Lawmakers introduced bills late last year to regulate the commissions charged by food delivery apps, and the National Assembly's National Policy Committee is set to begin full discussions on them. The intent — easing the burden on restaurant owners who run their own small businesses — is understandable, but there is considerable concern that both the diagnosis and the prescription are wrong.
A delivery app is a multi-sided platform that connects consumers, restaurants, riders and advertisers in overlapping ways. The fees and cost structures that arise from brokering transactions among them are just as complex. It is a misconception from the outset to treat every cost a restaurant bears as a delivery app commission. Brokerage commissions at South Korea's major delivery apps run at about 7.8%, and the main burden on owners is the delivery charge — in other words, payment for riders' labor. Compared with the days when restaurants hired riders directly, the current structure built around delivery apps is far more rational. It frees owners from rider wages, the four major social insurance premiums and severance pay that come with direct employment, as well as from employer liability for delivery accidents. They also no longer need to worry about rising rider labor costs driven by minimum wage increases.
Fundamentally, the difficulties facing restaurants are the combined result of many causes: rising labor costs, higher raw material prices, a slump in the real economy and shifts in demand. Reducing all of this to the single cause of delivery app commissions amounts to an excessive shifting of blame that obscures the true nature of the problem.
It is also hard to see how fee regulation would translate into lower consumer prices. At a restaurant charging 10,000 won a bowl, would cutting the commission by 3 percentage points really allow a 300-won price cut? Nor would owners' profits necessarily rise. Many of the restaurants that rely heavily on delivery apps are franchise outlets. More than 75% of chicken orders and more than 50% of hamburger orders come through delivery apps. Yet excessive franchise fees and logistics margins charged by franchise headquarters are hardly a new problem. There is no guarantee that lower delivery app commissions would flow through to individual outlet owners.
Compared with other advanced economies, delivery app commissions here cannot be called high. Apart from Baemin, most delivery apps are barely turning a profit. Under these conditions, heavy-handed fee regulation would inevitably degrade service quality. Benefits such as free delivery would clearly be suspended or scaled back right away, reducing consumer welfare. That in turn would cut delivery orders and shrink owners' sales. With less capacity to invest in artificial intelligence, cloud computing and cybersecurity to upgrade platform services, the development of tailored services for users would also be delayed. It is telling that fee caps imposed in major U.S. cities ended up reducing incomes for riders and restaurant owners, and that most of those rules were ultimately repealed or eased.
Delivery apps are already regulated under laws including the Fair Trade Act and the Act on the Regulation of Terms and Conditions. Market competition is relatively intense. Publicly run delivery apps hold a meaningful share, and barriers to entry are not high. Dual pricing — offering discounts when customers order directly through a franchise's website or app — is becoming established, and other types of platforms such as CatchTable are gaining popularity. When competition continues to emerge at various levels and in various forms, hasty and excessive regulation would not only block innovation but could also raise barriers to entry and entrench the monopoly position of dominant players — a regulatory failure. One cannot help asking what delivery app fee regulation is actually meant to achieve.
