Grubhub and Seamless have transformed the take-out and delivery markets across major metropolitan areas, creating a massive and highly profitable two-sided platform, linking hungry diners with independent restaurants. Though combined as of 2013, both businesses successfully executed the build-out of strong platforms, with Seamless beginning as a corporate-focused NY-based platform in 1999 and GrubHub beginning as a diner-focused Chicago-based platform in 2004.
Today, Grubhub offers diners an online and mobile ordering platform that connects them with thousands of local restaurants. For restaurants, Grubhub offers access to a high volume of high-margin orders without requiring seat expansion or significant additions to staff. While fees vary by location, in general, Grubhub charges the restaurant approximately 15% of the total cost of any given order while charging the diner at most a nominal delivery fee.
To scale, Seamless originally targeted corporate clientele, understanding that the costs to acquire and market these services per individual customer would be significantly lower, and the benefit significantly higher given its concentration. Grubhub’s model evolved with a larger focus on the individual customer. In the individual customer model, both businesses started with a small geographical footprint which allowed for faster sign-ups from restaurant owners at lower cost. Direct marketing was used to generate initial density required to attract users to the platform. Additionally, charging no upfront fee was critical to reduce barriers to adoption by restaurants. Effectively, Grubhub subsidized the platform costs (online portal, customer service, delivery network management) with the idea that sufficient adoption would eventually allow for greater profitability. Once sufficient scale was met, both businesses spent heavily on consumer marketing and promotional discounts. Given the cross-side network effects, Grubhub continued to pour funding into growing both sides of the network.
For both diners and restaurants, multi-homing is a common phenomenon in the take-out and delivery market. Both Grubhub and Seamless had significant early advantages in their respective markets given the size of their networks, but new entrants (Eat24, Foodler, DiningIn) were able to piggy-back on the restaurant side of the network through a similar direct sales model. For diners, multi-homing is far less common. While many users have multiple applications available, many find that use of one or two applications provide enough options, such that creating a new account is generally not worth the added effort.
New entrants, Eat24, Caviar, DoorDash and Foodler have all attempted to attack Grubhub’s market in different ways. Recently, Amazon and Uber have also entered the fray. Eat24 and Foodler started by attacking different markets (San Francisco and Boston, respectively), where Seamless and Grubhub had significantly lower restaurant density. Eventually, Eat24 partnered with review site Yelp to expand its base of restaurants and reduce customer acquisition costs. Caviar targeted a select group of high-end restaurants, focusing on providing more than the typical delivery experience. DoorDash and similar delivery companies have tried to cut Grubhub out by offering delivery directly from restaurants to diners. Amazon and Uber’s attempts to expand their platforms into food delivery appears to be mostly driven by interest in meeting revenue growth targets and leveraging their user or driver bases to steal share.
Outside of competition, which in this case was significantly limited when Seamless and Grubhub (#1 and #2 respectively) merged in 2013, Grubhub has faced some pressures from restaurants related to the fees charged and operational complexity added through use of the service. Since the merger, Grubhub has implemented a system whereby restaurants can choose their fee rate which is used to determine their ordering in certain search queries. Previous search results had been based on alphabetical order or other simple filters. Consumers generally appreciated the switch as this reduced search times, but this also led to increasing price wars among restaurants. Many restaurants are now starting to question whether the attractive economics of additional orders justifies the costs. Additionally, many restaurants are now flooded with Grubhub orders and are required to build additional kitchen space, add staff and change store layouts to alleviate the added pressure. For some restaurants, this has led to withdrawal from the platform or minimizing its use. Grubhub will continue to have to deal with both issues as they seek to grow and maintain their lofty valuation.
Overall, Grubhub represents a terrific story of disruption by digitization and the successful creation of a two-sided platform with strong network effects. Only time will tell if Grubhub will be able to withstand the pressure from Amazon, Uber and others seeking to take a bite out of their pie.