Title
Introduction of Ordinance Amending Alameda Municipal Code Section 6-62 (Third-Party Food Delivery Services) of Article XVIII (Fair Housing and Tenant Protections) of Chapter VI (Businesses, Occupations and Industries) to Continue Placing Limits on Charges Imposed by Third-Party Food Delivery Services; Define Core Product Offering as a Service; and Other Amendments. (Community Development 24161823)
Body
To: Honorable Mayor and Members of the City Council
From: Jennifer Ott, City Manager
Yibin Shen, City Attorney
EXECUTIVE SUMMARY
In September 2020, City Council unanimously approved an ordinance establishing a 15 percent of purchase price limit on charges imposed by “Third-Party Food Delivery Services,” and prevented Third-Party Food Delivery Service from increasing any fee, cost, or commission, or establishing any new fee, cost or commission, with respect to customers beyond those established on September 3, 2020. That ordinance was effective for the duration of the local COVID-19 pandemic state of emergency.
After the City Council lifted the City’s local state of emergency effective October 18, 2022, it directed staff to modify the Third-Party Food Delivery Services ordinance (Ordinance) to extend its duration until the State of California’s State of Emergency is rescinded. Effective February 28, 2023 the State of California is expected to terminate its COVID-19 emergency declaration, thereby ending the cap on food delivery service changes at that time, unless the City Council takes further action.
Local restaurants continue to be impacted by the effects from the pandemic. For many Alameda restaurants, and particularly for those which do not have large areas available for outdoor dining, delivery and take-out services are now a primary source of income. In parallel, the number of consumers using food delivery platforms to place orders with restaurants has increased significantly and is expected to continue to increase in the coming years.1 As many restaurants must rely on food delivery platforms to meet consumer demand, it is anticipated that delivery platforms will continue to play an increasing role in the restaurant industry going forward. Additionally, many members of the public continue to struggle against COVID-19 and its lasting effects. Immunocompromised persons continue to be disproportionately affected by the disease, which could leave some still unable to leave their homes. Other members of the community continue to suffer from the effects of long-COVID, where medical science continues to provide limited treatment options. For those and many others, they must continue to rely on food delivery services, not as a luxury or simple convenience, but to provide critical life-sustaining meals.
Given the importance of maintaining a vibrant restaurant industry in Alameda, continued challenges facing the restaurant industry, and the even more critical need to protect the most vulnerable members of the community from continued effects of COVID-19,, staff is recommending that the Ordinance be amended to continue the cap on delivery fees at 15% of the purchase price of the order while allowing restaurants the option of utilizing additional services, including marketing services, offered by Third-Party Food Delivery Service providers, at cost above the 15% threshold. In addition, the Ordinance would limit the establishment of new, flat fees, costs or commissions beyond those established in the Ordinance, and limit the increase of existing fees, costs or commissions beyond those established in the Ordinance by the percentage change in the Consumer Price Index.
BACKGROUND
On September 15, 2020, City Council unanimously approved an amendment to the Alameda Municipal Code by adding a new section 6-62 (Third-Party Food Delivery Services) of Article XVIII (Fair Housing and Tenant Protections) of Chapter VI (Businesses, Occupations and Industries) establishing a temporary limit on charges imposed by Third-Party Food Delivery Services. This limit was tied to the duration of the locally declared state of emergency related to the COVID-19 pandemic
Since the implementation of Alameda County’s shelter in place order on March 17, 2020, many Alameda restaurants have closed. Many of those able to continue operations have done so through an increased reliance on delivery, take-out service, or outdoor dining only. For many Alameda restaurants, and particularly for those without large areas available for outdoor dining, the delivery and take-out services are a primary source of income. Additionally, restaurant take-out and delivery services are particularly critical for persons with special vulnerabilities to COVID-19, such as the elderly, those suffering from long-COVID and immunocompromised individuals, who will continue to be precluded from engaging in indoor dining.
Third-Party Food Delivery Service companies, such as Grubhub, Uber Eats, DoorDash. etc., played an important role in helping restaurants to quickly scale up their food delivery services, including bringing menus online, receiving online orders, and coordinating deliveries. Prior to the establishment of the Ordinance, these companies charged a variety of fees for these services, with some paid by the restaurant and others paid directly by the customer. These fees could include the costs of delivery, credit card processing, and services such as marketing, order processing, and website maintenance. Fees varied by company and a number of other factors, including individual service packages, how the order is placed, and the distance of delivery, among others. Pre-Ordinance, Alameda restaurants reported paying fees ranging from 15% to 31% of the purchase price of an order, with most falling in the 20% to 30% range, and additional fees were paid by customers ranging from 12% to 30% of the order price. The high end of these fee levels was seen as infeasible for many small businesses in Alameda and community-members with limited income yet required to use such services to obtain life-sustaining meals.
In an effort to both limit restaurant closures, maintain a vibrant restaurant industry in Alameda, and to protect the most vulnerable members of the Community, in October 2020 City Council approved the Ordinance establishing a limits on charges imposed on Retail Food Establishments and consumers by Third-Party Food Delivery Services These limits were tied to the duration of the locally declared state of emergency related to the COVID-19 pandemic. The Ordinance established prohibitions, disclosure requirements, and enforcement mechanisms, which are summarized below:
The Ordinance includes the following prohibitions:
a) It shall be unlawful for a Third-Party Food Delivery Service to charge a retail food establishment a service fee that totals more than 15% of the purchase price of each online order.
b) It shall be unlawful for a Third-Party Food Delivery Service to increase any fee, cost, or commission, or establish any new fee, cost or commission, with respect to customers beyond those established on September 3, 2020.
c) It shall be unlawful for a Third-Party Food Delivery Service to charge a customer any purchase price for a food or beverage item that is higher than the price set by the Retail Food Establishment on the Third-Party Food Delivery Service or, if no price is set by the Retail Food Establishment on the Third-Party Food Delivery Service, the price listed on the Retail Food Establishment’s own menu.
d) It shall be unlawful for a Third-Party Food Delivery Service to retain any portion of amounts designated as a tip or gratuity. Any tip or gratuity shall be paid by the Third-Party Food Delivery Service, in its entirety, to the person delivering the food or beverages.
e) It shall be unlawful for a Third-Party Food Delivery Service to collect any fee from a Retail Food Establishment or its customers for a telephone order if a telephone call between such establishment and a customer made to place the order does not result in an actual transaction.
In addition, the Ordinance includes the following disclosure requirements:
a) Upon a request, the Third-Party Food Delivery Service shall disclose to the customer an accurate, clearly identified, and itemized cost breakdown of each transaction, including but not limited to the following:
1. the purchase price of the food and beverages at the cost listed on the Retail Food Establishment’s menu;
2. all fees, costs, or commissions charged to the Retail Food Establishment for delivery services;
3. all fees, costs, or commissions to the customer by the Third-Party Food Delivery Service; and
4. any tip or gratuity that will be paid to the person delivering the food or beverages.
Lastly, the Ordinance includes a series of enforcement mechanisms.
Per Alameda Municipal Code Section 6-62.8, the Ordinance was designed to automatically sunset when the locally declared state of emergency related to the COVID-19 pandemic is terminated. On October 18, 2022 the City of Alameda (City) terminated its COVID-19 emergency declaration.
On November 1, 2022 City Council approved a modification of the Ordinance so that the sunset provision for the cap on food delivery service fees will remain in place until the State of California’s COVID-19 emergency declaration is terminated. This termination is expected to take place on February 28, 2023, thereby ending the cap on food delivery services at that time.
On September 1, 2021, the Legislature adopted Assembly Bill 286 <https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB286> (AB 286). Signed by Governor Newsom on October 5, 2021 and effective January 1, 2022, the law regulates Third-Party Food Delivery Services throughout the state. There are three main aspects of AB 286:
• It prohibits Third-Party Food Delivery Services from charging more than the price set by the food facility, which is defined in the California Health and Safety code as “an operation that stores, prepares, packages, serves, vends, or otherwise provides food for human consumption at the retail level, including, but not limited to, the following:
o (1) An operation where food is consumed on or off the premises, regardless of whether there is a charge for the food.
o (2) A place used in conjunction with the operations described in this subdivision, including, but not limited to, storage facilities for food-related utensils, equipment, and materials.”
• It makes it unlawful for Third-Party Food Delivery Services to retain any portion of tips, whether those tips are for the delivery driver or for the Retail Food Establishment; and
• It requires that Third-Party Food Delivery Services provide a cost breakdown of each transaction to both customers and Retail Food Establishments.
DISCUSSION
Outreach to Food Service Establishments and Third-Party Food Delivery Services
City staff received direct feedback from both Retail Food Establishments and Third-Party Food Delivery Services. In October 2022, staff participated in a discussion facilitated by former Councilmember Knox White that included representatives from the Restaurant and Bar Coalition (Coalition), the Chamber of Commerce and Economic Alliance (Chamber), and the Business Improvement Districts (BIAs). Staff heard that despite improvements in business activity compared to the early months of the COVID-19 pandemic, Retail Food Establishments continue to struggle with ongoing concerns related to the COVID-19 pandemic such as the apprehension of customers to return to in-person dining at pre-pandemic levels. Representatives from the Coalition went as far as to say that if it were not for the delivery fee caps established in the Ordinance, they would no longer be in business. During that discussion, Retail Food Establishments conveyed the importance that 1) all Retail Food Establishments that have a presence on the Third-Party Food Delivery Service platforms should have the ability to respond to ratings and reviews, and 2) there should be transparency surrounding the fees, commissions, or charges associated with Third-Party Food Delivery Services for both the customer and Retail Food Establishments.
In November 2022, a second discussion was facilitated by the Chamber and included representatives from the Coalition, BIAs, as well as Third Party Food Delivery Service providers DoorDash and Grubhub. In this discussion, City staff presented a proposal to establish a permanent cap on delivery fees based on the structure of the recently established permanent cap in the City and County of San Francisco. Consistent with the San Francisco model, the proposed Ordinance would establish a 15% cap for a defined suite of “core product offering” while allowing Third Party Food Delivery Services to charge additional fees for services above and beyond those core product offerings. Under the proposal, Retail Food Establishments could elect to either maintain Third-Party Food Delivery Services at 15% of the purchase price or elect to utilize additional Third-Party Food Delivery Services marketing services at a higher cost. Further, the Ordinance contains language that ensures Retail Food Establishments who are unsatisfied with additional marketing services have the option of returning to the basic tier of “core services”. The purpose for defining “core product offerings” in the proposed Ordinance is to ensure that Retail Food Establishments have an affordable means of utilizing Third-Party Delivery Services, while preserving the food establishment’s election to contract for more services at a higher rate.
In addition, both DoorDash and Grubhub gave presentations regarding the evolution of their business models over recent years and the establishment of tiered fee structures, which are offered in an effort to provide restaurants greater flexibility in choosing a service level and fee structure that best fits their business. The Grubhub “Basic” plan begins at a fee of 15%; and the “DoorDash Basic” plan provides for a 15% fee for delivery and 6% fee for pickup orders. Additional marketing and other services are available at higher fee levels.
After further questions and discussion regarding Third Party Delivery services the structure of the proposed Ordinance. Coalition members expressed concern over changes being made to the tiered pricing structure, potentially increasing the cost of these “basic” plans. Coalition members also expressed a desire to maintain the services they are currently being provided at existing pricing levels.
In January, 2023, staff circulated a survey to Retail Food Establishments that asked whether businesses would support a permanent cap on Third-Party Food Delivery Services and sought information on the extent of Retail Food Establishment’s reliance on, and satisfaction with, Third-Party Food Delivery Services. The vast majority of respondent felt that a permanent cap would be beneficial to their businesses.
In February, 2023, staff met again with DoorDash and Grubhub to discuss proposed Ordinance changes in more detail. Both shared strong concerns regarding the Ordinance regulating fees related to both customers and Retail Food Establishments, as well as concerns about the proposed Ordinance’s enforcement mechanisms and a desire to better align the Ordinance language with AB 286.
Delivery Fee Caps in Other Cities
To understand what nearby cities are doing in relation to limits on charges imposed on Third-Party Food Delivery Services, staff contacted the cities of Hayward, Oakland, Berkeley, Emeryville, and San Leandro. Like the City of Alameda, all five cities established temporary limits on Third-Party Food Delivery Services in 2020 and, like Alameda, these temporary caps are tied to emergency declarations at either the local or state level and will therefore sunset upon the termination of those emergency declarations. However, it appears that all five East Bay cities contacted by staff are either anticipating allowing their ordinances to sunset without further action or have not yet discussed whether or not they will be continuing a cap of some kind.
The larger cities of San Francisco, Seattle, Philadelphia, Minneapolis and New York City, as well as the Province of British Columbia, Canada, have established a permanent fee cap. San Francisco is the only city in California that has established a permanent fee cap at this time.
The City of San Francisco, on June 22, 2021, approved a permanent cap on the fees that Third-Party Food Delivery Service companies are allowed to charge to restaurants. Neither the permanent cap nor its preceding temporary cap includes any discussion of limiting charges to consumers. Similar to AB 286, San Francisco’s permanent cap ordinance included disclosure requirements on fees and commissions imposed on consumers.
On July 16, 2021, DoorDash and Grubhub filed a lawsuit against the City and County of San Francisco, claiming that imposing “price controls” violates the state and federal constitutions.
San Francisco officials then worked with restaurant associations and Third-Party Food Delivery Services and in July 2022, the San Francisco Board of Supervisors unanimously approved an amendment allowing delivery companies to charge restaurants more for additional services like marketing, advertising and search engine optimization. However, the fee for Third-Party Food Delivery Service providers’ “core services”-which include delivery services and discoverability across all platforms-remains capped at 15% of the purchase price. Following the amendment’s passage, DoorDash and Grubhub agreed to drop their lawsuit within seven days of the amended ordinance which took effect January 31, 2023.
Impacts on Retail Food Establishments of Fee Cap
Research indicates that restaurants were among the most hard-hit businesses during the height of the pandemic, and continue to experience challenges as the economy recovers including, but not limited to, chronic understaffing, inflationary pressures, and supply chain issues. Continuing fee limitations for Third Party Food Delivery Services helps restaurants offer predictable and transparent delivery services. This could help restaurant owners better respond to growing consumer demand for delivery food while addressing labor and supply chain challenges.
Fee Cap Impacts on Third-Party Food Delivery Services Companies
In response to market demands, many Third-Party Food Delivery Service providers have begun providing a variety of service package options including a ‘Basic’ delivery service option for 15% of purchase price or less. The establishment of tiered pricing structures demonstrates that Third-Party Food Delivery Service companies have the ability to operate within the pricing structure of the proposed Ordinance. Furthermore, the proposed Ordinance amendment would allow for additional marketing services to be provided to Retail Food Establishments who elect to purchase additional services, enabling Third-Party Food Delivery Service providers the ability to offer the full suite of service packages. Therefore, continuance of the fee cap, as is structured under the proposed Ordinance, would likely have a limited impact on Third-Party Food Delivery Services.
Summary of Staff Recommendations
Based on feedback from both Retail Food Establishments and Third Party Food Delivery Services, and given the continued uncertainty of fees and reliance by Retail Food Establishments in Alameda on Third-Party Food Delivery Services, City staff seeks to amend the Ordinance to continue the cap on delivery fees at 15% of the purchase price of the order for basic or “core product offering,” until May 1, 2025 (unless otherwise extended by successor legislation) and allow Retail Food Establishments to elect to purchase additional Third Party Food Delivery Services, such as, marketing services, at a higher cost. This amended approach would enable Retail Food Establishments to maintain their current level of service, if desired, at a cost of 15% of the purchase price of the order, while also allowing for those interested in additional marketing services to do so. Additionally, staff seeks to amend the Ordinance to better align language with AB 286, where applicable, and provide greater clarity for Retail Food Establishments, Third-Party Delivery Services and customers. Additionally, staff recommends softening the provision pertaining to fees and commissions imposed on consumers by allowing Third-Party Delivery Services the ability to increase consumer charges on an annual basis at the rate of inflation. Finally, staff proposes extending the Ordinance for two years so that Staff may continue to evaluate the effectiveness of the Ordinances as society moves into a post-pandemic posture and determine if the protections should be further modified. .
ALTERNATIVES
• Amend the Ordinance. Amend the Ordinance to (i) cap delivery fees charged to restaurants at 15% of the purchase price of an order for basic or “core product offering” while allowing Retail Food Establishments the ability to elect to utilize additional Third-Party Food Delivery Service marketing services at a higher cost; and (ii) limit the establishment of new, flat fees, costs or commissions charged to consumers beyond those established in the Ordinance, and limit the increase of existing fees, costs or commissions charged to consumers beyond those established in the Ordinance by the percentage change in the Consumer Price Index. This alternative would maintain current prohibitions, disclosure requirements, and enforcement mechanisms. Based on current draft language, the Ordinance would sunset on May 1, 2025, unless otherwise extended by successor legislation.
• No Action. Allow the Ordinance to sunset once the State of California’s state of emergency related to the COVID-19 pandemic is terminated on February 23, 3023, allowing Third-Party Food Delivery Service companies to set their own fees charged to restaurants and consumers, subject to compliance with state law. Retail Food Establishments may be subject to fees increases in the future, which they report would be a financial hardship.
• Impose Cap for Retail Food Establishments Fees Only. Only amend the Ordinance to cap delivery fees at 15% of the purchase price of an order for basic or “core product offering” while allowing Retail Food Establishments the ability to elect to utilize additional Third-Party Food Delivery Service marketing services at a higher cost and strike the cap on fees charged to consumers such that consumer fees are not regulated by the Ordinance. Based on current draft language, the Ordinance would sunset on May 1, 2025, unless otherwise extended by successor legislation.
• Alternative Cap. Direct staff to amend the Ordinance to cap delivery fees and/or fees charged to consumers at a different level or to otherwise modify staff’s recommendations.
FINANCIAL IMPACT
There is no financial impact to the City from amending an ordinance to limit fees charged to Retail Food Establishments by Third-Party Food Delivery Service companies.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This Ordinance amends Alameda Municipal Code Chapter VI (Businesses, Occupations and Industries), Article XVIII (Fair Housing and Tenant Protections), Section 6-62 (Third-Party Food Delivery Services).
ENVIRONMENTAL REVIEW
This action does not constitute a “project” as defined in California Environmental Quality Act (CEQA) Guidelines Section 15378 and therefore no further CEQA analysis is required.
CLIMATE IMPACTS
There are no identifiable climate impacts or climate action opportunities associated with the subject of this report.
RECOMMENDATION
Introduce an Ordinance Amending the Third-Party Food Delivery Services Ordinance to Continue Placing Limits on Charges Imposed by Third-Party Food Delivery Services; Define Core Product Offering to Mean a Service; and Other Amendments.
Respectfully submitted,
Lisa Maxwell, Community Development Director
By,
Walker Toma, Development Manager
Len Aslanian, Assistant City Attorney
Financial Impact section reviewed,
Margaret O’Brian, Finance Director
Endnote:
1 Dalin-Kaptzan, Zahava. Food Delivery: Industry Trends for 2022 and Beyond <https://www.bringg.com/blog/delivery/food-delivery-industry-trends/>.