The COVID-19 pandemic has taken so much from so many, so we’ve got to find bits of joy where we can. For me, quarantined with my mother in Lexington, KY, that has become weekend food delivery. To be sure, my mother is an incredible cook and I am a middling (though improving) one and we have some delicious weekday meals. But they’re most of the healthy, low-carb variety. That is, until the weekend splurge, part of which is the door-to-door service. We’re not alone. Food delivery is having its moment during the COVID-19 pandemic. Despite the upsurge in use, industry consolidation appears to be on the horizon. The latest is Uber’s reported bid for Grubhub. The antitrust questions it raises mean the deal deserves special scrutiny during this time.
This is especially important because while food delivery is a weekend perk for me, it is a lifeline for others. For the elderly and immunocompromised, food delivery might be among the safest ways they can get food. And unlike almost every other sector of the economy, food delivery has seen a massive uptick in the pandemic. In many areas of the country, restaurants have been forced to close their dining rooms, so takeout and delivery are the only ways they can remain open and retain at least some of their employees.
Even before the pandemic, restaurant operators were dissatisfied with the food delivery business, complaining about opaque pricing and exorbitant fees. Restaurants notoriously operate with high overhead costs and extremely slim profit margins. It’s why so many have gone out of business after losing just a few months worth of business in the pandemic. A staggering 87% of NYC restaurants couldn’t make their full May rent payments. Now that these services can represent the only line of business for restaurants, these complaints have grown even stronger.
In April, an antitrust lawsuit was filed against the big four delivery apps. The class action suit alleges that the firms have abused their monopoly power, as evidenced through their exorbitant fees. The lawsuit zeroes in on a particular contract clause that restaurants sign with the platforms to be listed. As a condition of inclusion on the platform, restaurants must agree that they will offer the same prices as they offer to dine-in customers, as well as the same prices for their own delivery, if they provide delivery. The lawsuit argues that this operates as an anticompetitive price restraint that decreases restaurant profits and results in higher prices for consumers.
What an Uber/GrubHub Merger Investigation Might Look Like
The first question an antitrust enforcer must answer is how to define the market. Preliminary data shows both a concentrated national market and many concentrated geographic ones. Nationally, the food delivery app market has four major players which account for 98% of meal delivery sales as of March 2020. According to Second Measure, DoorDash is the market leader with 42% of sales, followed by Grubhub with 28%, Uber Eats with 20%, and Postmates with 9%. Antitrust enforcers would then take these market share numbers and calculate the Herfindahl-Hirschman Index (HHI) of the market. This number is calculated by summing the squares of the market share in both a pre- and post-merger world. Mergers in markets with high initial HHIs and those that involve big increases in HHI usually merit special scrutiny. Using the above market share data for the food delivery market, it has an HHI of approximately 3031, and post-merger that HHI would balloon to 4151—an increase of 1120 points. Under the Department of Justice’s Horizontal Merger Guidelines, food delivery would be termed “highly concentrated” and the increase would indicate the merger is “presumed to be likely to enhance market power.”
What about geographic submarkets? While a 4-to-3 merger resulting in two companies controlling ~90% of the market should be concerning on its own, market data from major cities is even starker. These numbers are even more important because food delivery is inherently local. Robust competition among delivery in Philadelphia doesn’t help a resident of Los Angeles. A combined Uber/Grubhub would control a whopping 79% of the market in New York City, 60% of the market in Chicago, and 59% of the market in Washington, D.C.
Although there doesn’t appear to be a move to one dominant platform nationally, there seems to be movement towards regional food delivery fiefdoms. DoorDash has over 50% market share in Houston and Dallas, UberEats has the same in Miami, while Grubhub dominates the New York market. Much like network effects with dominant digital platforms like social networks, restaurants are most incentivized to get on apps that are most popular in their geographic regions. Although customers and restaurants appear to be able to multi-home across apps, apps have responded by rolling out subscription services for customers and promotional deals for restaurants to incentivize choosing just one platform. And restaurants will still be beholden to where customers actually are in a city.
Next up in an antitrust analysis would be an examination of market entry. A merger in a concentrated market might be okay if it is easy and quick for competition to flood into the market. It appears that the food delivery business can be hard to enter and turn a profit. Amazon, a company that is no stranger to taking temporary losses to gobble up market share, ended its foray into the U.S. food delivery market—Amazon Restaurants—in 2019. If even a company as cash-rich as Amazon struggles to enter the market, one shouldn’t think organic entry into the food delivery business is easy. Amazon might be making a second go at the market through its investment in UK-based service Deliveroo, but the company lacks any U.S. presence as of now.
As evidence that competition is in fact robust among the apps, companies like Grubhub could point to their struggling financials. Grubhub was once the undisputed leader in food delivery, with a 55% market share as recently as 2018. The process of scaling up in a city can be prohibitively expensive, with costs such as signing up restaurants and contracting with a sufficient fleet of delivery drivers. Uber has announced plans to leave markets where it is not one of the top two players. This could suggest that promotions and losing early money could even be part of the business plan to dominate an area and turn profits.
So what to make of all this? If there’s an already concentrated national market, concentrated local markets, difficult entry, and a long road to profitability, then it should all set off alarm bells for antitrust enforcers. The Federal Trade Commission or the DOJ would need to consider all of these factors, as well as any information not yet public, in weighing whether to outright block the deal or perhaps require aggressive divestitures.
Other Tools and Fixes
Other federal policymakers have their own role to play, too. On Wednesday, Senator Amy Klobuchar led a letter to both the DOJ and FTC urging a robust investigation of the deal. The recently passed Paycheck Protection Program (PPP) could be expanded to help restaurants stay current on bills, keep staff on payroll, and maybe even give them the capital to launch their own delivery options. Untangling the complicated system of fees and markups delivery apps now offer struggling restaurants—and the potentially deceptive practices they employ—is a topic ripe for congressional investigation regardless of this merger.
Thus far, it hasn’t been the federal, or even state governments that have moved to regulate food delivery apps during the pandemic. Instead, individual cities are passing laws and ordinances to cap fees to help local restaurants stay afloat. Last week, the New York City Council passed bills capping delivery fees at 15%. The action mirrors similar caps in San Francisco, Seattle, and Washington, D.C., with other major metro areas with similar plans in the works.
Finally, there’s something each and every one of us can do if you’re worried about increasing fees. Those who can afford to eat out—without high risk to themselves or their families—should cut out the platform middlemen and order directly from struggling local restaurants that provide their own delivery. Delivery apps have made it difficult. (Make sure you’re calling the restaurant’s direct number or visiting its actual website and not a platform proxy.) It also might be less convenient—sans minute-by-minute tracking and a longer wait—but you can rest easier knowing that all of your money is going to a local restaurant and its staff.
My family will be among those trying to change. Some of our best meals have been from Lexington’s local restaurants—jerk chicken pizza from Eiffel Pizza, bourbon fried chicken from Ranada’s—and they need our support far more than Uber or Grubhub ever will. While big chains can sign exclusive deals with apps, small, local restaurants suffer from a lack of bargaining power with huge apps. If they get squeezed, it could result in fewer choices for consumers. It’s up to each of us to help make sure our favorite local delicacies are still on the menu once the pandemic passes.