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HomeMy WebLinkAboutMemo - Mail Packet - 11/17/2020 - Memorandum From Josh Birks Re: Temporary Cap On 3Rd Party Food Delivery FeesMEMORANDUM DATE:November 12, 20202 TO:Mayor and Councilmembers THRU:Darin Atteberry, City Manager; and Jacqueline Kozak-Thiel, Chief Sustainability Officer FROM:Josh Birks, Economic Health and Redevelopment Director RE: UPDATE: TEMPORARY CAP ON 3RD PARTY FOOD DELIVERY FEES This memorandum provides an update on a proposed temporary cap on third party food delivery fees reviewed by the Council Finance Committee (“Finance Committee”) on October 19, 2020. An ordinance had been scheduled on the Council Agenda for November 17, 2020 but was removed at staff’s request. Many independently owned restaurants are turning to delivery orders to earn revenue while simultaneously aiding in the fight against the spread of COVID by limiting access to their dining room facilities. Many of the third-party food delivery companies charge high rates of between thirty (30%) and thirty-five (35%) percent erasing the profit a restaurant makes from a delivery order. Staff presented an ordinance to temporarily cap these fees to the Finance Committee on October 18, 2020. Based on the concerns voiced by the Finance Committee, City Attorney’s Office (“CAO”), Economic Advisory Commission (“EAC”) and the City Manager, staff proposes an alternative approach to the challenge facing our restaurant community related to third party food delivery fees. Staff proposes using a portion of the Corona Virus Relief Funds (“CVRF”) allocated to the City to cover the restaurant commission paid for use of third-party delivery between November 30 th to December 30th of this year. To achieve this outcome staff has issued a Request for Proposals (“RFP”) that is due on November 17, 2020. Many independently owned restaurants face a daunting task –earning revenues while simultaneously aiding in the fight against the spread of COVID. As a result, the primary revenue generator for most restaurants has been significantly diminished –dining room capacity. Restaurants have turned to third party food delivery companies to capture added revenue from delivery orders. These companies make money by charging both the restaurant and the customer for the delivery. Many Based on conversations with numerous restaurateurs, carry-out now accounts for a significant portion of their business revenue. One restaurant owner stated that previously carry-out and delivery apprised three to five percent (3-5%) of their revenue. Today, during restricted dining room capacity, delivery and carry-out accounts for one-third of their revenue. This is a 10x increase. Additionally, this same operator indicated that outdoor patio dining accounts for another third of their revenue. Numerous restaurant operators report similar impacts from COVID on the make-up of their sales and thus revenue. These same operators report that 3rd Party fees are erasing the narrow margin they have traditionally operated their business upon. Capping these 3rd Party fees would help many independently owned restaurants retain a greater portion of their sales allowing them to invest in their employees, businesses, and pay rent/mortgage costs. Restaurants report 3 rd Party Fees that range between 15 and 32%. Larger operators –national chains or independent businesses with a high number of locations –can negotiate lower delivery charges. Independent single-location restaurants typically pay the highest fees –upwards of 30%. Providing relief to businesses makes sense because the existing remedies to small independent operators are limited: 1. Many lack the power of scale to negotiate better fees and choosing to forgo food delivery may impact their revenue during the winter months leading to closure. 2. The cost of starting and operating their own delivery service is high (insurance increase to cover employee cars, point of sales adjustments, online ordering software, training, etc.) Past Action On September 28, 2020 city staff participated in a phone call with the Colorado Restaurant Association (“CRA”) regarding a recently proposed ordinance in Denver Colorado that would temporarily cap the fees assessed restaurants by third party food delivery companies (e.g., Postmates, GrubHub, Door Dash, NoCo Nosh). Staff quickly reviewed the ordinance and proposed the policy be advanced to City Council for consideration. Staff reached this conclusion after conversations with restauranteurs and learned: Carry-out now accounts for significant portion of their business revenue –as much as one-third (33%) compared to historic rates of three (3%) to five (5%) percent. Typical delivery fees charged by third parties can range as high as thirty (30%) to thirty-five (35%) percent. Each operator negotiates fees independently, meaning that small single location establishments tend to have the highest fees. A fee over twenty (20%) percent erases all profit from the restaurant. Concerns & Open Items On October 18, 2020, the Finance Committee reviewed the proposed ordinance and associated economic analysis. The Finance Committee had a mixed response to the ordinance but unanimously recognized the challenge restaurants face trying to adapt their business models. The following challenges were mentioned by the Finance Committee, CAO, EAC, City Manager, and staff: Enforcement –Several questions came up about enforcing the cap on fees. Best/common practice relies on a complaint-based system where the business owner must file a complaint with the City and then attend a hearing to provide due process. This approach requires significant resource to develop and operate. There were several concerns about the ability to develop such a system in a timely fashion. Finally, this still puts the onus on the business owner to invest a significant amount of time getting a reduced delivery fee a central challenge for the current approach of negotiating directly with the companies. Legal Risk –Both the Finance Committee and EAC voiced concerns about the potential legal exposure to the City of such a temporary cap on fees. Based on staff research, no legal action has been taken across the Country where these fee caps have been initiated; however, other concerns remain. Finally, a temporary cap might need to be in place for more than 90-or 120-days to be effective increasing the potential for legal risk. Government Role –The Finance Committee raised concerns about the perception of government “price setting” raised by the proposed ordinance. Nationally there is precedence for governments to engage in this type of policy and legislation most notably during the 1970s oil crisis and World War II. However, it’s clear that such action is typically associated with a major crisis and used sparingly. Alternative Approach As staff continued to evaluate the proposed ordinance in advance of a presentation to Council on November 17, 2020 an alternative approach was discovered by reviewing other front range community responses. In Boulder, the City chose to partner with existing third-party food delivery companies by agreeing to fund the restaurant cost of using the service from CVRF dollars between November 17th to December 30th. Additionally, Boulder was able to secure a commitment from the winning respondent to their RFP to discount the cost of delivery to participating restaurants through December 31, 2021 or the lifting of indoor dining restricts, whichever comes first. This approach addresses the concerns raised by the Finance Committee, CAO, EAC, and City Manager: Enforcement –As the funding partner, the City will have direct review of the fees charged for delivery and fund the cost for a limited time –currently proposed to include November 30th through December 30th. This removes the need to develop and operate a complaint system for restaurants to report fees exceeding the temporary cap. Legal Risk –Using a competitive bid process enables for all current third-party food delivery companies to have equal access to the program. The RFP enables the City to work with multiple partners if multiple proposals have promise. Government Role –The proposed approach avoids the concerns around the perception of government “price setting” as the proposal agrees to fund the current and reasonable delivery fees charged by the respondents. If a commitment can be secured for a discount to extend beyond the subsidized period that is achieved through contractual agreement not regulatory mandate. Staff anticipates the alternative approach will provide needed support for restaurants facing high delivery charge costs by offering a fee option during the CVRF eligible period. In addition, this approach will continue to promote a safe customer experience by reducing visits to the dining room. Next Steps An RFP for Restaurant Delivery Services was issued by the City on November 7, 2020 due on November 17, 2020. Staff will work with CAO, Finance –Purchasing, and other colleagues to develop this solution unless Council indicates preference for a different approach. Updates will be provided on the status of the work through the regular CVRF reports.