How Will California’s new restaurant delivery law affect Grubhub, Doordash?

How Will California’s new restaurant delivery law affect Grubhub, Doordash?
Written by:
Jayson Derrick
December 28, 2020
  • A new bill will come into effect January 1 that could impact the food delivery business.
  • Food delivery platforms must end the practice of working with restaurant owners without a contract.
  • Each of the public delivery companies will be impacted differently but Grubhub remains the market leader.

Food delivery giants GrubHub Inc (NYSE: GRUB), Uber Technologies Inc (NYSE: UBER), and recent market newcomer DoorDash Inc (NYSE: DASH) could see their businesses impacted by a new California law that comes into effect on Jan. 1, The Wall Street Journal reported.

The new law

As of the beginning of 2021, third-party food delivery companies must have written contracts and agreements with restaurants it collects food from, according to WSJ. While it may seem odd to some, this means that a food delivery platform can post a restaurant’s menu without their permission or even knowledge.

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As of the new year, all food delivery companies operating in California will need to cut out what’s called unpartnered food merchants from their platform.

Unpartnered restaurants can run into logistic problems if they are not adequately prepared to handle online orders, especially those that thrive on dine-in sales.

Who is most impacted?

Privately-owned Postmates has a dominant market share position in California, especially in Los Angeles. Out of Postmates 700,000 merchants on its platform, 40,000 are unpartnered merchants as of September.

The public companies have much lower exposure and downside from California’s law change. According to the WSJ report, DoorDash said in its public-offering filing that more than 95% of all orders came from a verified partner for the nine-month period ending in September.

Uber’s impact is lesser-known although the company said its UberEats platform grew its active partnered restaurant count by more than 70% in the third quarter.

But Grubhub recently focused on including unpartnered restaurants to its platform and could see some of its market share gains in California reversed. The company historically avoided unpartnered restaurants but felt the need to follow its competitors to remain relevant to its clients.

While Grubhub counts New York City as its largest and most important market, the company’s exposure to unpartnered restaurants in California is likely “not-insignificant,” according to WSJ. Nevertheless, GrubHub is the clear market leader in the food delivery space with the largest network of partnered restaurants. 

Conclusion

California’s new law is somewhat consistent with what was seen in other states over the months, WSJ noted. For example, major cities including Philadelphia, Denver, Minneapolis, among others dictated that delivery platforms must have restaurants’ permission to be listed on their platform.

As new cities, states, and jurisdictions follow suit, it will become incrementally difficult for a newcomer to enter the food delivery market. 

Finally, restaurants in California will soon face the new reality that they can freely operate how they wish, including handling 100% of digital orders for delivery or pickup.