UPDATE: Sept. 28, 2020: This article has been updated to include a statement from Postmates.
- California Gov. Gavin Newsom signed two pieces of legislation into law that would create regulations for the food delivery industry, according to the Los Angeles Times. The first initiative, signed on Wednesday, requires aggregators to sign formal, written agreements with restaurants before adding the company to their marketplaces and providing delivery.
- The second law, signed last week, requires food delivery platforms to ensure cleanliness and temperature controls during the delivery process, while restaurants will be required to place a seal on the bag before giving it to the delivery courier.
- While both laws take effect Jan. 1, the first law will likely have the most impact on food delivery, especially since these companies have been adding non-partnered restaurants to their platforms as a way to attract more customers. Restaurants have criticized this practice, reporting they have found incorrect menus for their restaurants online, received orders for delivery when they didn't offer it, and complaints from customers regarding orders they were unaware of.
This new legislation could be both good news and bad news for food delivery companies. The good news is that requiring an agreement with restaurants could help these companies gain a more trustworthy brand halo and more restaurant partners, which would lead to more commissions and create better relationships with restaurants. Non-partner restaurants don't pay commissions, and the fees are passed onto the consumer.
"We're proud of the role DoorDash plays in helping restaurants connect with new customers and generate additional revenue, particularly during these tough times," a DoorDash spokesperson said. "We intend to fully comply with this new rule once enacted and will continue to demonstrate the value of DoorDash and the variety of options we provide to support our merchant partners."
The bad news is it would greatly restrict an aggregator's ability to add non-partner restaurants, a strategy that has allowed delivery platforms to quickly add options to their websites and expand market share. It can also serve as a marketing tool that allows aggregators to show non-partner restaurants an example of the business they could be getting if they were to officially partner with the site.
"Governor Newsom has cut off a lifeline for 40,000 local California restaurants which have relied in part on Postmates to keep their access to delivery services during the Covid-19 pandemic," Postmates stated in a press release on Friday. "While Postmates almost entirely works with merchants in formal agreements, California businesses have also been able to test out delivery platforms during a pandemic at zero cost to restaurants, before formalizing contracts, a crucial benefit during a time of so much uncertainty where businesses need to quickly generate sales revenue to stay open."
Grubhub added non-partnered restaurants in 2019 as a way to close its restaurant supply gap; it previously had performed some small-scale tests earlier in the year. But the move came with reservations. It led to slower delivery times and poor customer service. It added 150,000 non-partnered restaurants in Q4 2019, growing its network to over 300,000 restaurants in Q4. Grubhub's competitors have been amassing significant market share quickly, and have been adding non-partnered restaurants for years, as well.
"We've long advocated that partnering with restaurants is the best way to create a positive experience for restaurants, diners and drivers," a Grubhub spokesperson said. "Some companies built their businesses by listing non-partnered restaurants on their platforms and delivering food without an agreement so they could expand their restaurant supply, but this strategy fails to drive long-term value in the food delivery industry. We strongly support this effort in California to level the playing field, help restaurants better control where and how their food is delivered, bring lower fees to diners, and improve food delivery operations for everyone involved."
The pandemic has also been changing the dynamic between restaurants and food delivery companies. Restaurants increasingly turned to delivery aggregators, as dining rooms were forced to close and off-premise became their only option to reach customers. This shift boosted food delivery companies' partner restaurant counts. Uber Eats' restaurant partnerships grew 50% year-over-year in June, for example.
But additional legislation could be looming. Rhode Island introduced a bill in February that would fine third-party delivery providers for listing restaurants without written consent. The legislation is still pending. State legislatures have also been taking a closer look at food delivery practices, and many cities and states have added delivery commission fee caps to keep delivery costs down for restaurants throughout the pandemic.
Emma Liem Beckett contributed to this article.
Clarification: Grubhub clarified its early 2019 testing of non-partnered restaurant listings.