Amazon threatens local restaurants – The American Conservative

Amazon has announced that it will offer Prime members unlimited food delivery through the GrubHub delivery app. While the move will almost certainly be unprofitable in the short term, given GrubHub’s financial woes, this could help Amazon capture another major US industry.

GrubHub and other food delivery apps are running at a loss. Yet they received a predictable boost during the pandemic. In 2020, GrubHub, UberEats, and DoorDash saw revenue growth of 38%, 153%, and 241%, respectively. Customers have come to appreciate the convenience that apps provide, and that demand has survived the pandemic. As a result, restaurants have seen more and more orders come from these digital platforms. For some, online ordering has become the primary source of business.

“Whether [a delivery app] starts to become 30%, 40%, 50% of your business,” a New York restaurateur told NPR, “it’s not an extra business, it’s your business.”

Most major delivery apps, including GrubHub, charge restaurants exorbitant service fees. While its fees vary by location and restaurant type, GrubHub charged over 30% for every sale made on its platform. Smaller restaurants operate on tight margins, with most earning 3-5% on every order. The only way for many small restaurants to stay afloat with GrubHub is to offer higher-margin menu items or turn to catering.

Local alternatives, like delivery co-ops, are viable options in some cities. Smaller delivery companies tend to pay their drivers better and offer restaurants more competitive rates than Wall Street-backed digital platforms.

But the demand for an all-in-one digital experience, where consumers can browse multiple menus from a single platform, isn’t going away, which is why apps like GrubHub and PostMates have cornered the market. in many metropolitan areas. It’s also why many restaurants stay on GrubHub despite its high fees: it’s what their customers want. The owner of a small pizzeria, for example, told CNN he would lose more than 80% of his business overnight if he stopped selling on GrubHub.

Despite their popularity, food delivery apps struggle to generate profits. In 2020, GrubHub lost over $155 million; UberEats lost nearly $6 billion. Delivery giants have to pay their drivers and are subject to the vicissitudes of local restaurant markets. Their costs per delivery do not decrease as the business grows.

Like Stacy Mitchell of the Institute for Local Self-Reliance argued, food delivery apps “are not viable businesses” given their inherent diseconomies of scale. Why would Amazon choose to do business with a company that has never been profitable and has shown no signs that it can overcome its structural shortcomings?

It could be, like Mitchell argued, that they see an opportunity to implement “a predatory pricing system” that would result in “Amazon’s monopolistic delivery to different metros.” Classic economic theory says that it is irrational for a firm to engage in “predatory pricing” – to sell a product, in this case a delivery service, for less than it costs to produce to hunt competitors – in sectors where barriers to entry are low. If a firm in a low-barrier industry reduces its competitors and uses its new monopoly power to raise prices, the classic theory says that a new firm will enter the market and sell the product for less.

But markets don’t always work as theory predicts. And understanding Amazon’s actions requires a broader reexamination of what anticompetitive behavior looks like. As Lina Khan, current chairwoman of the Federal Trade Commission, wrote in a 2017 Yale Law Journal article on the antitrust “paradox” posed by Amazon, “the current antitrust framework – particularly its ‘consumer welfare’ competition, defined as short-term price effects – is not equipped to grasp the architecture of market power in the modern economy, “which often manifests itself in ‘predatory pricing’ and attempts to embed itself ‘into distinct lines of business’.”

While the Amazon-GrubHub deal may result in higher prices and reduced menu offerings for consumers, some restaurants have increased their menu prices for GrubHub delivery orders to offset service charges. high from the app, and others, especially those who do most of their business through the app, remove low-margin items from the menu altogether – the harm is greater than that.

The only way to effectively respond to Amazon’s attempts at cross-industry consolidation, of which its partnership with GrubHub is an example, is to expand our idea of ​​what constitutes consumer well-being. Is the only conceivable harm to consumer welfare in the food delivery market an increase in delivery prices? Certainly, the possibility that some local restaurants may fold in the face of high service charges constitutes a “harm” for the consumer and his community. A greater evil, I would say, than shelling out a few extra bucks to a delivery guy.

This article was supported by the Ewing Marion Kauffman Foundation. The content of this publication is the sole responsibility of the authors.

Gladys T. Hensley