It's popular with diners, but Uber Eats is taking a hefty cut from small food outlets, which feel they have to be on the platform to survive.

Although it's less than two years old in New Zealand, the food-delivery service could already be earning tens of millions of dollars a year in fees from restaurants.

Uber Eats launched in New Zealand in March last year, and now operates in Auckland, Wellington, Christchurch, Dunedin, Tauranga and Hamilton. About 1100 restaurants have signed up, and thousands of Kiwis use the service each month, though Uber won't disclose just how many.

Uber's vice-president and head of UberEverything, Jason Droege, says Kiwis' use of the app has surprised the San Francisco-based ride sharing company.

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"When we launched [in North America] back in December 2015, it was hard to imagine the success that we've had so far," says Droege. "We're really pleased with the success we've had here.

"There's no way I could have imagined it was going to be as successful or connect with eaters or restaurants in the way it has."

Uber began as a ride sharing business before branching out into food delivery. In this country, it carries passengers in the same six cities, as well as Queenstown, where Uber Eats is set to begin some time in the New Year.

Uber Eats started in 2015 as UberFRESH, a service that provided lunch in a Santa Monica, California, trial area. When Droege joined the company four and a half years ago, his job was to figure out what other businesses Uber could get into. "We ran a bunch of experiments in 2014 and one of them was UberFRESH," he says.

"We found that food delivery was a very, very big opportunity."

Today, Droege is focused on boosting the size of Uber Eats, which is now in 298 cities in 35 countries.

"We're launching in suburbs in Delhi (India), small cities in Australia ... we haven't found a city that is too small to launch this in quite yet," he says.

"Forty per cent of the new eaters that we get actually have never been Uber customers, so we're finding them to be very complementary to the rides business.

Jason Droege, vice president and head of UberEverything. Photo / Supplied
Jason Droege, vice president and head of UberEverything. Photo / Supplied

"When we launched in Toronto in 2015, we didn't really know if this was a developed market or a developing market or a global trend.

"The most surprising thing for us is the concept of getting food from a restaurant you want in about 30 minutes turned out to be a pretty universal need.

"Consumers want access to more and more restaurants, they want it delivered faster and they want it at a lower and lower price.

"As those things get better, we see consumers using [Uber Eats] less as a monthly treat and more as a different way to eat or consume food from a restaurant."

Ordering food from a restaurant to be delivered and eaten at home has proven so popular that "virtual restaurants" - without a dedicated kitchen or dining area - are now popping up all over the world to trade solely on the platform.

There are now about 1600 virtual restaurants selling via the Uber Eats app, with the concept particularly popular in the US and Britain. Uber expects to have 400 virtual restaurants signed on in Britain alone by the end of the month.

In New Zealand, there are about a dozen.

Restaurateur's three virtual restaurants

Auckland restaurateur Jasper Maignot, founder of Royal Oak eatery Happy Boy, operates a standard restaurant, but he gets as many as 180 additional orders each week, thanks to three virtual restaurants he operates just to trade on Uber Eats.

Maignot says the appeal of launching Donburi Fury, Thunder Burger and Kimchi Power as virtual restaurants was being able to use the resources already available in the physical restaurant: manpower, and products already on site which could be cooked in different ways.

"It's [about] expanding the catchment of the restaurant in a way."

Donburi Fury was his first virtual restaurant, and started four months ago. Following demand, he decided to start two more within a month of each other.

Jasper Maignot (centre), founder of Happy Boy and virtual restaurants servicing Uber Eats.
Jasper Maignot (centre), founder of Happy Boy and virtual restaurants servicing Uber Eats.

Maignot says the virtual restaurants have hit capacity in Happy Boy's kitchen, so he won't introduce more, but he is toying with the idea of setting up a "satellite kitchen" dedicated to virtual restaurants.

On average, his businesses get about 400 orders a week through the app - 180 of which are for the virtual restaurants.

Another virtual restaurant owner is Conor Kerlin, co-founder of Mexicali Fresh and a serial restaurant owner. "The problem with the restaurant business these days is wherever there is inconvenience there is opportunity, and people want things quicker and when they want it, and so Uber Eats really has caused a bit of destruction in the regular sit-down restaurants," he says. "People would rather pay a bit more and get it sent to their front door."

Kerlin operates Hot Lips, which specialises in Nashville-style fried chicken, out of the kitchen of his Ponsonby restaurant Ha! Poke. He has four more virtual restaurants in development.

California-born Kerlin says he launched the virtual food brands on Uber Eats with the idea that, "if you can't beat them, join them".

He says it's a good way to test new food concepts.

It's [about] expanding the catchment of the restaurant in a way.

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"With regular restaurants, you have to be staffed and have people out the front even if there's nobody there ... with virtual restaurants, you can basically turn it on and off whenever you like, you have much more control when you're serving, and it's much easier to manage staff," says Kerlin.

"You can launch a brand, provide something and do a lot of testing to see if it holds up to be something that could be bricks and mortar.

"It's a good testing model as it's like: 'Okay, before we invest $400,000 in building a restaurant, let's actually see if people like our food first'."

Research by Morgan Stanley this year found that online food delivery was about 4 per cent of New Zealand takeaway restaurant sales. In Australia it was 10 per cent, and 34 per cent in the UK.

Takeaway sales surpassed $2.7 billion last year, according to the Restaurant Association's latest hospitality report.

Andy Bowie, New Zealand country manager for Uber Eats, says he expects virtual restaurants to take off here as they have in other markets.

"We are actively helping restaurants fill specific cuisine gaps in neighbourhoods around New Zealand cities, which also enables them to test new concepts without investing in a whole new restaurant," says Bowie.

"Chefs and restaurateurs can be more creative than ever before, experimenting with new trends and cuisines using their existing kitchens."

Mexicali Fresh owner Conor Kerlin (right) with Ha! Poke chef Mike Shand. Photo / Supplied
Mexicali Fresh owner Conor Kerlin (right) with Ha! Poke chef Mike Shand. Photo / Supplied

Commission fees for virtual restaurants are the same as they are for conventional operators - 35 per cent for most and 20-25 per cent for chains bringing in large numbers of orders. As well, diners pay a delivery fee, typically about $7, although that varies with the time of day.

But Maignot says he does not believe current commission fees are reasonable.

"At this stage Uber Eats is dominating the market in Auckland ... and that's why they can put that margin on the deliveries," he says. "Once you've got it as a source of income for the business, you sort of outweigh it.

"You have to take it into consideration because it is a big part of the reality of business these days - people do want to eat in the comfort of their house."

Maignot says restaurants and hospitality joints are in a way forced to be on Uber Eats because of its cult following. "Uber Eats has got sort of this brand [reputation] like Apple has, like Mac computers - very easy, very user-friendly."

Uber says different restaurants pay different service fees, "addressed on a restaurant by restaurant basis".

"We do work with businesses that are going to provide large-scale or large benefit back to our business and how it grows the marketplace as well," says Bowie.

He could not say whether commission fees would decrease with time or competition.

You have to take it into consideration because it is a big part of the reality of business these days - people do want to eat in the comfort of their house.

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"We definitely see that eaters are very much taking to the platform by storm, we're seeing order frequency trends grow. Having said that, we're also seeing the same growth with restaurants," says Bowie. "Because there are so many eaters jumping on board, these restaurants have an opportunity to gain incremental sales and grow their business ... they are seeing value behind it as well."

Several factors go into the commission rate, he says, including the need to pay drivers, as well as software engineers around the world who develop the technology that makes the service possible.

"Running a full delivery fleet for a small restaurant is a very complex thing to do, so we're hoping to be able to provide that platform to them at a rate that is able to complement their business.

"[We believe the platform] actually provides immense opportunities for growth to these restaurants that they might not normally have."

Though it's relatively new, Uber is already earning millions of dollars from Kiwi businesses. Given the 1100 restaurants on the platform, and assuming Uber earns at least $100 a day per restaurant, over a year that amounts to about $40 million.

Uber Eats commission rates 'extortionate'

One Auckland business owner who runs an Indian takeaway says Uber Eats' commission fees are too high - particularly for small and medium-sized businesses.

"If a business is selling $100 worth of food, about $41 [after GST] is going to go to Uber Eats," says the business owner, who wants to remain anonymous.

He says it would work out cheaper to hire a person to deliver the food itself, but the popularity of Uber Eats means that being on the platform is essentially a way of marketing the business, and "that's where the customers are".

Uber Eats policy says businesses must not increase their prices on the platform and they should be the same as those offered in-store. However, the takeaway owner says that is not feasible and many users do increase their prices on the app to accommodate the high commission fees.

"Consumers are paying higher prices. Suppose we sell something for $20, with Uber Eats we have to sell the same thing for $28. That means they are paying extra, plus a delivery fee," he says. "Uber is charging commission from the shop owner and they are charging the buyers a delivery fee. It's extortionate."

Most Indian takeaways on Uber Eats charge higher prices on the platform, says the business owner. "They can't survive [otherwise], they are already selling food at margin in their own premises."