The food-delivery giant Grubhub is having a difficult week: disappointing quarterly earnings, a declining share price, even talk of growing skepticism among investors about the broader food delivery market.
Now the company also faces an angry New York City Council.
On Wednesday, more than 30 members of the Council sent a letter to Grubhub’s chief executive, Matt Maloney, calling for him to hire a third-party company to evaluate complaints that Grubhub has charged restaurants for phone calls that never resulted in orders.
“A refund must be issued for any phone call fees that did not yield a sale,” said the letter, a copy of which was shared with The New York Times. “In the event that you do not take corrective actions, we will explore potential legislative solutions.”
Katie Norris, a spokeswoman for Grubhub, said the company is “happy to have an open, working dialogue with the New York City Council” about how to connect consumers to local restaurants, “including improving our phone order process.”
The letter marks an escalation of the Council’s monthslong investigation into the increasingly popular app-based food delivery market, which has come under scrutiny for the high fees restaurants must pay to be listed on the online platforms.
In June, the Council’s small-business committee held a four-hour-long hearing in which restaurant owners decried the steep commissions — which usually range from 15 to 30 percent — that Grubhub and other food-delivery services charge on every order.
Over the last few months, the chair of the small business committee, Mark Gjonaj, has said repeatedly that he might introduce legislation to regulate the fees that the food-delivery companies charge.
But the letter was the first time that a majority of the 51-member City Council has made a unified statement raising the prospect of legislation to address Grubhub’s practice of charging fees for phone calls without verifying that the calls generated orders.
Although most customers place delivery orders by tapping their smartphone screens, Grubhub allows its users to make phone calls on the app, and Yelp listings often include a Grubhub number alongside a restaurant’s direct line. Grubhub uses an algorithm to determine whether calls resulted in orders, charging restaurants based on a range of factors, including the length of the call.
But that formula is far from perfect: In recent months, restaurants have reported paying hundreds of dollars in fees for calls in which customers simply inquired about a menu item or requested a reservation. In December, Tiffin, a chain of Indian restaurants in Philadelphia, sued Grubhub, claiming that for at least seven years the company had charged restaurants on its platform for calls that did not lead to orders.
In August, Grubhub pledged to refund restaurants that could show they were charged erroneously and doubled the time it gives them to review recordings of calls, from 60 to 120 days.
“Four months is more than enough time for a restaurant to review every call they receive via our platform,” said Ms. Norris, the Grubhub spokeswoman, adding that the company is “mindful of consumer privacy concerns from keeping this data for longer.”
But restaurant owners have protested that the extended window does not go back far enough and unfairly puts the onus on small businesses to spend hours reviewing the calls. The Council’s letters calls for Grubhub to hire a company to audit the full history of phone orders placed at restaurants using its platform.
“Owners do not have the time and the wherewithal to listen in to every phone call that was placed,” Mr. Gjonaj said. “It was a calculated move on behalf of Grubhub knowing that small businesses would not be looking at their statements carefully.”
Mr. Gjonaj declined to say when legislation on food delivery might be proposed or what form it could take. But in the coming months, the Council plans to hold more hearings on food delivery, according to someone familiar with the body’s plans.
Local legislation regulating commissions, phone fees or some other aspect of the on-demand food delivery economy could pose a serious threat to Grubhub. New York is one of the company’s top-performing American markets, as well as the birthplace of its popular Seamless brand. Across the country, Grubhub has been losing market share to its three main rivals — UberEats, Postmates and DoorDash.
And even as online food delivery becomes increasingly popular with consumers, investors stung by the recent struggles of start-ups like Uber, Lyft and WeWork are growing skeptical about the prospects of the food delivery services. On Tuesday, Grubhub’s stock price plunged by more than 40 percent after it reported sales figures that fell short of analysts’ projections.
The company also lowered its expectations for the fourth quarter, blaming its slowing growth on “promiscuous” diners who are being lured away by the other apps.
Much of the criticism that Grubhub has faced in New York also applies to those other delivery apps, whose tipping policies for the gig workers who transport food have proved controversial as well. The companies have long argued that their platforms expose restaurants to new customers, allowing small businesses to tap into a network of tens of millions of online users and to benefit from the advertising muscle of multi-billion-dollar companies.
But in recent months, restaurant owners everywhere from San Francisco to Mumbai have rejected that narrative, arguing that delivery services have cannibalized their existing customers, as people who used to dine out now order through the apps.
