Sweet and sour of food-delivery boom

Sweet and sour of food-delivery boom

Giant online platforms such as Uber and Airbnb are portrayed as disrupters who improve markets for consumers. Let's hope we don't look back on them as pirates who made a killing because governments failed to regulate the on-demand economy.

Consider the fast-food industry. Uber Eats, Menulog and others have capitalised on and fuelled growth in food delivery. If Australia continues to follow United States trends, weekly spending on restaurants and takeaway food will eclipse that spent on groceries.

Food couriers have made takeaway food more convenient, reliable and attractive. A few clicks of an app and food from a wider range of restaurants is at your door, typically within the hour.

They have also exposed restaurants to a larger customer base. Some cafes that were struggling, now do brisk trade; online ordering and delivery saved them.

Bicycle food delivery in the Sydney CBD.

Bicycle food delivery in the Sydney CBD. Credit:James Brickwood

Food couriers deserve their spoils for solving a problem for consumers and restaurants. But what happens when one or two food couriers become giant food-delivering "utilities" and have too much power over restaurants and consumers?

Courier businesses were in the news last month over claims they are exploiting delivery riders. Fairfax Media reported a survey showing three in four riders believe they are paid below the minimum wage. One I heard on talkback radio said he worked five hours to earn $28, had no insurance cover, sick pay or other entitlements. Tax and superannuation were not considered.

The problem, of course, is that the food couriers' business model relies on contractors who work for on-demand payments. The model fails if riders are paid while waiting for jobs or have entitlements that most workers take for granted.

As the media focus on delivery riders, other risks are being overlooked. How long until some casual restaurants depend almost entirely on an online ordering platform for their sales? The big delivery platforms could have dangerously high market power.

Loading up on the Uber Eats orders at Biggie Smalls.

Loading up on the Uber Eats orders at Biggie Smalls.Credit:Kristoffer Paulsen

One owner I know says 70 per cent of his cafe's revenue comes from an online ordering platform. His business would be dead without it and he praises the service. But his cafe has no defence against the platform's price rises or moves to take more of his profit margin.

A Chinese restaurant I visit occasionally put its prices up 20 per cent overnight and reduced the menu range. When I asked about the changes, the owner said he had no choice: the food-delivery platform took a fat commission on sales and he offered fewer dishes to speed up cooking times. He had to lift prices to maintain margins.

In fairness, restaurant complaints about paying 25 to 35 per cent commission to food couriers need context. The cost to the store of having its own driver, transport equipment and insurance is close to that anyway, say some restaurateurs. Extra online orders in theory make up for the loss of margin, although it's curious that more cafes are jacking up their prices lately.

My concern is what happens when the big food-delivery companies consolidate into one or two. Food delivery is all about scale: a couple of giant operators is more efficient than a handful of competitors.

Other online markets, such as property advertising, typically have a market leader, a challenger and not much else. They benefit from "network effects": more advertisers attracting more visitors, which in turn attracts more advertisers.

Will tens of thousands of small restaurants and cafes eventually rely on one or two giant delivery platforms for the bulk of their revenue?

And what happens when millions of Australians spend more on eating out than cooking at home, and rely on one of the giant couriers for a chunk of their weekly spend? My guess is that food deliverers will use their immense pricing power to lift profits.

As the on-demand economy grows, leading online delivery platforms will look more like utilities than websites. But unlike power, gas or water utilities that monopolise a market, the on-demand economy seemingly has free rein because of a lack of regulation.

I'm all for free markets, disruption and entrepeneurs who seize opportunity. I detest excessive regulation that punishes consumers through higher prices or rewards lazy industry incumbents. Nobody can blame the on-demand food couriers who build giant ecosystems of companies and customers – and exploit their pricing power as needed.

But it's troubling when thousands of small businesses rely on a handful of food-delivery platforms for their livelihood, in a low-regulated industry. Imagine if regulators required food couriers to pay their riders more? Will the courier pass on extra costs to restaurants with yet higher commissions, and will that be passed on to customers?

Regulators must ensure there is sufficient competition among food couriers and that businesses and consumers who use them are sufficiently protected.

Small restaurants should retain multiple sales channels wherever possible. Relying on one food-delivery company, as attractive as it is in the short run, is dangerous if the business cannot survive without it. The greatest defence against courier price rises is having options.

Sadly, I see too many restaurants wrecking their business in the pursuit of quick online sales. Regular customers suffer from online-driven price rises, longer wait times as more food is picked up by couriers, smaller menus and sometime lower food quality (as cooking is rushed).

Yes, online food-ordering and delivery platforms are an important, growing part of the hospitality sector. Casual restaurants that avoid them completely could be left behind. The challenge is getting the right balance: using them sensibly to boost sales, but not so much that the business lives or dies on the whim of giant platforms that control order flow.

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Tony Featherstone writes on Personal Finance specialising in Superannuation & SMSFs, Specialist Investments.

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