Complex Made Simple

Food Wars: Why are UAE restaurants and food delivery apps duking it out?

Conflict between restaurants and online aggregators (also known as food delivery apps) is coming to a head as the coronavirus pandemic overstays its welcome.

A major contention point is the 15-35% commission fee that aggregators demand for fulfilled orders Most aggregators have refused to reduce their fees, instead offering other support mechanisms Most Dubai restuarants are not content however, and have come up with a solution of their own: A food delivery app for restaurants, by restaurants

The F&B industry has been among the industries taking the brunt of the COVID-19 pandemic, with KPMG reporting sales in the sector have dropped by 30-80%  With people locked away from cafes, restaurants and malls, companies in the sector have begun to feel the sting of the virus to their wallets. This was made doubly worse with the onset of Ramadan, a period during which food sales usually surge. 

“Traditionally, people go out especially after Iftar to socialize, eat out and enjoy the Suhoor with friends and family. For instance, in UAE, it was reported that 46% prefer to have Iftar out at least once a week, 26% order delivery especially at the second half of the holy month, and 78% planned to have Suhoor in cafes,” Aya Yousef, Senior Analyst at HLB Egypt Makary Consulting, writes.

While the UAE has eased lockdown restrictions in light of the month of Ramadan, allowing restaurants to operate at 30% capacity, this has done little to alleviate financial woes, and just fueled the debate between restaurants and food delivery apps/online aggregators, whose relationship has been strained as of late. 

Why are restaurants at conflict with aggregators?
With the sudden boom of aggregators across the world in recent years, with companies like UberEats, GrubHub, and Zomato rising to the forefront, restaurants were caught off guard. The F&B industry is quite the traditional one in nature, and when tech disruptors entered the fray, the acclimation was far from smooth. Aggregators entered the market promising expanded exposure, food delivery services, convenience and access to a wider range of consumers. In exchange, they asked for a significant cut of restaurant sales made through their apps, along with a push for aggressive discounts that would entice customers to purchase online. 

The problem was that the discounts would come out of restaurant’s profit margins. Coupled with an already significant commission fee (often between 15-35% of the total order value), restaurants were naturally unhappy. While conflict between the two groups has been reported on in recent years, things all came to a head in the UAE after the COVID-19 pandemic caused the government to enforce a nationwide lockdown, with businesses having to rely solely on a food delivery business model. This exacerbated an already tense situation, as most aggregators refused to cut back on their fees. 

The fact that customers were now more conscious of their spending given the uncertainty of the global pandemic, in addition to diminishing disposable income, more free time to cook at home, and increasing hygiene concerns, meant that food delivery, which was restaurants’ last lifeline, would see even less demand than expected. 

Are aggregators “profiteering”?
Aggregators’ unwillingness to scale back their fees has called for harsh criticism from restaurants and other industry members. 

“When I look at third-party delivery companies, I would say outright, they are profiteering because all these restaurants have shut down, they’re doing everything they can to keep cash flow, keep their employees safe and paid,” Ian Ohan, Founder and CEO of Krush Brands, told The National. “Third-party delivery companies charge up to 35%, which is egregious to begin with, and they are not cutting their fees to help support the very industry that they profit from.”

Ohan said these aggregators are “taking full advantage” of the fact that restaurants have had to resort to aggregators to try and salvage sales during this period. 

“When you look at operating costs for a restaurant, your food cost on average is around 28-30%; your labour cost is around 20-25%; your rent is 15%; and then you have overheads that include utilities, insurance, connectivity, marketing expenses, maintenance, accounting costs, garbage disposal, and admin costs. You are left with 5-7% margins,” Bhanu Pratap Rathore, managing partner at GrowthX Advisors, told Khaleej Times.

“Most aggregators have outright rejected our request for commission reductions,” Shanavas Mohammed, Managing Director of the Golden Fork chain, told Gulf News. “Some only offered partial deferment of commissions – and right now, that’s not much.”

Another restaurant owner told Gulf News that “we as restaurants are changing our business models, creating new ways to increase revenue and decrease cost, working hand in hand with other restaurants in order not to go to the easiest solution of increasing menu prices to customers.” 

How have aggregators responded?
While it is true that some aggregators have refused to cooperate with restaurants to decrease fees, many have complied in different ways.

According to The National, those that complied include Careem NOW, who reduced their commission fee by 15%. However, Gheed El Makkaoui, General Manager of Careem UAE, told the UAE newspaper that it is not possible for them to reduce their commission any more than the 15% discount on the 19 to 25% taken.

While not outright reducing commission fees, Uber EATS instead decided to waive delivery fees for consumers when ordering from nearby restaurants.

Talabat came forward with a similar initiative in terms of location-based delivery waivers, but have also deferred commission payments for 6 months. Additionally, they have removed on-boarding fees for new restaurants. 

As for Deliveroo, it will now “allow restaurants to access money made from deliveries within a week, in a bid to help restaurants combat the coronavirus pandemic,” news site Caterer reported. “The new service has been made immediately available to all of its restaurant partners, with Deliveroo covering increased banking charges for the rapid payments.”

The service will be available for the next three months at least, before Deliveroo assesses whether to extend it at that point.

This week, Zomato sounded off with their side of the story in an official statement, defending their decision to not cut back on commission fees.

“As one of the world’s largest restaurant discovery and food delivery platforms, we are also in a very financially challenging situation. While we continue to work our hardest to continue delivering food to people as safely and efficiently as possible, and to carry on helping our restaurant partners reach their customers, like most businesses, we are also trying to ensure that our own business survives the pandemic.”

According to Zomato, they are taking a number of steps to support their restaurant partners. 

“One of these key steps is a relief fund for restaurant industry workers where 100% of Zomato Gold revenue for the month of April is going towards helping restaurant workers. Another measure taken has been to offer interest-free loans for small- and medium-sized restaurant partners and delivery partners.”

Dubai restaurants take matters into their own hands

Realizing their survival is on the line, and with food delivery apps not fully complying with their demands, more than 100 small and mid-sized F&B outlets in Dubai are coming together to launch their own order booking and delivery app, according to Gulf News. The app could be ready in 3 months, reportedly.

“More than ever, the restaurant community in the UAE feels our interests are not best served by food aggregators,” Golden Fork’s Mohammed said. “This app service will be owned and operated by the restaurant owners.” 

If they succeed, this app could cause a major shift in the F&B industry in Dubai and the UAE, and potentially even in the GCC, and aggregators will likely find themselves in a precarious position. This could prove more likely if the coronavirus pandemic is not resolved soon. However, it is important to note that firms like Zomato and Uber EATS have perfected their infrastructure, service and brands over many years. It’s still up in the air whether an app developed in a rush by restaurants will be able to maintain the same level of quality, service and presentation as existing industry veterans.