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New York vs. Grubhub

Restaurant owners say Grubhub's business model has cut into their profit margins. A New York City Council committee is investigating.

ImageCreditCreditJordan Speer

ByDavid Yaffe-Bellany

• Sept. 30, 2019

Seamless, the food delivery service started two decades ago inMidtownManhattan,calls itself"the most New York app in New York." In advertisements, the company cracksjokesabout the L train and takesunsubtlejabs at New Jersey. "Eat Like a True New Yorker," one subway ad declares.

But while the delivery giant Grubhub, which owns Seamless, seems to have plenty of affection for New York, that feeling may no longer be mutual.

In June, during a four-hour hearing of the New York City Council's small-business committee, restaurant owners complained about thehigh commissionscharged by Grubhub and other third-party delivery apps, which usually range from 15 to 30 percent. The service also faced criticism for itsrecently discontinuedpractice of creating web domains for the restaurants on its platform.

Senator Chuck Schumer of New York hascalled for a federal investigationinto widespreadcomplaintsthat Grubhub charges restaurants fees for phone calls that do not result in orders. Although most customers place delivery orders by tapping their smartphone screens, Grubhub allows users to make phone calls through the app, and Yelp listingsoften includea Grubhub phone number alongside a restaurant's direct number.

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In response, Grubhub has started awebsiteto help restaurants reclaim their web domains and has promised to let owners listen to the recordings of some phone calls that generated disputed fees. OnTuesdayafternoon, the company plans to hold the first in a series of "restaurant round tables" in New York to let business owners air their concerns.

Those steps have not mollified the company's critics.

ImageMark Gjonaj, chairman of the New York City Council's small-business committee, said legislation that would regulate the commissions that delivery apps could charge restaurants was being considered.CreditJeenah Moon for The New York Times

"I would love for Grubhub to do the right thing and do more," said Mark Gjonaj, chairman of the Council's small-business committee. "If they don't, we're going to be looking at serious legislation as we move forward that will make this a much more fair playing field."

New York is one of Grubhub'stop-performing American marketsand a crucial battleground in theescalating competitionfor dominance among the major food delivery apps. But the transformative impact of delivery apps is being felt far beyond the city. As third-party services including DoorDash, Uber Eats and Postmates, as well as Grubhub and its Seamless brand become faster and more convenient, they are growing increasingly popular across the world,fundamentally changing what it means to operate a restaurant.

And fromSan FranciscotoMumbai, the owners of small, independent restaurants complain that the per-order commissions the third-party services charge have cut into already-thin profit margins.

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The major delivery companies have long argued that apps expose restaurants to new customers, allowing small businesses to tap into a network of tens of millions of online users and to benefit from the advertising muscle of multibillion-dollar companies. Katie Norris, a Grubhub spokeswoman, said the service drove "incremental sales" bringing in customers who would otherwise stay home and cook.

"The incremental sales and traffic with higher average checks more than offset commission rates," she said.

But that has not been the experience of Anil Bathwal, who runs the Kati Roll Company, a New York-based chain specializing in Indian street food.

Mr. Bathwal did not have a large-scale delivery operation when his chain signed up with Seamless, and he said the service had initially brought him new business. But over the years, third-party delivery has grown to account for as much as 30 percent of his sales, as existing customers those who used to eat at the restaurant have started using Seamless instead.

"As time goes by, more of my existing customers are being cannibalized," said Mr. Bathwal, who estimates the delivery service has reduced his overall profits by 2 to 5 percent.

The third-party delivery apps vary in their approaches to calculating commissions. While Uber Eats levies a flat rate, Grubhub charges restaurants higher commissions in exchange for better visibility on the platform.

That system could change in New York. Mr. Gjonaj said the small-business committee was considering legislation to regulate commission rates. In August, the New York State Liquor Authorityproposeda policy that couldeffectivelyput a cap on commissions charged to restaurants with liquor licenses.

ImageSigns advertising Seamless and Grubhub delivery services at a deli in the Bronx.CreditJeenah Moon for The New York Times

But with Grubhub and other delivery apps gaining popularity with customers, few restaurants can afford to opt out.

"Grubhub has such huge market share that to say no, a lot of them feel like they'd be missing out on a lot of business," said Melissa Autilio Fleischut, president of the New York State Restaurant Association. "There are lots of concerns, but I don't know of any restaurant who says, 'I'm not going to do it through these apps.'"

From its founding as an independent company in 1999, Seamless prided itself on maintaining healthy relationships with the restaurants on its platform, working with business owners to develop sales strategies and improve menus, according to threeformerSeamless employees who spoke on condition of anonymity to discuss internal company dynamics.

But the company's culture shifted after it merged with Grubhub in 2013, the employees said, and a less sympathetic approach took hold. Sales officials at Grubhub's headquarters in Chicago sometimes yelled at owners who called with complaints, two of the employees said.

Ms. Norris, the Grubhub spokeswoman, said any employee who yelled at a restaurant owner would be immediately disciplined.

"We depend on the success of our restaurants and work very hard to be the best partner we can be," she said.

Another practice also concerned some Seamless employees after the merger and has recently come under scrutiny: Grubhub's system for determining whether a phone call made through the app has generated an order.

In December, Tiffin, a chain of Indian restaurants in the Philadelphia area, sued Grubhub, claiming that for at least seven years the company had charged restaurants on its platform for phone calls that never resulted inorders.

ImageMarco Chirico said his restaurant, Enoteca on Court, had been charged by Grubhub for calls that did not result in orders.CreditJeenah Moon for The New York Times

Marco Chirico, who runs Enoteca on Court, an Italian eatery in Brooklyn, said he hadrecently discoveredthat in two months Grubhub charged him hundreds of dollars for phone calls during which customers simply inquired about a menu item or requested a reservation. He received a refund from Grubhub, he said, but only for the phone calls whose recordings he had reviewed.

"Now I have to take my time or pay someone extra to go through all the transactions and phone calls to see whether they were orders or reservations," Mr. Chirico said. "It can hurt you at the end of the month."

Over the years, Grubhub haspublicly acknowledgedthat it uses an algorithm to determine whether a phone call resulted in an order rather than reviewing the transcript of every call. The company decides whether to charge restaurants based on a range of factors, including the length of the call and whether the customer who made it also placed an online order that day, according to Ms. Norris, the spokeswoman.

"We are constantly refining these systems and processes to ensure we are optimizing for accuracy," she said.

In August, Grubhubannouncedthat it would double the time it gave restaurants to review phone calls, to 120 days, and would refund inaccurate charges. But the 120-day window won't ensure that restaurants recover their losses, Mr. Enrico said.

"It doesn't help with the thousands of dollars you lost in prior months," he said. "You should fix the past to move forward."

The fees are expected to be one of the main topics of discussion at the first restaurant round table, which will be hosted by a Grubhub executive, Kevin Kearns, at the company's office in Manhattan.

Over the summer, restaurant owners also began questioning another Grubhub practice: purchasing internetdomain names for thousands of restaurantsso that customers searching for them online would be directed to place orders through the delivery service. Ms. Norris, the Grubhub spokeswoman, said the company discontinued that policy in 2018 and, in any case, always got restaurants' permission to establish such "microsites."

But in June, an articlein the food industry news site New Food Economydetailing the practice led to an outcry from restaurant owners who said they had not realized that joining Grubhub essentially meant signing away the rights to their online identities. To reclaim control over their digital profiles, some owners are working with ChowNow, a California company that helps restaurant owners develop their own apps, charging a monthly subscription fee rather than a per-order commission.

"Restaurants are waking up and saying: 'I need to own my website. I need to own my customers. I need to own my identity online,'" said Chris Webb, who runs ChowNow.

Haruki Kai, a co-owner of Sushi Ryusei in Manhattan, said Seamless had benefited his fledgling business, generating around $1,500 a month in profits. But given the popularity of online delivery, Mr. Kai said he believed that number should be even higher. He now offers a 10 percent discount to customers who bypass Grubhub and order through his ChowNow app instead.