Claiming that food delivery apps are purely rent extraction

Question

I engaged in an argument with a friend about whether takeaway food ordering apps had any 'value'. I tried to persuade him that they were rent extraction enterprises but he wasn't convinced. So I want two things here. Firstly what the weak points of my argument are and secondly how I can articulate my points better.

My position was that apps are being used to provide marginal benefits to consumers who then use them at great expense to the restaurants that actually prepare the food. However, if those that benefit from the app (hungry consumers) had to shoulder the cost incurred rather than the restaurant, they would choose not to use the app. By this I mean if the money paid by the restaurant to the app firm was added as a surcharge to the customer bill, they would pick up the phone instead of using the app. Therefore because those who enjoy the limited benefits of the app would not be willing to pay to service the app, the app has no value and is a rent seeking enterprise by a tech firm to extract money from takeaway restaurants.

Answer 1

at great expense to the restaurants that actually prepare the food

Your premise seems to be that the restaurants are somehow losing out.

The key though is that (if done right) all three parties (the app company, the restaurant, and the consumer) should benefit. The reason is that through economies of scale (delivering for multiple restaurants) and perhaps other factors, the app company is able to organize and execute the delivery at a lower cost than the restaurant would be able to.

One piece of evidence that all three parties benefit is that all three parties continue to use this arrangement.

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Note that with certain countries and certain apps, the delivery app companies are actually losing money. Venture capitalists throw money at them hoping they'll end up as the "winner-takes-all".

Rarely though is it the case that the consumer or the restaurant loses from this arrangement. A consumer who finds this a losing proposition can quite easily stop doing business with the app. Likewise with any restaurant.

Answer 2

In addition to @KennyLJ 's answer, I think it's worth pointing out that your points require some pretty restrictive assumptions about the demand for food delivery. Some individuals might substitute calling and placing an order with going online, but certainly not all. Given that the app itself might encourage some people to order delivery (or take out) who would have otherwise prepared their own meals, it's very possible that both the app and the restaurant come out ahead.

Furthermore, we should consider information asymmetries, like search costs, which are reduced by the existence of the app. Before it was as simple to search for options that satisfied basic requirements, consumers might have simply reverted to "trusted options" (like major chains) instead of trying local options. (Note: I realize that Google still exists which reduces search costs, but I think food apps might be even more effective- apps like Grubhub allow for a more effectively constrained search based on relevant parameters, like no delivery fee or no minimum, etc.).

Finally, it should be pointed out that many restaurants might not have offered delivery before the introduction of apps like Grubhub (which will occasionally deliver using their own network of drivers) because it wasn't profitable. Thus, these apps may substantially increase the business these outlets are able to attract.

In short, I agree with the other answer, and your friend's points- there are observable, clearly defined efficiencies that food service apps are able to provide. And while some restaurants may be hurt by them, it certainly isn't "purely rent seeking."

Answer 3

In my youth, pizza delivery was my way to make money, so I have some understanding of how the economics work in practice.

1. Taking orders is expensive. It takes several minutes and can require that the order taker clean their hands before and after taking the order. Before because it's hard to read something covered in tomato sauce; after because they were just touching something that was not food and may not be clean. Or they have to have dedicated order takers.

   So not taking the order over the phone and instead having the app do it is in and of itself a gain for the restaurant.

2. Marketing is expensive. The app is replacing both the yellow pages (telephone book) and circular (mailed to the home) advertisements.

   Again, spending those advertising dollars on the app rather than the traditional methods can be a gain for the restaurant.

3. Taking payment for orders is expensive. Again, this can take several minutes of someone's time and require multiple hand cleanings. Beyond that, you have to pay the credit card company, the armored car company, or take the risk of carrying cash to the bank (which also takes time).

   With the app, they generally take the money and pay the restaurant by check or direct deposit.

4. Food is cheap. Food is often only a fraction of the cost of sale. Most of the cost is rent, utilities, and labor.

   If a restaurant can make more food or use less labor (because people who were taking orders and payment are now making food instead), then they are ahead.

5. Apps tend to be integrated with the restaurant ordering system. So the app makes the order come out of the same printer as in-house orders. That interface is cheap, because the same basic system can be used by a large number of restaurants.

6. Unlike food prep, the order and payment time has to be done on demand. Restaurants can prep extra food when they know it will be busy. But they can't do anything about orders and payment taking. So shifting that outside the restaurant reduces their labor when they are busiest and increased labor is least effective.

7. Sit down restaurants are expensive. The restaurant has to send someone out to take the order, has to move the food from the kitchen to the table, has to take payment, and has to clean up the table and dishes afterwards. Much cheaper to get people to take the food away and use their own plates and silverware.

8. Delivery is expensive. The typical delivery takes about twenty minutes to bag the pizzas for delivery, take them out to the car, drive to the destination, carry them to the door, wait for someone to answer, get the money, give the pizzas, give the change, return to the car, drive back, take the empty bags into the restaurant. About ten minutes driving and ten minutes walking or waiting. The restaurant has to pay the driver at least minimum wage, plus a delivery fee (used to be \$.50; may be more now). That's at least \$2.30 these days.

   When Little Caesars started delivery, they added a \$2 surcharge. This suggests that their delivery costs were at least that much and probably more. They likely subsidized delivery at least somewhat. They did not offer free delivery then despite how common it was because they were a carryout shop that priced itself assuming carryout. They were about 25% cheaper than other pizza shops at the time, suggesting that delivery is in fact 25% of the costs.

Let's consider some of the costs replaced by the app:

• 2-3% credit card fee.
• Labor taking orders and payments.
• Labor for delivery (or eat-in).
• Advertising.

As I said earlier, just delivery costs are likely around 25% of the cost of a pizza order. Yet virtually every pizza shop offers free delivery. This is because most people would prefer to pay extra for "free" delivery rather than go pick up their food.

That's why restaurants are willing to pay 25% to have someone else handle delivery and taking orders and payments. That stuff is expensive. Your argument assumes that all that is free when the restaurant takes the order directly.

You may be correct that if the cost were added as a surcharge, people wouldn't pay it. But the relative price would not be 25% then. Because some of the cost would show up in the regular prices of the restaurant. And it's also worth noting that restaurants that do offer "free" delivery often do better than cheaper restaurants that do not.