Why Restaurants Hate GrubHub Seamless

I had heard grumblings about GrubHub Seamless (they merged in 2013) for many months, but not until a Tribeca restaurateur recently vented in detail did I realize that the company warrants a deeper look. It has made ordering delivery much easier for consumers, and restaurant owners acknowledge that business would be dramatically lower without it. But the cost is substantial, and restaurants—already feeling the pinch of high rent, increased wages, and so forth—no longer believe that the company is on their side. Indeed, with no formidable competitors, GrubHub Seamless isn’t afraid to flex the extraordinary power it has over restaurants that offer delivery.

“If I stop using them, tomorrow I close the door.”

That’s a quote from one of the 15 local restaurateurs who agreed to talk anonymously about their experiences with the company. Note: GrubHub Seamless also owns MenuPages, Allmenus, Restaurants on the Run, DiningIn, and Delivered Dish; and from here on out, for simplicity’s sake, I’ll refer to it as Seamless.

 

The commission system

Seamless takes a percentage, not a flat fee, of the total food and beverage amount, even though its involvement is the same whether an order is for $10 or $250. (In April of 2014, under pressure from the New York Attorney General, Seamless agreed to stop including gratuity and tax.) Restaurants can choose from four commission levels (12.5%, 15%, 17.5%, and 20%); the more a restaurant pays, the higher up it will appear in the search results. When you search for restaurants on Seamless, you may have noticed that, in the default view, the results appear to be random, but they’re actually arranged by who paid what. (And unlike with, say, Google search results, there’s no disclaimer.) You do have the option of sorting by other criteria—restaurant name, price, rating, distance, delivery estimate, or delivery minimum. Only the name and distance filters appear to be unaffected by the commission.

This explains why Seamless floods the results with so many restaurants, including ones farther away than your typical delivery zone. The more results there are, the harder it is for a restaurant to stand out—which makes restaurants likelier to pay more to increase their exposure. Is it cynical to think that this may also be why the company has been less then vigilant about cracking down on false listings?

“If you choose the lowest option of 12.5%, you are really relying on people who will already search for you, as you’ll be at the bottom of the list and you might not get any new customers.”

“We started with 15% but we were not found by our guests. They often asked why they couldn’t find us at all.”

But even a 20% commission doesn’t guarantee restaurants much of anything. To show up on the first few pages of search results, they have to pay much more. The percentage is determined by what competing restaurants will pay, and because the process is opaque, restaurants have no choice but to trust that Seamless is not manipulating the rates to its own advantage.

“Their sales rep makes it perfectly clear that you need to pay a minimum of 20% to exist, and the more you pay, the more you appear in the first pages. Even by paying over 30%, we’re only on the second or third page. So some restaurants pay even more than that! But we could feel the difference when we jumped from 15% to over 30%: We multiplied by 10 our orders from day 1. We don’t make money on Seamless, however. Thirty percent is our break-even point. But it’s helpful for marketing—maybe a customer will try us and then come back in person.”

“I don’t know why anyone would pay anything other than the minimum, because what’s the point of paying 17% to get on the seventh page of results?”

The commission structure particularly galls restaurants that do a lot of corporate business. In a brilliant move, Seamless effectively cornered the delivery market by offering corporate accounts that allow employees who work late to order through Seamless, but only after a certain hour and up to a certain dollar amount. The companies get billed directly and the employees don’t have to go to the trouble of getting reimbursed. And many companies now insist that their employees use Seamless for late-night meals.

“Before Seamless I had a thriving delivery business with Citigroup. But now the only way I can get that business is via Seamless—which takes 12% off my revenue.”

 

The fees

So if a restaurant is paying a commission of 20% or less, it’s solely using Seamless to facilitate the transaction; the marketing component is negligible to nil. And even though all Seamless is doing is taking the order and charging the credit card—something that might reasonably be covered in a 12.5%-20% commission—it tags on a credit-card “processing fee” of 3.05% plus 30¢ per order.

“Compare that to the 2.7% we pay credit-card companies on transactions at our restaurant. And because Seamless is huge, it gets an even better rate than that.”

“The 30¢ doesn’t sound like much, but 100 orders a night adds up to $30. That’s $210 per week—which is $10,290 per year—on top of the 3.05%.”

A best guess is that Seamless, with the purchasing power all large companies have, only pays credit-card companies around 2%. As for the 30¢ surcharge-on-a-surcharge, those nickels and dimes add up: Seamless “processes an average of nearly 242,000 daily orders,” according to its website; since those are nearly all credit-card orders, the 30¢ charge totals more than $70,000 per day.

There are two other fees worth noting. The first is a $1 “transaction fee” that a restaurant must agree to in order for Seamless to release its money more frequently than monthly. (The maximum is once per week.) Compare that to the 48 hours or so that restaurants have to wait to be paid for their own credit-card transactions. UPDATE: “Restaurants that are paid electronically are paid on a weekly basis, without the $1 fee you referenced,” says a GrubHub rep. “The $1 fee you mentioned is only applicable if restaurants want to be paid on a daily basis (which would be faster than the average 48 hours you mentioned, that restaurants have to wait to be paid for their own credit card transactions).”

“Even then, we are still financing Seamless for one full week.”

“You rely on cash flow when you own a restaurant, and if you don’t have it, you can’t exactly ask your vendors to wait.”

The second fee is a sort of finder’s fee. Every listing includes a phone number that is not the restaurant’s phone number, although if you call it, you will be forwarded to the restaurant. It’s a dedicated number that Seamless uses to track—and record—orders placed by phone, so it can charge restaurants what it judges an appropriate fee (even though the restaurant takes the order and runs the credit card itself). That is, if there even is an order.

“They charge us a minimum of $3 for any call under 30 seconds. If the call is longer, the fee can be up to $7. And at the end of the month, we have to go through all the calls, listen to them, and tell Seamless which calls did not result in orders. Then they’ll refund the fees for those calls. As a small restaurant owner, that is time I don’t have.”

UPDATE: “We charge the same marketing fee (the commission percentage you referenced) for phone orders as online orders,” says the GrubHub rep. “Our algorithm determines whether a call results in an order; the length of the call is one factor that goes into that determination. The review system is in place so that if our algorithm makes a mistake, we can rectify that with the restaurant.” Apparently, this vetting of the phone fees can only be done long after the call was made—so restaurants can’t hang up the phone and invalidate the fee just because someone wanted to ask if, say, there are peanuts in a certain dish.

 

All of this really starts to hurt

How much do restaurants pay Seamless over the course of a year?

“Roughly $110,000 per year [for two restaurants]. I know, it’s crazy.”

“Last year the total fee was over $110,000.”

“A monthly average of $15,000.”

Not all responses were that high, but even at half those amounts, you can see how it takes a toll. Especially since….

 

The technology stinks

Seamless and GrubHub were founded in 1999 and 2004, respectively, and yet they still haven’t found a way to integrate their current technology into restaurant point-of-sale systems—or even into a single tablet. (Then again, why would the company want to free up space for a competitor’s tablet?) Corporate orders are directed to what used to be the Seamless tablet and personal orders—which there are generally many more of—to the inferior GrubHub tablet. Restaurants have to monitor the tablets for orders, and then manually integrate them into their systems. Moreover, Seamless does not give restaurants the ability to change their own listings. Instead, they have to call or email if they want to add or remove an item, update prices, and so on.

In other words, Seamless has one job—to take the order and run the card. And as you’ll see below, it does a terrible job of it.

“They are responsible for changing menu items and prices, not us, and even then there is always a problem. It can take 10 minutes for a person to pick up the phone, and it takes many weeks for them to get it right.”

“The service department is non-responsive and when we change our menus sometimes it takes them a month to update them, resulting in guests ordering items that we no longer provide.”

“The system malfunctions on occasion so an order will not print. You get the call from the customer and you have no idea what the order is. Then you get a negative review which further impacts your business (in addition to having to offer a discount or complimentary item).”

“There have been multiple occasions when we have been listed as closed, or do not receive any orders even though we are open.”

“Since the merger, they seem pretty confused internally. Five times in the last month we have notified them that we were not offering delivery for a night—due to a private event or simply being closed—and they failed to close us on the system, so we got orders that we couldn’t fill. It causes chaos on already busy nights, lets down our customers, and makes us look bad.”

“I’ve had instances where Seamless has changed our prices to cheaper ones than on our menu, so we’re actually losing money.”

“Restaurants always take the blame.”

Restaurant owners report varying levels of success in getting Seamless to make up for its technical failures, whether it’s by contacting customers who were affected or covering the cost of the meal. Either way, the owners resent the extra effort necessary to goad a response out of the company.

“If they take such a high commission, they should take more responsibility when problems arise.”

 

How can you help?

Most restaurant owners would very much prefer it if you called in your order, not least of all because it saves them at least 15%. If you’d really rather order online, see if you can do it via the restaurant’s website; you’ll often receive a discount if you do (because even the extra 5% or 10% off is probably less painful than Seamless). And there are direct competitors to Seamless—such as Delivery.com, Eat24, Epicure—that take less of a cut, although they have less traction in the market.

Paying cash is always welcome, because it eliminates the credit-card fee. (Personally, I try to tip in cash. It stays under the table, and the credit-card companies don’t get 3%. This goes for dining at restaurants, too.)

“I understand that people order Seamless for the convenience of a push of a button, and they don’t want to wait on the phone while ordering. However, it would help tremendously if guests called the restaurant and ordered directly. It is painful to have to share 17.5% of your already nonexistent profit just to process your payment. For small businesses, this is a big deal.”

“I wish customers would realize that these websites are more for trying new things. They’re easy and convenient, but what starts as a ‘taste test’ turns into doing it because it’s easier. Our website actually offers a 10% discount and most restaurant websites keep your information secure so you can log in and order without having to put all of your information in again and again. At the end of the day, if Seamless is used by one person more than four times for the same restaurant, it just becomes a money-sucking leech.”

Seamless does allow restaurants to add a “delivery fee”; don’t be surprised if you see it pop up more often, in an effort to pass along some of the costs. Restaurants, for their part, might also want to consider incentivizing customers to call in orders by offering a discount and streamlining the process as much as possible.

 

The future

The food-delivery world is in a period of upheaval. Seamless is facing serious competition from the likes of Caviar, Uber, and Amazon; the latter two are said to be charging restaurants a 30% and 27.5% commission, respectively (and Uber customers will pay a $5 fee), but they’re removing a significant hassle for restaurants by handling the delivery.

And a number of companies—such as Maple, Munchery, and Savory—are offering delivery from commissary kitchens rather than restaurants. Seamless is already allowing “virtual restaurants” to be listed on the site. What’s more, it has invested in at least one, Green Summit. As CEO Matt Maloney said in Crain’s, “We absolutely want to continue supporting virtual restaurants through our ordering platform, by driving orders their way, and we would seriously consider any other opportunities to directly support virtual restaurants with this structure.” Remember, more restaurants in the listings means more restaurants willing to pay a higher percentage to appear near the top.

As a public company, GrubHub Seamless faces pressure to grow and squeeze out more revenue. And perhaps because its universe is changing so rapidly, it appears to be prioritizing short-term earnings growth, harming its relationships with restaurants in the process. All of us who have come to value the company over the years should hope that it will realize that restaurants are on the brink of revolt—and that it’s vulnerable to a savvy competitor who understands that. If the margin on delivery orders continues to shrink, restaurants will be tempted to ditch Seamless. They’ll have nothing left to lose.

UPDATE 4/6: A reader pointed out another aggressive scheme of GrubHub Seamless’s.