why combinator pitch, the city filled with restaurants that don't deliver. I mean, can you even imagine that city now? Delivery apps have become so ubiquitous that they're just another routine part of our lives. Alright, I got a mask up now and go meet the delivery guy. I live in Harlem with my wife, Salimah. One night we ordered some delivery from a restaurant called The Hand Pull Noodle. I had never been there in person. It came up on the apps. As we unpacked my deal, Salimah and I noticed a flyer tucked into a menu that came with our order. It was headlined "Please read in all caps." And underneath that was an appeal. The note said "Please order directly from your favorite neighborhood restaurant whenever possible." Because Grubhub and Seamless take a cut of each order, "simply for being the middleman." By the way, I should mention Grubhub own Seamless. You may actually see more notes like this. That's because restaurant owners and drivers say that on-demand delivery, as it's designed now, may not be sustainable. They say they're hurting, even though these are the very people the apps that they wanted to help in the first place. Welcome to Land of the Giants. I'm Amadal Yuckber. I'm a food writer and audio journalist. And I'll be hosting our first ever mini-series delivery wars. This is a unique season for Land of the Giants because we're not focusing on one big company. We're examining a whole industry, restaurant delivery. And since that industry intersects with tech and the restaurant business, delivery wars is a collaboration with Recode and Eater, Fox Media's Food Publication. We're covering delivery apps this season because these companies are giants in the making. And they're taking the same path that the biggest tech companies in the world took before them, companies like Amazon, Google and Netflix, a path of disruption and the pursuit of convenience. All the ways third-party delivery apps are upending the restaurant industry, defining the terms of the gig economy and transforming our culture, that's still unfolding. Which means this is the perfect moment to look more closely at the rise of these apps. The key players who ends up in the lost column and who comes out with a win. Back in 2010, in a slightly less online age, Great Chapman worked the night shift at a doggy hotel in Atlanta. Chapman has come a long way since those dog days. She's a freelance writer and journalist now, she's written for Eater as well. But back then, Chapman had one recurring problem. After feeding all those pups, she needed to figure out what to feed herself and the nearest thing was a drug store. But then, something rescued Chapman from eating frozen meals all the time. Early 2010 or so, I found out about a company that had launched here in Atlanta called Zifty. Zifty partnered with local restaurants in Atlanta to coordinate delivery online. That alone was a big deal back then. The app connected all sorts of restaurants, not just pizza and Chinese. It was a whole new world of luxurious abundance. At that moment in time, the fancy burger places were starting to happen and it was kind of my first brush with burgers that had AOLI on them. Back then, online food ordering was mostly defined by local startups like Zifty. As more and more people like Chapman started noticing the apps, so did more entrepreneurs and investors. Customers saw fancy burgers, startups saw the potential for huge paydays. I think the delivery landscape really shifted around 2010 and onwards, so those teen years. This is Amanda Clute, Editor-in-Chief of Eater. So, seamless and grub hub had been around in 2004 and 5, but all they did basically was aggregate menus into a website and connect customers to delivering restaurants. They didn't yet provide their own drivers. Once you get to 2011, you get caviar and then door dash and postmates and uber eats. That's when you saw so many people enter the business and it kind of exploded from there. It was inevitable in a way. The tech industry introduced convenience culture for so many other aspects of our lives. With Amazon Prime, I can get toilet paper by tomorrow. My kid asked me a question, I can Google it and tell them the answer immediately. I can pull up any song on my phone immediately. There's this immediacy to our lives now that just did not exist before technology entered the fray and I think that translates very easily and seamlessly to food. It's not like the apps invented the concept of getting food immediately. Chapman could have always ordered a pizza to the doggie hotel, but she couldn't have gotten a turkey burger with A.O. Lee. On-demand delivery like this caught on with people, like a lot of people. Looking at the numbers is astounding. The NPD group, which is a market research company, has been tracking the number of orders made through the delivery apps for a while now. And if you look at the period from May 2017 to April 2018, more than 400 million orders came through third party apps. Now, compare that to the same period in 2020, more than 3.5 billion. I'll do the math for you, that's a 775% increase. Which means for a lot of us, delivery has become more of a habit than a treat. But not for Chapman. I have made a concerted effort to just do take out more, as opposed to having it brought to me. It's been a decade since Zifty opened up a world of possibility for Chapman. She's actually trying to order delivery less now. Because like many consumers, she has this growing awareness that small restaurants are struggling. And by ordering delivery, she might be part of the problem. Here's Amanda Clute again. that we have so many options at our fingertips for so cheap. Amanda is naming the big question about restaurant delivery here. Who's voting the bill? You may pay a delivery fee when you order food through an app, but often that's not really how much your delivery costs. The app and the restaurants are subsidizing your true delivery cost out of their own pockets, because the delivery infrastructure is expensive. You have to pay a driver, there's insurance for the driver, the apps themselves are expensive to run, and those are just a few of the costs. So, we consumers are getting a huge discount. Even if we pay, we're getting more than we pay for. This dynamic can really sting for restaurants, especially when they feel that their businesses are banning more of our costs than the apps. After the break, the way restaurants are absorbing the costs. Basically, it's like I have a new partner. His name is GrabHub, and they're other uber eats, and they're all taking their 20-25% cut. And I'm in business with them because I have no choice. 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At Topkins Square bagels in Manhattan, that scratch pad tradition is still going strong. They take your name. Christopher Puglisi is the owner of Topkins Square bagels, and he's been in the restaurant industry for years. He's old school, a scratch pad kind of guy. The digital future, where customers hardly interact with staff at all, Puglisi's suspicious of all that. He's all about the in-person connection. You can see it in the way he's designed the place. The walls are bright yellow and green, and there are vibrant paintings of New York City by local artists. Customers can look into the kitchen as workers make the bagels by hand. Oh my god. Those are some pillowy soft bagels. I see back there. Oh, going into the water. That's so amazing. I love watching that. Alright, so put this picture in your mind. The bagels are boiled and baked in the back of the kitchen. On the left, eggs and bacon are sizzling on the griddle. In the middle, there's an island, where a staff member is slicing Rosa bagels, putting egg or locks on, wrapping them up in foil, and then some of those sandwiches go to the front of the house, fulfilling those orders written on scratch pad. But other orders go sideways to the bar countertop. Where are you picking up for? Mario. Mario. Alright, cool. Alright, so he's checking it off on his phone. Taking off his bag. This area of the back was once intended to be a spot where customers could sit and eat and watch the food being made, much like what I'm doing. But Puglisi ripped out seating to make space for a waiting room for delivery workers. It wasn't meant for this, where you see these wedges those were for barstools. On the other side, you have Patrick. Patrick is someone that Puglisi hired to manage the orders coming through the apps. I arrived at 830 in the morning. For an hour or so, I watched Patrick setting out orders to delivery drivers consistently. He wasn't really interacting with customers or even other staff. He was interacting with three or four different iPads, primarily. Each delivery app requires its own device and a printer pumping out receipts. During rush hour delivery times, it can get chaotic. On a Saturday, it will just be lined with badge and one after the other guys and door dashers will come and pick up orders. Puglisi says before the pandemic, delivery wasn't really a priority for him. About 20% of his orders were delivered via third-party platforms. But then, in March 2020, the pandemic shut down the city. And when it looked like indoor dining wasn't coming back anytime soon. I went into like fight or flight and I was like, "I have to survive. What am I going to do to survive?" He had to make some compromises. One of the things I did was join every third-party app that I could. Now you can order his bagels on GrubHub, Seamless, DoorDash, UberEats, ChaoNow, and a couple of other apps too. And Puglisi admits the apps helped him get online. I know, I would never have been capable of setting up this system that they have myself. Puglisi was able to start delivering to a wider zone of customers. I know that they've invested a lot of time and money into developing their customer base and their platforms. And they've come up with great ideas. I don't knock them and they are a necessity. And I probably wouldn't have survived the pandemic without them, like I acknowledge all that. Over half of Puglisi's orders are now online orders. He needed to adapt to the moment and made some tough decisions. He said he had to lay off 30 members of his staff and he narrowed down his menu. That's how he was able to remain profitable during the pandemic. But that doesn't mean he's happy. The iPads in the back? That wasn't his vision for the store. He wants the scratch pad vibe, talking to regulars, getting to know their stories. And beyond losing touch with his customers, Puglisi has another problem with delivery apps. The other thing that I don't like is how they sort of, you know, and I'm Italian-Americans. So I see as the mafia reference. But they, they, I'm sorry. But it's very mafia-esque. Very like, hey, hey up. Or you're not going to make any money. Third-party delivery apps charge restaurants, commission fees every time an order comes through an app. And that is Puglisi's big problem with these services. They take what he feels is far too big a cut. Puglisi shared an itemized list of orders with us that came through the DoorDash app in the month of January. On January 31st, at around 9.30 in the morning, a typical order came into the bagel shop through DoorDash. The app charged the customer 11.95 total for the base order, probably a bagel, cream cheese, maybe some locks, the customer paid a delivery fee and a tip. But Puglisi had to pay too. DoorDash charged him a commission fee of $2.39 on the order, 20% of the total. And that 20% commission fee kicks in on every single delivery order that a customer places at Puglisi's restaurant through DoorDash. These fees add up. Puglisi showed us a grub hub bill from last year, $75,000 in orders, $15,000 in commission fees. Again, 20%. Puglisi says he could see paying a smaller fee, maybe 5% to 10%, the apps do bring in more customers. But. From a business that already has small margins, when you start going to 20%, 25%, 30%, you've gone way, way over the line. Like, you're basically now where the horse and you're whipping the horse. That's my problem. Razer, thin margins. This is a really common refrain. The restaurant owners we talk to speak about the small wiggle room for profitability. So they criticize these double digit commission fees, especially during the pandemic. During the pandemic, New York City Council passed an emergency cap, which prevents delivery apps from charging more than 20%. That's why Puglisi's rate is 20% right now. He acknowledges it's a big weight off his back. But the commission fee could be higher for restaurants in other cities. The apps are generally against government caps. But they say they're listening to the toll commissions are taking on restaurants. In April, DoorDash announced a tiered fee structure. Restaurants could opt into a 15, 25, or 30% commission fee, with the lowest tier being pretty bear bones. A smaller delivery radius and a higher delivery fee, covered by the customer. This ranking practice isn't new though. Crabhava has had tiered pricing for years. But the drawback of less commission is less reach, less promotion. And Puglisi doesn't like the system you. Take your money up, or we're going to bury you. Like, hey, if you agree to pay 25%, you'll come up first on all the searches. And if you don't, you know, you're going to be like 10th. And it just gets more and more and more. Puglisi feels like working in the system means you're damned if you do and damned if you don't. But a few miles uptown, another restaurant owner is experimenting with ways the system can work for him. [phone ringing] Did you expect this is Carol? The expat, like any restaurant, gets a lot of calls. And not all of them are orders. Actually, the majority are just questions. Yes, hi. Listen, the barbecue fried rice with the barbecue pork is just then a smaller or a large order. Whoa! It's pretty silly. These questions can get surprisingly into me real quick. Listen, I'm like two and a 15 pounds on my power lifter. Is that going to be, I wouldn't be probably two orders of that, right? In that case, probably, yeah. You just heard something important in that call, more than an oversharing customer. Because when that bodybuilder called the number for the expat he found online, he probably thought he was calling the restaurant directly, and he got through to the expat like he wanted, right. And this is key. The phone number was routed through a third party app first, which means the restaurant was charged a commission fee for this call. It's a charge that Andrew Ding, the co owner of the expat in Harlem, discovered in spring of 2020. He was reviewing his grub hub bill and noticed that he had been charged about $380 for orders that came through over the phone. And then I was just like, okay, well, let's just see what the calls were, and let's listen to them. Ding opened up his grub hub account and went to the page where all the phone calls were recorded, because restaurants can get access to the calls they're charged for for a set number of days to review them. And so I spent like hours sitting at my laptop and just like manually listening through every single one of these calls, downloading them, labeling them, and then kind of like organizing them into categories. And Ding discovered he was charged for all kinds of calls, for a call that went to voicemail. Welcome to the expat, our dahi room, and bar. He was charged $6.82. For customers calling with general questions about the menu or restaurant, that call was $7.14. For a customer calling to confirm an online order, he displaced, Ding was charged $6.72. That's on top of the commission ding already paid when the customer ordered online, double commission. While not all grub hub contracts we looked at say so, grub hub's contract with the expat says the company is allowed to charge a fee for phone calls that result in delivery orders. What that means is the fee is based on the average commission from the past six orders, and an algorithm determines whether to charge or not, whether a delivery was made on the call. But Ding knew, without a doubt, he was being charged unfairly, because he doesn't take delivery orders over the phone. He does take pickup orders over the phone, but he says of the $380 he was charged, only three calls were for pickup orders. The rest, Ding alleges, were predatory or fraudulent charges. He says he was charged for over 50 calls that resulted in no orders during that time period. He also says he emailed grub hub with his concerns and claims he got no response, so he performed his own audit, contesting each call individually. You have to do one for every single call, I had to do one for every single call, 55 calls. I literally had to send a separate email each time, and I was petty enough to do it. And look, we all know what a time-consuming headache it is to deal with customer service. Now imagine having to do that over 50 times. In April 2020, grub hub told Eater and Ding it would conduct an audit of the calls. Ding got a case number from the company. I asked him what happened with the audit, did he ever get his money back? Ding looked back at his records, and said he couldn't find any evidence that the audit ever happened. So he called a grub hub rep, gave him the case number, and Ding says they couldn't find any information on the case either. More than a year after he ran his own audit of the calls, Ding has no idea whether or not grub hub ever refunded his money. I also call grub hub. A spokesperson told me they couldn't share details of Ding's case for privacy reasons. Let's go back a moment. Grub hub has acknowledged these charges aren't a good look. And since January 2020, grub hub says it's changed that policy. It acknowledged that restaurants should not be charged for calls that don't result in orders. Improved its algorithm, offered restaurants an audit on Grub hub's dime in more time to review calls, and they also dedicated more staff to complaints. But those phone calls you heard that Ding was charged for, those came four months after Grub hub's policy change. Ding says he was still being charged for calls that didn't result in orders. When we spoke to Grub hub CEO Matt Maloney about these kind of complaints, he said the accusations were overblown, that they didn't account for much money. And that's true. Ding admits that $380 is not that much money out of his bottom line. But I hate feeling like I'm getting ripped off. Being ripped off by like a corporation takes on a whole nother level of annoyance. You're not just getting screwed over by some like random electrician you found on Craigslist. You know, it's like, yeah, it's the principal. Now remember that little note stapled to my order from the hand pulled noodle at the beginning of this episode with the deal. Andrew Ding is the mastermind behind that note because he also co-owns the hand pulled noodle. And while Ding is passionately critical of the delivery apps, the hand pulled noodle is actually designed to be delivery first. And it's done well in this app economy. The hand pulled noodle actually grew during the pandemic because we were already poised to capture the online orders when people went into lockdown. But even with that growth, Ding doesn't love the environment created by the delivery apps. I mean, there is, I'm not going to say that the platforms don't have a place because it's a marketplace. It helps for discovery. But what they've morphed into is basically modern day Mafia. Mafia. Ding brought that up completely on his own the same way Pagliese did when talking about the commission fees. Ding is particularly frustrated by Grubhub's marketing fee, which it charges as part of the commission. Grubhub defines this marketing fee as services such as customer acquisition, social media, and email marketing. But Ding, he feels like he's just paying a fee to be listed online. I think a lot of businesses became comfortable using their platform because it offered such instant exposure that they didn't think of this as marketing money. Because according to Ding, a flat monthly fee of marketing should buy more than just exposure. It should mean getting to know your customer base and cultivating those relationships on your terms, getting data, and then using that data to expand the business. But the apps don't typically give data like customer names, emails, or spending habits to the restaurants. Ding was pretty sure if he could just apply that same money to his own marketing efforts, he'd grow organically. So he did just that, started his own marketing campaign. I'm very aggressive with converting people from Grubhub to direct. Ding stays on Grubhub, so customers like me can find him, but then he tries to lure them away from the platform. I've gone out and professionally printed out double-paged flyers that I will staple to every single one of my Grubhub orders that basically says, "Thanks for finding us. If you could find it a way to order directly next time, maybe it'd be helped to us." This flying campaign has been a success for Ding. The majority of my orders now come through direct orders after implementing this whole campaign to try to reach out to customers and let them know about why they should order directly. The majority, like literally the majority of. I went from, like, yeah, I flipped it, including pick up, including pick up. Over a year into his gorilla marketing campaign, Ding saw massive growth in his direct customers. In an average month, Ding says the majority of his customers now order direct. Ding is also lowering the fees he pays to the apps in other ways. Grubhub offers a somewhat unique option where restaurants pay a lower commission if they provide their own drivers, which Ding takes care of through a courier app called Relay. Ding sets his own delivery fee on Relay. He decides how much of it he'll pay and how much he'll pass on to the customer. So Ding gets to prepare the food and fine-tune his customer service while taking home a bigger share of the delivery pie. But given how the app economy works, this is about as far as Ding can push his hacks. He's not getting off the apps anytime soon, not even for his other restaurants that don't focus on delivery. By the way, there's a clause in Ding's contract that states he isn't allowed to ask customer to order directly from the restaurant when they order on Grubhub platforms. I called him up to inform him about this before finalizing the story. I'm fully aware of it. In fact, I dare them actually enforce this. He says public consensus is on his side. Bring it on. Yeah, bring it on. Because no matter how hard he resists, the consumer needs a lot of education on what restaurants actually want. But a hack can backfire. When Ding was listening through all those phone calls Grubhub charged him for, he found this one. Yes, sir. I wasn't going to do Grubhub, but I got your notice on your bag. It's better for me to call you directly. It's good better for you, right? This customer didn't actually end up ordering food on their call. But it still costs Ding $7.14. That commission fee was tallied up along with all the other commission fees Ding paid that month. In New York City, as we mentioned, there's still a cap on those commission fees, 20 percent. But in most places, there are no limits on commissions. We see fees from 18 percent to 35 percent. But maybe not for long, says Eater's Amanda Clute. I think there's upwards of 60, maybe 70 different municipalities, whether it's a very small town or a city or even a state like Washington State, where they're saying some of the caps are as small as 10 percent or 15 percent. And the companies are pushing back on those, so some are just outright ignoring them. And then some are passing the cost on the consumer, which is getting criticism that think that's actually a good thing. Why is it a good thing in your view that the consumer gets more of the cost of the actual delivery? I think the consumer has been paying an unrealistic price for this product for a long time and it has been subsidized in this way that makes it invisible to them. So they see the cost on the menu and then it's delivered to their door basically for free, maybe with a fee here or there, but usually for free. And it's not free. It's costing someone in the end. So we know restaurant owners are chafing at their share of the cost. But here's the surprising thing, even with all that commission money coming to the apps. I think many of these services have not been sort of bottom line profitable. This is Jason Del Rey, senior correspondent for Recode. And we're going to hear from him in our next episode where we explore the origin stories of these delivery companies. Jason and Amanda have been keeping an eye on the earnings reports for the big delivery apps for years. So post 2014 when you have all of these major players on the scene, you started seeing them get a little more brutal and how they were competing. These companies have spent years losing hundreds of millions of dollars. And even after a global pandemic dropped a huge windfall in their laps, the companies are still chasing profitability. So what will it take to win the delivery wars? The bet here is that food delivery may not be a winner takes all model, but it'll be something close to that. Every one of our episodes this season will take up the question of cost. Who absorbs the true cost of convenience? What do we gain and lose from these services? And the price the consumer is paying right now? Is it realistic that it'll stay that low in the future? On the next episode, cost from the perspective of the apps themselves. You'll hear from their leaders and investors who are all trying to figure out a fundamental question. What will it take for their businesses to be consistently profitable in the long run? It was a big risk, but we believed in the company, we believed in what they were building. We saw the long-term value and profitability of that company if we could get there. And so we took the risk. Land of the Giants delivery wars is a production of Recode, Eater, and the Vox Media podcast network. Nor was was is the shows producer. This episode was edited by Lissa Soep and Megan Kane. Adrian Lillie engineered this episode with help from Brandon McFarlane. Alex Letterman is our fact checker. Our theme song was composed by Gautham Shriekishan. Thanks to Recode's senior correspondent Jason Del Rey and Recode's senior data reporter Ronnie Mola for their help with this episode. Sam Altman is Recode's editor-in-chief. Amanda Clute is Eater's editor-in-chief. Julie Myers is our showrunner and Nishat Kourwa is our executive producer. I'm Amadal Yachtberg. Land of the Giants is conveniently located on all of your favorite apps, Commission Free. Subscribe wherever you get your podcasts and leave us a review. We'd love to know what you think. Interrupted sleep headaches constant fatigue. For a lot of women these aren't three separate issues. In Perry, Menopause, and Menopause they're often the same hormonal story. Midi can help because your symptoms have answers. That's Join MIDI.com. JoinMiddi.com. CodeVox. New and exclusive holiday decor just launched online at the Home Depot. 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