Food delivery platforms’ 30% commission is justified
So the Restaurant Association of Singapore is calling for food delivery platforms to lower their ‘very high’ commission levels.
They complained about the 25%-32% commission charged by delivery platforms too high. The spokesperson from the association said ““Whether it is the circuit breaker period or not, the rates are not sustainable for the businesses given F&B’s razor-thin margins.”
Of course, any interest or industry group can call or lobby for their members. However, they got the basic facts wrong.
I used to run a food delivery marketplace in Singapore, and I believe I do know something about the industry.
Food delivery basics
There are a few basic understandings about food delivery platforms:
First, a food delivery platform is a three sided marketplace with restaurants, riders and customers.
Customers order food and make payment, restaurants cook food, riders deliver the food. And the platform does EVERYTHING ELSE: marketing/customer acquisition, logistics, payment, technology and customer service. These activities, in particular marketing, are not cheap.
Second, restaurants’ cost structure can be broken down into three parts, in a simplistic way: ingredients, rent, manpower and other variable running costs.
For a restaurant to include food delivery through a platform, it does not need to pay additional rent.
In addition, it usually does not need to hire additional manpower, unless its kitchen is already running on full capacity with dine-in guests. Full capacity is not the case for most restaurants – otherwise the likes of Eatigo or loyalty apps will not have survived their first month.
So the only real marginal costs are from the ingredients. Again unless you are running on just-in-time inventory, you do not need to buy additional ingredients. Food delivery platforms actually help you reduce wastage.
Third, riders need to be paid, and this is not cheap on a per order basis.
As many have rightly pointed out, delivery riders are at the bottom of the food chain. They race their bikes and motorbikes under sun and rain to get cooked food to customers, and ensure restaurants have more business.
When I was running food delivery in 2015, per order cost paid to riders already reached about S$10. Of course, now more riders have joined (because jobs are scarce elsewhere under covid-19), and platforms are more efficient. Nonetheless it still takes 20-30 minutes to deliver an order – think about how much you want to pay for that manpower.
Fourth, most restaurants need more customers and food delivery platforms are getting these customers for them.
The concept of consumer traffic is well understood by now – for a restaurant to increase its business, it needs to spend money to attract more customers.
There are three ways to do that: 1) Marketing to build your own brand (expensive and risky); 2) rent a high traffic location (expensive but more predictable); and 3) use a food delivery platform (like a virtual high traffic location).
30% commission is justified
If you put all these facts together, you would realise that it is actually quite justified for platforms to charge 30% or even higher commission for food. Even with that level, many platforms will still be running at a loss.
This post from Grab explains very well the cost structure and should be essential read for anyone trying to comment on the subject manner.
Of course, the story will change if one platform becomes dominating (70-80% market share) and starts to squeeze all sides more. We do not foresee this happening in Singapore.
Covid-19 is an act of god that impacts everyone – forcing food delivery platforms to absorb the losses of restaurants is not a viable or sustainable solution.
As for anyone planning or calling for hawker food delivery – please, do some basic maths. It does not make sense for any of the parties involved: hawkers, customers, riders or platforms.
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