GrubHub: The Alignment is…SEAMLESS!

Seamless alignment no unicorn can touch


GrubHub provides an online/mobile platform for restaurant pick-up and delivery orders. With >5MM monthly active diners and >30,000 restaurants, GrubHub has built a vibrant two-sided marketplace within a domestic takeout industry processing $67bn of transactions annually.1

For context, GrubHub went public in April 2014 and is currently a $2bn market cap company at a revenue run-rate of $340MM/yr, growing 30%+ per year, with 20% operating margins. (1)

The Business Model: Grub extract’s a commission rate from both sides of their network when they enable a takeout/delivery order.

• Restaurants: Grub Hub does not charge its network any upfront or subscription fees, but instead only gets paid commission per order generated, providing restaurants with a low-risk, high-return solution. Restaurant subs may choose their level of commission rate; choosing a higher rate affects prioritization of a restaurant in Grub’s algorithm, generating higher page views similar to network businesses like AutoTrader.
• Diners: GrubHub charges a small commission or ‘take rate’ to the consumer on a per transaction basis.
I find this business model compelling because of its ability to simultaneously extract value from both sides of a co-dependent, two-sided market that is growing rapidly, at a highly profitable rate of 20% operating margins. (2) Like many winner-take most internet marketplace models, SCALE is the key.

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GRUB’s Operating Model
Grub continuously invests labor, capital and IP to create value for BOTH SIDES of their network. Let’s take a deeper look at each.

The Diner Value prop: GRUB’s technology provides an intuitive and personalized platform that helps them search for and discover local restaurants and then accurately and efficiently place an order. GrubHub also provides diners with information and transparency about their orders and status and solves problems that may arise. The Company makes re-ordering convenient by storing previous orders, preferences and payment information, helping to promote diner frequency and drive strong repeat business.

Investing in Diner-side: To maintain/drive scale, Grub’s operating model requires constant investment in diner acquisition. Two vectors matter:

  1. ‘Build’ customers – this means investing in advertising campaigns to increase brand awareness and ultimately drive app downloads. The company investing $41mm in marketing in 2014 to this end.
  2. Buy’ Customers – GRUB has also used its Balance Sheet to buy scale when appropriate. In fact, the company initially scaled through a merger with Seamless, and more recently GrubHub paid $71MM to acquire Dining-In and the delivery service ‘Restaurants on the Run’

Investing/Adding Value to Restaurant Side

The following stats come from a Vivid Economics survey about exploring Grub’s impact on restaurant partner takeout businesses. (3)

  • One year after joining GrubHub, restaurants’ monthly takeout revenue grows by an average of 30 percent, six times greater than that of restaurants not using the service.
  • One in five restaurants doubles their takeout revenue one year after working with GrubHub.
  • Small restaurants with less than $2,500 in monthly takeout revenue typically see their revenue increase 50 percent after signing on with GrubHub.
  • GrubHub cuts order processing time by more than 50 percent, helping restaurateurs spend more time making food and less time answering the phone

Clearly, these are results worth paying for.

GRUB is also investing some $20mm into the delivery build-out effort in 2015 – a short term hiccup for profitability which I believe will ultimately cement their position of strength on the restaurant side of the network.

While delivery is highly competitive – with many darling new entrants like Doordash and Postmates gaining $billion valuations for their fledgling services – its important to note that these services often operate at odds with restaurants who are not official partners, or worse, at the expense of consumers, who get their food at markups as much as 45%-75% more expensive, likely limiting broad appeal.3 Grub takes more of a partnership approach which, is likely to prove more sustainable in the long term. (4)

GrubHub invests to grow both sides of its marketplace. They invest labor in building relationships and capital in ensuring competitive delivery and a partnership model, driving value to restaurants by delivering tangible order growth. Maintaining and growing the restaurant list drives greater value to customers who receive greater choice in addition to the ease of a mobile ordering system. By investing in customer acquisition, GRUB drives diner scale and strengthens their value proposition to the restaurants by increasing order volume.

The flywheel spins, driving order volume and monetization through commission.  The alignment is nothing short of…SEAMLESS!


1 Grub Hub 10q –

2 Investor Presentation


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Student comments on GrubHub: The Alignment is…SEAMLESS!

  1. Great write-up on a promising two-sided platform. Recognizing when to buy scale as opposed to continuing to compete in an almost fragmented space is playing in their advantage. Partnerships with restaurants are important, but it limits the choices for consumers unless all are partners. It’ll be interesting to see who ultimately wins between the GrubHubs or Favors (who allow any restaurant, tack on a service and delivery tip, and just assign a runner to go pick up the food) or if there is room for both models.

  2. I like the partnership approach and GrubHub has significant share in a winner-takes-most marketplace but there is something to be said about the Postmates of the world who, short of cooking the food, take care of the entire supply chain. I see those players more as a delivery infrastructure platform than anything else. Consider the proportion of restaurants that don’t do takeout for instance or those whose delivery capacity has maxed out but their kitchen’s hasn’t. Providing a distributed delivery force expands the take-out market and that’s disruptive. However, as you mentioned, with the acquisition of Restaurants on the Run, Grubhub wants to get into this business too. That will be no easy feat — there is significant logistical expertise that’s required to scale something like that efficiently and they don’t have that core competency as a result of their existing operating model.

    1. +1….great report Ian! In major cities where GRUB has achieved scale, I think their offering was for a long time revolutionary and is still a great service, as you describe. I might be a little biased because I wrote my TOM challenge on the competitor that’s seeking to disrupt GRUB :), but here are some thoughts to build on to Vesal’s:

      GrubHub/Seamless has 5MM MAUs, but they are unable to penetrate many markets where restaurant-supported takeout isn’t as popular (for example, San Francisco). As Ves mentioned, they rely on a network of already existing couriers and delivery people, employed by the restaurants themselves. Where they fall short is when they haven’t achieved scale in a certain metropolis – for example: whereas in New York, there are many options to choose from, in smaller cities without that option, competition does not drive efficiency for the end user. A lack of competition means restaurants are more complacent with their services.

      Therefore, as a many-times frustrated user of Seamless, I find myself blaming Seamless when something goes wrong, when really they are just the middle man. Given the way they’ve scaled, GRUB might find themselves in a tough place because they cannot control many of the operational aspects, but do bear most of the revenue/business risk when things go awry. I worry that as they expand to new markets, the costs will begin to outweigh the benefits if they cannot find a way to control the entire ecosystem. Their business and operating models might start to diverge, at which point it would be time to rethink the strategy.

      Furthermore – I’m intrigued to understand why they haven’t begun to explore delivery options for other goods (supplies, alcohol, packages, etc). Is food the only thing people want delivered these days? Without the ability to control the operational supply chain, they might be limited in their ability to deliver other items. As we begin to shift toward the “on-demand” economy, I worry about how will GrubHub broaden its offerings to compete with peers.

      1. Its certainly a debate playing out in the market as we speak…although I’d argue that the delivery business broadly is not all that interesting to me given the razor thin economics and amazing efficiency of AMZN Prime and on the other side a player like Uber with the infrastructure in place to compete. In this arena its really the value GRUB is adding to both sides of the transaction (re: the operating model) which will allow it to grow and either prove to be a true moat, or not; though all are right that they have not yet proven efficacy beyond NYC/Chicago which is troubling.

        I guess where I really struggle, though, is how some of these abhorrently loss-making delivery businesses get $Bn valuations and Grub is only worth $2bn despite a proven economic model which actually turns a profit…but alas perhaps thats a question for another class!

  3. Full disclosure — I am somewhat of a Seamless ‘super-user,’ would probably use it 10x a week in NYC and am deeply disappointed by the offering in Boston. At the end of the day, I think it has way more potential than the Postmates of the world (which get traction among the market cognoscenti because their product is something that appeals to well-off individuals who have more disposable income).

    Vesal’s point regarding the delivery force is critical if GrubHub/Seamless is going to expand out of high-density urban environments where delivery makes lots of economic sense for restaurants. If Boston is too spread out to justify restaurants for this, just imagine what its like in the South and Midwest.

    Final point, I think GrubHub/Seamless has really dropped the ball in terms of recommendations / personalization. This will be critical as scale increases — who has the time to scroll through 5000 restaurants?!
    Considering the amount of data points they

  4. have, the fact that I can’t have a tasty meal recommended to me based on mood / day and time is baffling.

  5. Grotta thx for response and very good point on Boston being awful on Seamless. Not really sure how to explain it – I guess it goes back to Ves and Ellen’s point about being a platform vs. owning the infrastructure, though as I argue I do believe that is the strength of the economic business model.

    Anyway- heres the response from the horse’s mouth (GRUB CEO)

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