The impact of a hike in fed rates on on-demand businesses

The US Federal Reserve hiked interest rates by half a percent last week from 0.75% to 1%. Further increases are predicted, with US inflation reaching 8.5% in March 2022.

According to reports, the US Fed hiked interest rates for the first time since 2018 and indicated doing so again in May. The rate increase was 50 basis points in the end.

The next step is to understand what happens when these fed rates are hiked, and how this can impact the economy. 

What happens when fed rates are hiked

Raising the federal funds’ target rate is the Fed’s attempt to increase the cost of credit across the economy. The higher the interest rate, the more expensive it is for businesses and individuals to borrow, resulting in higher interest payments.

People who can’t or won’t make the additional installments postpone projects that require financing. Moreover, it motivates consumers to save money in order to receive higher interest payments. As a result, the amount of money in circulation drops, therefore reducing inflation and limiting economic activity – in other words, cooling off the economy.

Considering the fact that the credit cost will increase, and the interest rates will be higher on loans, this is surely not the right time for any business to launch or expand. 

As a result, business owners will be affected on the one hand by the rising costs, while on the other, by aggregators cutting the margins. Businesses would be paying 20-40% as commissions to aggregators.

The impact of hiked fed rates on on-demand businesses 

Businesses face tremendous challenges from all sides in the current environment. According to a survey conducted by business.org in 2021, 89% of small business owners have raised prices since the pandemic began. In 2022, 46% of companies plan on reducing inventory in response to inflation, with 45% planning to increase prices by over 20%.

Major challenges for the businesses:

• Increased costs
• Raised prices
• Narrower profit margins 
• Reducing or changing inventory

This doesn’t end here, after all the hiked rates and inflation, the business owner has to pay 20-30% commissions to the aggregators. 

A realistic scenario:

Most restaurateurs are unaware of the disarming potential of a high aggregator commission mode, which kicks in as soon as a brand makes its first sale. These commissions are normally applied on a per order basis which is apart from the service and transactional charges in many instances. 

UberEats’ began commission for MENA-based food providers was roughly 35% during the pre-pandemic phase. It quickly rose to 41%, resulting in a flat payment rate of up to $5 in commission applied to each incoming online food order. Zomato allegedly charged a 12%– 20% fee on each inbound order during the first quarter of 2018. In addition, there is a $500 terminal charge for the first time setting up services for a food operator. 

These high aggregator commissions may not appear to be a problem because the picture isn’t always obvious to the restaurant owner, but there’s always a leak in the boat.

Are they producing consistent profits for their brand or the aggregator, at the end of the month? That is the long-term question that must be addressed.

How can businesses see themselves out of this situation?

Initially, food delivery aggregators promised to increase revenue for restaurateurs, but today they control a significant portion of a restaurant’s revenue. Here’s a solution that can challenge the status quo of these aggregators. Businesses can set up their own ordering platforms and food delivery operations, and encourage consumers to order directly from them.

Employing a direct-to-consumer approach can help businesses fight the rising rates and aggregator commissions. The D2C model can assist businesses through –

• Higher profit margins 
• Direct control over your brand & customer engagement
• Expanded market opportunities 
• Strong brand presence 

With the hike in fed rates and rising inflation, businesses have to build on a way out to secure more margins for themselves. As aggregators commissions will only hamper their growth and is clearly not a sustainable model in near future.