Source: DoorDash
Venture Capital

The Hidden Cost of Convenience With Food Delivery App DoorDash

Chief Executive Tony Xu says the startup plans to make pricing more transparent in the next few weeks.

A menu on DoorDash Inc.'s website lists the price for a Bubba Gump's shrimp po' boy at $14.95 before delivery fees. Walk into the same restaurant in Denver, and you'll find it on the menu for about $3 less.

Unlike other food delivery apps, DoorDash gives no indication that its menu prices are higher when you place an order, leaving some customers and restaurants unaware of the discrepancy. DJ Fisher, a 34-year-old sports agent in San Francisco, has been a loyal DoorDash customer for almost two years, using the service to order from Outback Steakhouse and other restaurants. He had no idea he was paying extra for his Outback Toowoomba pasta, on top of the delivery fee. "That's kind of outrageous," he said. "All this time, I thought I was getting a deal."

Markups can be found on DoorDash at many restaurants in such cities as Chicago, New York, and San Francisco. The price for a BLT at Italian eatery A.G. Ferrari is $10.99. DoorDash lists the item for $14.95. An Applebee's, which charges $13.49 for a Brew Pub Philly, has the sandwich listed for $16.50 on DoorDash's website. On top of the markup, the startup adds a $5.99 delivery fee, as well as tax and tip.

DoorDash Chief Executive Officer Tony Xu said he hoped customers would see the higher price as a unique way to reduce delivery fees and avoid sticker shock at the end of a transaction. But the practice isn't common among delivery apps. "We don't start a business by doing what everyone else does," Xu said. The company is working on a new version of its app that breaks out DoorDash's fees from meal prices, he said. "We will soon announce a change to be more transparent. We will list our service fee as a separate cost from menu prices in a few weeks," Xu said.

In the meantime, restaurants are pushing back. Legal Sea Foods LLC, a Boston-based restaurant chain with 33 locations in the U.S., sued DoorDash on March 2, claiming the startup artificially increases prices, misleads customers and uses the company's trademarks without permission. In-N-Out Burger filed a trademark infringement suit against DoorDash in November.

Grocery delivery startup Instacart had similarly used hidden markups to help offset the company's operating costs. When customers protested, Instacart changed the system in April 2015 to more clearly highlight price discrepancies, as well as eliminate them at many stores. Other delivery apps, such as Postmates and Square Inc.'s Caviar, typically list the same prices as those on the restaurants' menus. "Transparency is key with businesses like these," said Sucharita Mulpuru-Kodali, an e-commerce analyst at Forrester Research.

An explanation for DoorDash's price discrepancies can be found in a support document within the help section of the company's website. It says partner restaurants may choose to charge customers more to make up for commissions paid to the delivery company, or DoorDash may raise prices at other restaurants at its own discretion. It doesn't specify which restaurants it charges a markup for. "We may adjust menu prices to help keep our service fee as low as possible and ensure effective operations," the site reads.

Venture capitalists have backed a slew of food delivery startups in recent years. In 2015, food tech companies raised $5.7 billion, more than double the previous year, according to research firm CB Insights. The businesses aren't cheap to run, and in June, CB Insights declared the market “overcrowded.” SpoonRocket, a startup that prepared food in its kitchen for delivery, shut down this week and sold some assets to Brazil's IFood. DoorDash, which was valued by investors at $600 million last year, recently sold shares to investors at a lower price than in its previous round, according to a securities filing.

Several restaurant owners were surprised to learn of DoorDash's pricing practices. Jeff Miller, owner of Miller's East Coast Deli in San Francisco, expressed dismay. "They're padding the cost of my menu items without telling me or giving me a cut of the money," he said. "I had no idea they're doing this."

(A previous version of this story corrected the name and age of the DoorDash customer in the second paragraph.)

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