Title
Introduction of Ordinance Amending the Alameda Municipal Code by Adding a New Article XVIV (Third-Party Food Delivery Services) of Chapter VI (Businesses, Occupations and Industries) Establishing a Temporary Limit on Charges Imposed by Third-Party Delivery Services During the Locally Declared State of Emergency Related to the COVID-19 Pandemic. (Community Development 256)
Body
To: Honorable Mayor and Members of the City Council
EXECUTIVE SUMMARY
Since the advent of shelter in place in March of 2020, many Alameda restaurants, and their consumers, have come to rely on third-party delivery service companies, online platforms that facilitate food delivery and pick-up. These companies provide a variety of services, including food delivery, website integration, marketing assistance, credit card processing and insurance coverage. Typical fees these companies charge restaurants for these services range from 15% to 31% of the purchase price, on top of the 12-30% fees charged to customers. While services offered by these companies are valuable and important, the services offered by brick-and-mortar restaurants are essential during the COVID-19 pandemic. In short, restaurants and their prepared foods are an important link in the U.S. food supply chain. Significantly, these fees represent a significant financial hardship to restaurants which are already experiencing great difficulty due to restrictions imposed in response to the COVID-19 pandemic.
In order to ensure food security and to safeguard the welfare of restaurant employees and customers, who rely greatly on the restaurant industry during this pandemic, staff is recommending that third-party delivery service fees for restaurants be limited to 15% of purchase price until the local state of emergency ends, or indoor dining resumes at 100% capacity (whichever comes later).
BACKGROUND
Since the implementation of Alameda County’s shelter in place order on March 17, 2020, many Alameda restaurants have been closed, or limited to delivery, take-out service, or outdoor dining only, in order to limit the spread of the COVID-19 virus. These restrictions, while necessary, have had a devastating impact on many of the city’s food service businesses, which are a critical component of food supply chain.
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 their 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 or immunocompromised individuals, who will continue to be precluded from engaging in indoor dining during the COVID-19 pandemic. Finally, as the fall/winter approaches and if the pandemic surges, reliance on third-party delivery service companies may become increasingly prevalent.
During this time, third-party delivery service companies, such as Grubhub, Uber Eats, DoorDash etc., have 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. These companies charge a raft of fees for these services, with some paid by the restaurant and others paid directly by the customer. These fees include the costs of delivery, credit card processing, and services such as marketing, order processing, and website maintenance. Fees vary by company and a number of other factors, including individual service packages, how the order is placed, and the distance of delivery, among others. Alameda restaurants report paying fees ranging from 15% to 31% of the order price, with most falling in the 20% to 30% range. Prior to the COVID-19 pandemic, additional fees to customers can range from 12% to 30% of the order price.
Concerns regarding this issue have been discussed at both the Economic Recovery Task Force and Restaurant meeting discussion. Council Members Vella and Knox White had brought the concerns to the City Manager’s attention.
DISCUSSION
Restaurant Outreach
In order to gather feedback on the proposed Ordinance, City of Alameda (City) staff have conducted outreach to Alameda restaurants, including nine individual interviews and a meeting of the Alameda Restaurant and Bar Coalition. While most restaurants acknowledged the need for third-party delivery service companies and the value they provide, they also reported that the size of the fees charged by the companies, in combination with the restrictions associated with the shelter in place, have placed a sudden and severe financial strain on their businesses. Prior to COVID-19, indoor dining accounted for the majority of sales for many of these businesses.
One restaurant owner reported that, despite being quite busy with take-out and delivery orders, he cannot afford to take a salary and will need to consider closing by December 2020, if current conditions remain unchanged. In a focus group of Alameda restaurants and retailers, conducted as part of the outreach on behalf of the Economic Recovery Task Force, participants predicted a wave of business closures over the winter months, unless current conditions improve.
Delivery Company Outreach
City staff also reached out to four major third-party delivery service companies to learn more about how and why their fees are charged, and the potential impact of a fee cap. The companies shared that their fees cover a wide range of services to restaurants, including delivery, customer service, marketing efforts, website integration, point-of-sale services, data analytics, credit card processing fees, liability insurance, refunds for bad orders and the provision of background checks and personal protective equipment for delivery drivers. The companies reported that they do not support fee caps, with some asserting that they are not legal.
Delivery companies also noted that they sometimes offset reduced fees by providing less marketing to restaurants, reducing delivery radii, stopping service to harder-to-reach delivery areas, and passing more delivery costs on to the customer. One company reported that, when they increased customer surcharges in one market, they observed a 20% reduction in delivery orders for small businesses placed through the third-party delivery service companies. While none of the companies reported reducing driver pay as a result of the reduced fees, they did note that driver pay might be impacted by fewer orders or lower tip amounts related to a customer surcharge.
Restaurant outreach conducted for this staff report suggests that many are not highly concerned about these potential impacts, and feel that fewer orders placed through the third-party delivery service companies may result in a higher number of direct take-out orders, which are more profitable to the restaurants. Other restaurants, however, did voice concerns about these impacts, noting the importance of these companies in facilitating and promoting delivery for many businesses, and the potential for third-party delivery service companies reduce services or to leave Alameda entirely.
Review of Limits in Other Cities
City staff surveyed other Bay Area cities, and found that many have enacted a fee limit. As shown in the table below, many local cities have set their limit at 15%. Oakland and Berkeley both allow for some additional fees on top of the 15% limit. None of these cities cap the delivery fees to consumers.
Bay Area Limits on Third-Party Delivery Services
|
City |
Commission Limit |
|
Berkeley |
15% of purchase price for delivery + 5% for other fees |
|
Fremont |
15% of purchase price |
|
Livermore |
15% of purchase price |
|
Oakland |
15% of purchase price + cost of credit card processing |
|
San Francisco |
15% of purchase price |
|
San Leandro |
15% of purchase price |
The following are typical provisions of ordinances/orders in the Bay Area regulating delivery fee:
• Time frame: Most cities set the end date either at the end of the local emergency order, or when indoor dining resumes at full capacity. Oakland set the end date at 90 days from the end of the emergency order.
• Enforcement: Most cities leave enforcement as a private civil matter, with restaurants providing written notice to the delivery company and a request for reduction in charges if their fees are not being appropriately limited. The City of Oakland set a civil penalty, accruing daily, for violation of the order, and Fremont allows for both criminal and administrative enforcement. Even if such an ordinance does not specifically authorize local enforcement, it may nonetheless be enforced by the Attorney General, the District Attorney, and the City Attorney (with Consent of the District Attorney) pursuant to California Business and Professions Code Section 17200.
A number of other cities in California and around the country have also implemented third-party delivery service fee caps, including Los Angeles, New York, Portland and Seattle. Caps on fees for restaurants in these cities range from 10% (Portland) to 15% for delivery fees + 5% for other fees (Los Angeles and New York).
The vast majority of jurisdictions studied by staff have capped fees charged by third-party delivery service companies to restaurants. Staff is aware of only one jurisdiction (Chicago) that has considered limiting fees to consumers. Although Chicago has not yet adopted such a provision, at least one news outlet reports this item is still under consideration. In the meantime, Chicago has adopted an ordinance requiring third-party delivery service companies to disclose all fees charged to enhance transparency.
Summary of Staff Recommendations
The proposed Ordinance includes the following elements:
• Fee Limit: In order to provide maximum relief to Alameda restaurants, and the consumers and drivers who count on them to remain financially viable, staff recommends a limit on fees to restaurants of 15% of purchase price. This includes all fees associated with the service, transaction, and delivery of food.
• Time frame: Staff recommends that the end date be set at the end of the local emergency order, or when indoor dining resumes at 100% capacity - whichever occurs later.
• Enforcement: Staff recommends a wide range of potential enforcement options, including civil, criminal, and administrative enforcement to provide the city with the full range of tools and discretion. As discussed earlier, beyond what enforcement tools may be provided by this Ordinance, the Attorney General, the District Attorney, and the City Attorney (with Consent of the District Attorney) may enforce this the substantive provisions of the Ordinance through California Business and Professions Code Section 17200.
• Other elements: Staff recommends the following other notable elements, which is intended to address specific concerns raised by both restaurants and delivery service companies, and mirror similar elements in other bay area fee limit ordinances:
o Delivery companies may not charge a higher price for menu items than what is set by the restaurants. However, restaurants retain the right to increase the price of their own menu items.
o Delivery companies may not retain any portions of the bill designated by customers as tip or gratuity, which must be paid to delivery drivers.
o Delivery companies may not charge a fee for telephone orders if that order does not result in an actual transaction.
ALTERNATIVES
Alternatives to staff’s recommendation include:
• Set a fee limit at 15% for fees charged to restaurants, plus credit card processing fees. This alternative would allow third-party delivery service companies to pass credit card processing fees, without being subject to the cap, which are set by credit card companies, directly on to restaurants. This structure may lessen the likelihood that third-party delivery service companies would need to offset these costs in ways that may have a harmful impact on restaurants, as noted above. However, it would provide less direct financial benefit to restaurants. Typical credit card fees are 2% to 3%, thus resulting in 17% to 18% combined fee limit.
• Set a fee limit at 15% for fees charged to restaurants, plus 5% for other fees. This alternative, adopted by Berkeley, would allow third-party delivery service companies to pass along additional fees, and essentially result in a combined fee limit of 20%. As with the above option, it may lessen the likelihood that the delivery companies would need to seek alternative ways to offset costs, but would provide less financial relief to restaurants.
• Set a fee limit at 15% (or some other amount as directed by the Council) for fees charged to restaurants and freeze customer fees at the current rate. This alternative would ensure that delivery companies do not simply pass on and increase costs to customers, thereby increasing costs to vulnerable populations which rely on food delivery during the COVID-19 pandemic. City staff were unable to identify any other city ordinances which include this clause, and delivery companies report that it may result in them withdrawing from Alameda, or taking legal action to block such an ordinance.
The City Attorney’s Office recommends this alternative. The City Attorney’s Office notes that this alternative would protect consumers, in addition to ensuring restaurants, an important link in the food supply chain, survive the pandemic. Consumers rely on restaurants for food options that allow them to safely shelter in place. Many consumers use third-party applications and websites to place food and beverage orders with these establishments for delivery and takeout; and many do so out of necessity because they lack the ability or capacity to obtain life sustaining food through any other means, especially vulnerable populations (e.g., disabled, immunocompromised and elderly) who are often unable to absorb such price increases for life-sustaining food. If the Council chooses this option, a provision would be added to the draft ordinance to clearly state that the freeze on consumer fees would be retroactive to the date this agenda report is published to prevent an anticipatory bump in fees in response to this provision.
• No action. This option would allow third-party delivery service companies to continue to set their own fees, and would ensure that they remain active in Alameda and provide a full range of services. Restaurants would continue to pay current fees, which they report to be a financial hardship.
FINANCIAL IMPACT
There is no financial impact to the City from introducing an ordinance to limit fees charged to restaurants by third-party delivery service companies.
MUNICIPAL CODE/POLICY DOCUMENT CROSS REFERENCE
This Ordinance is consistent with the City’s Economic Development Strategic Plan which states, “Alameda shall continue to evolve into a thriving and resilient economy with a range of quality jobs by supporting innovative businesses, entrepreneurs, and artists; providing a wide range of housing; enhancing the vibrancy of retail, restaurants, tourism, and cultural destinations; leveraging its unique waterfront assets; improving multimodal local and regional transportation options; and pursuing clean energy solutions, while maintaining a commitment to environmental sustainability, climate action, social equity, and fiscal health.”
It is also consistent with the earlier-adopted urgency ordinance declaring the local emergency. The Alameda Municipal Code Chapter 2-24.2 defines a local emergency as “the actual or threatened existence of conditions of disaster or of extreme peril to the safety of persons and property within this jurisdiction… requiring the combined forces of other political subdivisions to combat.”
ENVIRONMENTAL REVIEW
The California Environmental Quality Act (CEQA) applies only to projects that have the potential for causing a significant effect on the environment. This action is not a project under Public Resources Code section 21065 and CEQA Guidelines section 15378.
CLIMATE IMPACTS
There is no climate impact associated with this action.
RECOMMENDATION
Introduce an Ordinance amending the Alameda Municipal Code by adding a new Article XVIV (Third-Party Food Delivery Services) of Chapter VI (Businesses, Occupations and Industries) establishing a temporary limit on charges imposed by Third-Party Delivery Services during the locally declared state of emergency related to the COVID-19 Pandemic.
CITY MANAGER RECOMMENDATION
This item has been discussed at both the Economic Recovery Task Force and Restaurant Association meetings. The City Manager recommends approval.
Respectfully submitted,
Debbie Potter, Community Development Director
By,
Lois Butler, Economic Development Manager
Amanda Gehrke, Development Manager
Financial Impact section reviewed,
Nancy Bronstein, Interim Finance Director
cc: Eric Levitt, City Manager