Commission rates by delivery apps proving 'costly' to UAE restaurants
Opening a restaurant is easy, but sustaining it is a real challenge.
Restaurants across the UAE looking to mitigate the impact of Covid-19 on their businesses have called for third-party aggregators to reduce their commission rates, with many voicing concerns about their restaurants going out of business if the situation were to continue.
Speaking to Khaleej Times, several restaurant owners highlighted how the ongoing pandemic has impacted their businesses, and the challenges that they are facing as a result of the high fees being charged by food delivery platforms such as Zomato and Talabat.
Gaurav Varma, CEO of The Royal Orchid Group of Restaurants Abu Dhabi, listed several issues that restaurant owners have been facing when dealing with delivery platforms over the years. These issues have only been exacerbated when it was announced that restaurants would operate only on a take away and delivery basis because of the coronavirus.
"Aggregators charge between 25 to 30 per cent as a commission on orders, and this amount has steadily increased over the years," he said. "Not only that, but they have a lot of other fees that they charge restaurant owners such as the discount credit card commission. What happens is that these fees just keep piling up and eating into your revenues, and for restaurants that relied heavily on their dine-in option, this is proving disastrous."
Varma also highlighted several problems that the platforms themselves are facing, which have resulted in disgruntled customers and poor reviews for the businesses. "Not only are these aggregators overcharging for delivery, but they also insist on delivering."
Battle to survive the epidemic
Bhanu Pratap Rathore, managing partner at GrowthX Advisors, shed light on how the restaurant industry in the UAE has changed over the years, especially with the arrival of food delivery platforms and their growing market share.
The UAE has around 17,500 restaurants currently operating, he said. Opening a restaurant is easy, but sustaining it is a real challenge.
"Convenience plays a big role, and this is exactly why delivery platforms have thrived," he noted. "Around 35 per cent of the business is home delivery, and this is slated to grow to 40 per cent by the end of this year. What this means is that four out of 10 orders are being serviced at home. Earlier, lots of restaurants were surviving on dine-in, and deliveries were complimenting this business."
However, with the outbreak of Covid-19, the dependence has shifted completely on delivery.
"Aggregators charge you up to 35 per cent on an order," Rathore said. "It certainly has its benefits, but at the end of the day it is a sizable portion of your revenue that you are giving away. When you look at operating costs for a restaurant, your food cost on average is around 28-30 per cent; your labour cost is around 20-25 per cent; your rent is 15 per cent; and then you have overheads that include utilities, insurance, connectivity, marketing expenses, maintenance, accounting costs, garbage disposal, and admin costs. You are left with five to seven per cent margins."
Discount wars destroying the industry
Rathore and Varma both noted that another key friction point between restaurants and aggregators revolves around discounts on the delivery apps.
"The way that these apps work is that they increasingly highlight restaurants that offer the highest discounts on menu items," said Rathore. "In other words, they are actively driving online traffic to restaurants with discounts. The cost of these discounts are being borne by the restaurant."
Varma revealed that a restaurant, which wishes to retain a high visibility to customers online, has to advertise regularly with the aggregators. Lots of discounts mean that customers end up spoilt for choice, and then begin to tailor their orders exclusively around restaurant discounts. Failure to find a restaurant that is giving discounts means that a customer will move on to find another one which does.
"This is one of the reasons why you will find restaurants offerings discounts to customers who place their orders directly with the restaurant rather than with their online partners," he said. "Mid-range restaurants cannot afford to get into a constant discount war with each other on delivery platforms. It might help to avoid listing these discounts altogether for a few months since we are talking about survival."
Deferment is not the answer
Rathore noted that the biggest challenge right now is for restaurants to reach out to aggregators and see how both parties can work together on a solution that can be implemented over a three to six-month period. While he agrees that aggregators need to "tone down" on the constant discounts, and that a cap has to be put in place to protect restaurants from high commission rates, he is also quick to point out that both parties have to learn to "co-exist."
"Delivery apps are here to stay, but restaurants not surviving will hurt them in the long run," he said. "Talabat has offered to postpone the payments, but deferment is not a solution. On the other hand, Careem NOW has said that it will reduce its commission by 15 per cent for restaurants across Dubai, which is a great step."
Similarly, Varma praised incentives app, Entertainer, for removing all commissions on food deliveries. The move, he said, has allowed food businesses to grow amid the pandemic. He also said that he had received an update from Talabat regarding commission waivers.
"I have just recently been advised by Talabat, that they are giving us a 50-100 per cent commission waiver for one month; some outlets will get 50 per cent off commission and some 100 per cent for one month," he said.
Time to re-look at commission structures
Rohith Muralya, director of SFC Group, noted that the current situation has not left smaller players with much room for negotiation.
"Many people don't seem to realise, but around 90 per cent of restaurants go out of business within their first year of operations. You have to constantly keep working to acquire new customers, who have become more price sensitive. In addition, the last few years have seen what we call a discounted market. Now, add on to this an unprecedented crisis, where malls and restaurants have had to close," he said.
"There is simply not enough demand to justify the cost of the commissions being charged by aggregators right now," he pointed out. "Delivery apps charge in two points - the marketplace where they facilitate the order, and logistics where they pick up the order and deliver. Aggregators, I feel, need to charge five per cent for the marketplace and 10 per cent for logistics. This will help restaurants that are feeling drastic cash flow pressures."
He also pointed out that small restaurants will still struggle for cash flow when the restrictions are lifted. "While dine-in accounts for around 50 per cent of a restaurant's business, and in some cases it could be between 60 to 70 per cent, not everyone will go out and start eating at a restaurant with their families; many residents will still be cautious. What we need are interim measures where some respite is given, as well as a long-term approach where we re-look at commission structures."
Similarly, Rathore proposed a cap on commission prices during the interim period. He highlighted the case in San Francisco, which is limiting how much third-party delivery platforms can charge local restaurants during the Covid-19 pandemic. It was announced that third-party delivery companies can charge restaurants no more than 15 per cent commission.
Both Rathore and Varma also called for a forum, where industry players can come together to share ideas.
"We need to approach these aggregators as a team to highlight our concerns and plan for the future of the industry," said Varma.
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