New California Law Could Spoil Some Growth for Food-Delivery Platforms

 New California Law Could Spoil Some Growth for Food-Delivery Platforms

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Even Grubhub, which only recently started adding unpartnered restaurants to its platform, could see some of its recent gains reversed.

Even Grubhub, which only recently started adding unpartnered restaurants to its platform, could see some of its recent gains reversed.

Photo: David Paul Morris/Bloomberg News

Just how valuable has restaurant selection been to delivery platforms’ growth over the past year? We could soon find out.

A California bill is set to require third-party delivery platforms to have stated agreements in place with merchants to deliver food orders starting Jan. 1. The bill will effectively end the growth-strategy platforms including
DoorDash
and Postmates have historically employed to rapidly augment their delivery footprints. Delivery platforms will have to remove so-called unpartnered food merchants, or those with which they don’t have a stated agreement, from their apps in California. Without an agreement, a delivery platform can list a restaurant’s menu without permission, sometimes leading to complications for restaurants like dining rooms crowded with unexpected delivery people or orders for items the kitchen no longer makes.

While users might be in for a shock, the companies themselves have been preparing. DoorDash, for example, said in its public-offering filing that over 95% of its gross order value came from partnered merchants in the nine months ended Sept. 30. Similarly,
Uber Technologies
’ Uber Eats said it grew active partnered restaurants by 70% year over year in the third quarter.

The California bill won’t affect all players equally. The impact on Postmates, whose largest market is Los Angeles, could be disproportionately large. Postmates has 700,000 merchants on its platform, according to a September regulatory filing from Uber.

Of those, only 115,000 were partnered at that time, according to the company.

In California specifically, Postmates has said it had 40,000 unpartnered merchants as of September when the bill was signed into law. They would have to come off its platform if not converted by the end of the year. Any potential impact would flow through to Uber’s business since it acquired Postmates this year.

No major player is entirely insulated.
Grubhub,
which only recently started adding unpartnered restaurants to its platform, also could see some of its recent gains reversed. While the company for years prided itself on listing only restaurants with which it had partnership agreements, exceptional growth from competitors forced Grubhub’s hand to also add unpartnered restaurants in order to better compete.

According to regulatory filings, Grubhub grew its restaurant offering 114% in the year ended Sept. 30. As of its third-quarter filing, 55,000 of its total 300,000 restaurants remained unpartnered. While its largest market is New York City, it seems likely that a not-insignificant number of those unpartnered restaurants are in California.

More broadly, many of the temporary Covid-19-relief regulations covering food-delivery commission caps in cities nationwide also include increased transparency measures. Beginning last week, for example, Minneapolis began requiring delivery platforms to get restaurants’ consent for services performed such as delivery. Similar regulations were passed in Philadelphia, Denver, Tucson, Ariz., and elsewhere. An assembly bill introduced in New York in November would prohibit unauthorized listing of food merchants on delivery platforms statewide.

While restaurant selection is just one of many ways in which delivery platforms compete for consumers’ business, it may well be the most important. DoorDash, for example, now has a dominant market lead over its U.S. competitors, even though its food doesn’t arrive the fastest on average and its loyalty program is no cheaper than those offered by competitors. It is now believed to have the largest U.S. network of partnered merchants. Much of that growth was achieved by asking restaurants to partner with them after demonstrating the platform’s value, not before.

The rules will raise barriers to entry, which might be why some in the industry support them. But by requiring a partnership agreement up front, at least some percentage of restaurants will choose not to be on any platform and to simply go it alone. That could crimp the industry’s growth.

Write to Laura Forman at laura.forman@wsj.com