US food delivery didn’t just boom during the pandemic. In the US, this market generated $218 billion in revenue in 2022, and is not expected to decline. In fact, it’s expected to increase to a value of $500 billion by 2027. Yet despite the market size, there are several unique accounting challenges in the food delivery industry.
To help you stay on top of your financial management, we’ve compiled a list of the seven most common issues.
1. Variable Revenue Streams
Due to the complex nature of business and pricing models, food delivery businesses may have a number of income streams. These include, but are not limited to:
- Subscription services: Customers may pay a monthly fee for access to perks such as free delivery or discounts.
- Delivery fees: Orders may warrant delivery fees, especially if this is outsourced to a third-party company. Delivery fees can vary depending on factors like distance between locations, and demand.
- Commissions: Delivery platforms may charge restaurants or grocers commissions for orders made through the platform. Some businesses also have tiered commission fees.
- Advertising and promotions: Restaurants or grocery stores might advertise on platforms hosted by food delivery companies, or use branding on delivery vehicles.
- Fee-for-services (FFS): Some delivery companies may charge service fees for special requests.
- Software-as-a-service (SaaS) fees: Often, third-party food delivery companies may have a storefront that can be tailored to a specific restaurant, like personalization of menu items.
This diversity of income can pose significant accounting challenges in food delivery. Tracking each stream accurately can be complex, and may affect the timing of your revenue recognition.
2. Driver and Rider Compensation
The backbone of food delivery comprises delivery drivers. Yet this also poses additional accounting challenges in food delivery.
For example, the payment structures of delivery drivers may vary. Some are paid per order, others by the hour, and some are salaried employees. When you consider that some platforms offer bonuses during peak times like holidays, as well as the fact that many drivers will work overtime for after-hours delivery, this can complicate payroll calculations.
There are also additional expenses to consider.
Variable expenses in food delivery
These days, numerous technological tools exist to assist delivery drivers. For example, certain apps allow for route optimization, delivery tracking, and even the ability to assign a specific delivery to an individual driver or rider. The expenses attached to such tech could influence your cash flow.
Another expense worth considering is the purchasing and maintenance of delivery vehicles, as well as the associated fuel costs.
And then there’s also the problem of fraud. According to a recent study, a significant number of delivery drivers steal food while out on a delivery. This could lead to unhappy customers, a negative brand image, and requests for refunds or reimbursements. All of these could affect your bottom line and your accounting practices.
Competition and regulatory compliance
The competitive nature of the food delivery industry could also have payroll implications. For example, an app like Rodeo allows delivery drivers and riders more insight into their earnings. The app tracks the algorithms of mainstream food delivery platforms to help users choose which routes pay the best and which delivery dates are more profitable. While this helps the delivery person, it can be problematic for food delivery companies, who could be strong-armed into paying higher fees for deliveries.
Moreover, it’s worth noting the regulations outlining the remuneration of delivery drivers and riders. Cities like Seattle and New York have clear regulations surrounding the employment of delivery people, including termination of contracts and minimum pay requirements. As such, it’s vital to ensure that your payroll accounting considers these aspects.
3. Refunds and Order Discrepancies
In 2022, 63% of online food delivery customers reported at least one incorrect order during the year. This means that the potential for requests for refunds or reimbursements is extremely high in the food delivery industry.
Unlike other e-commerce sectors, food items cannot be repaired to recover a portion of the initial cost. If a customer refuses to pay, or requests a refund, it’s an immediate loss for your company.
Firstly, you lose the income from the meal itself, and the revenue from delivery fees. Secondly, every time a customer issues a chargeback, your payment services provider can charge you to reverse the transaction, which can eat into your profits.
Tracking refunds and credits accurately and ensuring they’re reconciled in your accounting system can be challenging and time-consuming.
There are also added accounting challenges in food delivery because of fraud.
Refund fraud
In addition to legitimate returns and chargebacks, almost half of all US food delivery merchants have experienced an increase in chargeback fraud over the past year.
In such cases, a customer may claim that they did not receive their order, despite the delivery being made. They then request a refund, meaning you have to cover the cost of both orders and deliveries.
Another increasingly popular scam is committed by drivers, who receive payments for orders that they have stolen or not delivered.
Both scenarios can drastically affect your accounting practices and cash flow.
4. Perishable Inventory for In-House Stock
If your company also stocks food items, such as in the case of grocery delivery services, there’s the challenge of accounting for perishable inventory. This refers to products like food that expire over time, and therefore become worthless financially.
Avoiding stock wastage is a common challenge for restaurants, grocery services, and online food delivery companies. A variety of techniques for managing inventory exist, such as first in first out (FIFO). In these cases, the oldest food products are used or shipped first to avoid keeping them beyond expiration dates.
Despite this, it’s not always possible to avoid write-offs for perishable inventory. After all, factors like demand and seasonality play a large role in food sales. To prevent perishable inventory losses, you’ll need stringent quality control and accounting measures in place.
5. Sales Tax and Regulatory Compliance
A pressing concern that can further complicate accounting challenges in food delivery is sales tax, and who pays it. Several factors come into play here, including:
- The type of food delivered.
- How delivery charges are invoiced.
- Where you deliver an order.
- Who delivers the order, such as a restaurant or a third-party delivery service.
The complexity of food delivery sales tax has led to the creation of market facilitator laws. Usually, a market facilitator is a business providing a platform for other companies (such as restaurants or grocers) to promote and sell products. As such, many food delivery companies can be designated as marketplace facilitators.
However, the regulations surrounding taxation for marketplace facilitators, as well as nuances in the definition, can vary between states.
For example, in Arizona, a food delivery business is not considered a facilitator because the state’s law stipulates that only retail sales are subject to the marketplace facilitator law. In Colorado, a food delivery company can opt out of the facilitator law if they provide the state with their sellers’ information.
Regulations around sales taxes themselves are equally complex. For instance, in New York, a whole bagel served without spread is not subject to sales tax because it is viewed as a “grocery item”. But if the same bagel is sliced and has a topping or spread, it is considered a sandwich, which is subject to sales tax. In Texas, fees charged by a meal-delivery platform, including service fees, credit card processing, and others, are all subject to sales tax.
Overall, sales tax regulations and the taxability of fees differ from state to state. That’s why we recommend enlisting the services of a CPA to help you navigate this.
6. Accounting for Sustainability Initiatives
Currently, there are federal and local legislative measures towards reducing plastic waste. Considering that the food delivery industry relies heavily on plastic packaging, there is a growing trend of transitioning to more eco-friendly packaging.
However, such materials can be pricier than their plastic counterparts. In addition, they may have different procurement cycles. Both of these considerations can complicate expense tracking and cash flow.
The industry’s reliance on delivery vehicles also has an impact. With the introduction of the Carbon Energy Tax and the Clean Energy Bill, food delivery businesses must ensure that they are compliant with regulations.
Luckily, this legislation provides an opportunity for tax credits and incentives for delivery companies making use of hybrid or electric vehicles. On the downside, the cost of clean energy vehicles can have a significant impact on your budgeting and expenses.
Alternatively, you may want to invest in carbon offset programs to counteract the environmental impact of greenhouse gas emissions. This often requires purchasing carbon credits, which will need to be factored into your accounting.
7. Gift Cards and Loyalty Programs
While loyalty programs are great incentives for customers to increase spending, they are seen as an accounting liability. When a customer spends money to earn points which can be used to redeem discounts or a free product, this is considered deferred revenue.
Deferred revenue is money collected from a customer without immediately providing goods or services. In the food delivery industry, this is especially important for discounts, gift cards and coupons.
Why loyalty programs lead to deferred revenue
For instance, when allocating an amount of each purchase towards a future reward (say $1 per $20 spent), only the amount not allocated to the reward ($19 in this example) is recognized as earned income. The remaining dollar is recognized as deferred income until the loyalty points or deferred revenue are used by the customer.
The same is true of gift cards. While a purchase of a gift card is income, it is not allocated to a meal or service until the gift card is used. This can be particularly problematic for gift cards that are never redeemed, which can affect your accounting and have tax implications.
These seven accounting challenges in food delivery can have multiple implications for your business.
For advice on the best ways to mitigate the challenges that come with operating in the food delivery industry, schedule a discovery call with one of our CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.