Last Updated: April 18, 2020
It was 7 April 2020 when the ‘Circuit Breaker’ came into effect. With that, dining-in at hawkers and restaurants were put on a freeze, resulting in an unprecedented rise of on-demand food delivery apps such as GrabFood, Deliveroo, and foodpanda.
With the ban in place, many F&B outlets in Singapore are turning to delivery platforms to get their food delivered to diners. However, the increased usage of such services comes with its own set of problems—one that we, as diners, might not feel as intensely as F&B owners do. I am, of course, talking about the delivery and commissions rates that, for many Singaporeans, are simply not something we bothered to understand.
A recent popular Facebook post by a restaurant owner in Singapore became a hot topic overnight as it raised this exact issue with regards to the high merchant commission charged by food delivery platforms. The analysis and breakdown of costs within the post sparked waves of discussion and divided readers into two camps with regards to the feasibility of the F&B industry’s chances of surviving the ‘Circuit Breaker’ if they relied solely on such delivery platforms.
In a gist, this post emphasised the high commission charge of 25% to 30% and the “ridiculous” delivery cost borne by the merchant with every order processed through GrabFood. It, thereafter, concluded with a rallying cry to consumers to forgo usage of such delivery services and to make orders directly with the merchants to help reduce unnecessary overheads.
As a food writer, I was intrigued. Not least by how consumers will react after finding out the “truth” about Grab’s “business model” (at least as purported by the owner of the post), but also by what the delivery platform has to say in their defence. Following a Zoom conversation with Grab representatives to seek clarification, there are definitely some rumours and myths which we have to debunk to get a clearer, more accurate assessment of this entire situation.
For those of you who are unsure of the term ‘merchant commission’ or ‘merchant fee’, it is a 25% to 30% cut of food cost which Grab takes from the merchants for every order made through their platform. This service fee has been in place ever since Grab started and its existence is also clearly stated in Grab’s merchant-partner page.
At the moment, merchant commissions are only applicable to delivery services since self-pick-up commissions have been fully waived till 4 May 2020, in an attempt to encourage Singaporeans to pick-up their orders directly from the merchants when the food is ready.
However, unlike what is perceived, this commission is simply not “just for transporting their product”. In this regard, an informed comment was made in the first-mentioned post noting that the merchant commission is used to cover transaction fees, platform fees, and delivery charges.
Before we delve into the question of delivery charges, let us put on our thinking caps and derive logic out of the need for merchant commissions. Without much persuasion, some commenters have already made statements clarifying the main points of this fallacy.
But to add on to the comments above, the commission fee also covers:
Like all businesses, Grab’s customer-based platform comes at a price. Vast manpower cost is spent to keep the business running in addition to the advanced algorithmic technology behind this application that also comes with a measurable amount of spending. That’s a lot of money just on ensuring the technology behind the product is sound.
It is this technological prowess that efficiently allocates delivery partners to pick up food from a certain merchant and get it delivered to your doorstep quicker than, say, two hours. With the sudden influx of consumers using the application at almost the same time during this circuit breaker, have you stopped to consider how the apps work without much system errors?
Technology and the use of data analytics are the answer, and as informed by a Grab spokesperson, more than 15 technology enhancements alone were made to the platform during this ‘Circuit Breaker’ period. That definitely equates to cost.
Grab also has separate platforms for its merchants and delivery partners to ensure delivery runs smoothly at all ends. Yup, that would mean more technology costs. All this tech come at a price, a portion of which is deducted from the commission fee Grab collects from merchants.
As most of you already know, regular delivery fee (excluding island-wide delivery) varies between S$3 – S$5, and is calculated based on the demand and supply of available riders, merchants (dynamic pricing), and distance.
Most of the time, the fee consumers pay is unable to cover the entire cost of delivery by the delivery partners. Grab thus uses part of the merchant’s commission to compensate (see Earning Adjustment from the example above) them for that particular ride made.
“The cost to hire a rider to deliver the food within a radius of ~3km typically comes up to around S$9 – S$12. This is the delivery cost,” he mentioned. “Right now, that cost is borne by the restaurants. Why? Because I don’t know of too many people who would be okay with paying S$9 – S$12 to deliver a S$30 meal,” he added.
To make things simpler—since humans are mostly visual animals—Grab has actually clarified the breakdown of their merchant commission in a Facebook post, which is extracted above for your reference.
Like me, many readers were flabbergasted by the cost of delivery amounting to S$14.50 that was quoted in the post. Most regard this cost at face value, with criticisms immediately flooding and attacking its sheer amount. But have you ever wondered why this cost is on the higher side?
Read closely between the lines and you will spot the answer. Yes, the restaurant in which the order was placed was apparently a “cool restaurant that delivers islandwide”. The word we need to emphasise here is islandwide.
The concept of islandwide delivery was introduced by Grab in a press statement released on 15 April 2020. This initiative is not only to satisfy consumer’s food cravings but also to extend help to their merchants and delivery-partners by creating more income opportunities.
In relation to the delivery cost, a wider range of distance coverage will then naturally lead to higher costs—vis a vis petrol usage and time spent on the road. Another commenter who is a driver of Lalamove, gave a transparent breakdown of the cost for a long-distance delivery:
So, if you think that paying an extra S$14.50 is too absurd, forgo that craving of yours that has to be delivered from the cool restaurant 8.5km away. Why not opt for a nearby alternative that, though pales in comparison to your craving, is good enough for the moment? Or better yet, take a walk down, with a mask on, of course, to a coffeeshop around the corner and let your legs do the delivery for you—free of charge.
As consumers, we are usually enticed to buy from certain merchants not just for the food they are selling but also the promotions and discounts that they are offering. “But who is the ultimate bearer of such cost?” you might ask.
We were informed that the merchants are the ones absorbing discounts and promotions at face value. But, to encourage their merchant’s efforts and initiative, Grab shares this burden by charging the merchant commission on the discounted order value and not at its full price.
This was why, in the example, the business owner got back S$18.90 instead of S$18 if Grab was to charge the merchant’s commission on the original price of S$30.
For Grab to do this is in no way to their benefit. After all, they will earn more from the commission if the store does not offer a discount.
To acknowledge the high commission cost merchants incur with the use of online delivery services, ESG has stepped in to fund 5% of the commission cost charged by all three delivery platforms for the period of 7 April to 4 May 2020.
The truth is that the ESG is already passed on to the merchants which is why the commission rate dropped by 5% for most merchants as the government’s funding was reflected directly on the fees by the food delivery platform. With this made transparent to the public, I was perplexed when I saw commenters making comments like “Why is ES subsidising a private firm” and “(delivery platforms) simply taking advantage of gov subsidies without passing it back to the industry”.
With all my points being mentioned, we simply just cannot conclude this heated argument without asking ourselves these basic questions. “What is the delivery platform’s target merchant demographics? Who exactly can benefit from their services?”.
Zoom out and take a look at the root of this controversy. You will realise that these are voices of the restaurateurs whose businesses, pre-‘Circuit-Breaker’, were built around a business model of customers dining in for the experience, the ambience, and the higher quality ingredients. To many of them, it is inconceivable to even consider food delivery on a scale as large as what they’re forced to adopt now.
As mentioned by a Grab spokesperson, GrabFood’s platform “always had a representative demographic of quick-service restaurants, big chains, and independent small businesses”. Thus, though we are not privy to actual statistics, one can safely conclude that a majority of the food establishments on Grab are those whose business models are naturally dependent on deliveries and takeaway. Places such as Shihlin Taiwan Street Snacks, Crave, and the hundreds of bubble tea shops littered across the island, thrive on a platform such as Grab.
Business models aside, these kiosks also largely have a lower food cost when compared to higher-end restaurants that rely on more exclusive ingredients for the dishes they offer.
Unfortunately, it is during unforeseen times like this when dine-in restaurants are left with little choice but to rely on delivery for the bulk of their income, bringing to light merchant commission fees they deem unfair especially when they still have rent to pay, ingredients to source, and staff to feed.
We understand, and we empathise. But the reason why these restaurants jumped in on the Grab platform is due to Grab’s huge share of the marketplace and delivery technology that simply works.
Like what a commenter said in response to Jonathan Yang’s post, it all boils down to a simple point—“certain things shouldn’t be on delivery”. Just as consumers have the freedom of choice to choose which delivery platform to use, the merchants too, have the ability to best decide if it is in their business interest to be listed on these platforms.
A search online would show several other cost-effective methods for them to get their food delivered to potential customers. So, do work within your budgets as I’m sure consumers like myself, will still be willing to support local F&B outlets whether they are on the major delivery platforms or not.
To my fellow consumers, decide for yourselves on how you would like to get your food delivered to your doorstep. As much as directly supporting the merchants is a good call to action in helping smaller F&B survive, do remember the thousands of delivery partners whom we are also helping when we make our orders through these delivery platforms. Take a moment and think about them before you close the app.
With the facts laid out here, what do you think Grab could have done better to benefit every single person involved in this ecosystem of food delivery? Since the start of this ‘Circuit Breaker’, we know that they have come up with new initiatives to help increase exposure for the merchants. But do you think these are enough? Is there really a perfect solution that satisfies all parties? Or is that just a pipe dream?
These dire times call for Singaporeans to put our heads together in finding solutions that are befitting for all—be it large corporations or small businesses. There might never be a perfect outcome, but who knows, your suggestion could possibly lead to a series of thoughts that will, hopefully, change the outlook of delivery platforms and F&B businesses altogether.