Grubhub: Delivering a Valuable Platform
Grubhub is attempting to increase network effects and increase barriers to multi-homing for customers on both sides of their platform
As a former investment banking analyst, the mention of Seamless brings back unfriendly memories of dinners in front of excel sheets preparing for another late night in the office.
However, Seamless, and its parent company, Grubhub, provide tremendous value through their platform. Grubhub started as a digital platform that aggregated various restaurants offering delivery, allowing consumers a proliferation of choice. The platform benefits restaurants by offering a digital portal for customers to access take-out and delivery options more efficiently and freeing up staff resources to focus on preparing food and serving in-store customers. In addition, Grubhub’s platform acts as a marketing tool to expand the restaurants access to customers. From the customer’s perspective, Grubhub’s platform makes ordering take-out or delivery extremely simple and provides a discovery process to find new restaurants. Grubhub captures some of the value that it creates through their two-sided platform by charging restaurants a commission fee to be listed on the platform.
As a two-sided platform, Grubhub is the beneficiary of strong direct network effects in that the more restaurants that choose to use the platform the more consumers are attracted to the platform due to the abundance of choice. The more consumers that choose the platform, the more attracted restaurants are to it due to a broader population of prospective customers. However, the switching costs and barriers to entry in this market are extremely low meaning Grubhub’s existing business historically operated in a winner-takes-all market where scale should create the biggest switching cost.
It appears that Grubhub saw this as a dilemma given how fragmented the restaurant delivery market is. Grubhub’s existing strategy of ‘subsidizing’ consumer access to the platform to increase the strength of the network effects that attracts restaurants to the platform would be extremely costly and time consuming, if even possible given existing competitive forces in such a fragmented market.
Grubhub has subsequently looked to increase the value of the platform to the party, restaurants, it clearly views as more important, given the value the platform is able to provide to that party. They have aimed to improve the platforms value to restaurants over time to increase switching costs for restaurants. Decisions they have made to do this include: (i) providing data and stored information that improve experience on the platform and (ii) introducing delivery services to expand the addressable market of restaurants and/or allow existing restaurant customers to outsource delivery logistics. These services discourage the propensity for customers to multi-home their delivery services as Grubhub has now inserted itself as an invaluable service provider to restaurants while increasing the ‘pain’ for consumers to use multiple platforms. In addition to increasing the switching costs of their platform, Grubhub has been able to capture additional value from offering these services. They charge additional commission both for prioritizing restaurants listing positions on the website as well as for providing delivery services.
It appears that Grubhub has improved the value of their platform through these strategies. Have they set themselves up to be the winner in this competitive market?
Student comments on Grubhub: Delivering a Valuable Platform
Great read! It’s interesting to hear about the ways that Grubhub is trying to increase switching costs for restaurants. However, it feels like an uphill battle given that there is still a fragmented market for food delivery and there isn’t a clear winner that restaurants can rely on. In addition, I wonder if Grubhub is doing anything meaningful to increase loyalty of its users? For me, most food delivery services seem to offer a commodity service, and are just trying to attract users through coupons. From my time working in NYC, I think Grubhub’s Seamless did a great job when signing exclusive corporate partnerships so the investment banks and other corporations would only allow employees to order through Seamless, and that probably build some consumer awareness and habits to extend to deliveries outside work.
As you said, it is very difficult to create a sustainable competitive advantage in this market, as switching costs are so low. Grubhub and it’s European counterpart DeliveryHero have responded by acquiring as many local players as they can to gain scale advantages in certain markets. The big challenge is going to come when restaurants start to demand better terms and squeeze profit margins, which will make competition even more fierce. Traditionally, delivery orders have represented incremental revenue for restaurants, so they have not had an issue with fees being charged. As this starts to change and delivery starts to become a more integral part of the restaurants business (cannibalizing some in store sales), the delivery platforms will have a tougher time making money. In cases where this already exists, they pass these costs on to the consumers. This will also be challenging in an increasingly competitive environment.