Disruptors disrupted - the threat to digital delivery platforms that's coming from their own clients

Stuart Lauchlan Profile picture for user slauchlan November 1, 2019
Grubhub has 20 years behind it as a digital delivery platform for restaurants, but the market forces are shifting towards major providers building their own capabilities.

Fast food images of KFC, pizza and tacos
(Fast food images of KFC, pizza and tacos)

Sometimes it’s all about the company you keep. Even as Yum! Brands - owner of KFC, Pizza Hut and Taco Bell - announced moves to accelerate its digital expansion this week, its association with online delivery service platform Grubhub dragged it down.

As noted earlier this year, there are strong ties between the two firms:

[Yum!] has hitched its delivery options to a third party platform provider in the firm of Grubhub. Such is the dependence there that Yum! last year splashed out $200 million to take a 3% stake in Grubhub as part of a five year partnership deal initially focused around KFC and Taco Bell. As Grubhub founder and CEO Matt Maloney said at the time: This is big - the largest restaurant company in the world chose us.

That investment is worth less this week after Grubhub turned some very poor Q3 numbers, which came on the back of the digital delivery veteran losing half its market value this year as competition increases from the likes of Uber Eats and Amazon, but crucially from major food brands building up their own online services.

With three national delivery providers operating across the US, the trick now is focus on being the “most compelling”, according to CEO Matt Maloney:

If you think about the industry historically, third-party delivery unlocked new pockets of growth over the past few years. But with all the major players, at least, expanded across the whole US delivery coverage has now been commoditized…we all have roughly the same algorithm, same driver interactions, the same ETAs, five minute difference in delivery time is negotiable for diners, effectively delivery as a function is commoditized and now with non-partnered restaurant inventory becoming more prevalent, supply side is soon going to be commoditized as well.

It’s now a battle for diner loyalty, he adds:

Diners are starting to sample multiple platforms. We want to make sure that there is no reason for diners to slip back to a previous platform once we've effectively stolen that diner from a competitor…We also know that our competitions diners are placing more and more orders in our platform, so we want to retain as many of these diners as possible. Our goal is to build extremely engaging experiences for diners that reward usage with economic and emotional incentives. We've seen in the data that we're able to steal share that diners are sampling across platforms, especially in the newer markets that we've entered in the last year.

For its part, Yum! remains publicly loyal to its Grubhub partnership. Chief Operating Officer David Gibbs says:

KFC US continues to partner with Grubhub to add locations for delivery and click-and-collect. We officially launched online ordering at KFC.com on October 13 in conjunction with the introduction of Kentucky Fried Wings and our Rudy-inspired advertising.

We now have 2700 KFCs offering delivery in 3700 restaurants available for Click and Collect. We're excited about owning our own digital channel and the operation ease this provides our franchisees, while Grubhub takes care of the delivery.

We continue to expand our Grubhub partnership test with Pizza Hut, which is now active in over 700 restaurants. Pizza Hut is well positioned to leverage being listed on the Grubhub marketplace, but by fulfilling delivery orders through our own delivery network. This gives us better control of the customer experience.

Grow your own 

But the company also wants to grow its own digital capabilities and to that end the firm has made a couple of significant executive appointments. Walmart CIO Clay Johnson has joined the firm as Chief Digital and Technology Officer (CDTO), while Gavin Felder will assume the role of Chief Strategy Officer.  Felder has most recently been CFO at KFC, where he had responsibility for of strategy, digital and technology, supply chain and IT security.

Both men will report into group CFO Chris Turner who pitches the newly-created roles as necessary to “accelerate global growth through technology and disruptive innovation”. In practical terms, that means that Johnson will oversee Yum!'s Global Technology Strategy across the three brands:

He will lead a co-ordinated cross-brand effort to accelerate Yum!'s digital commerce strategy, data and analytics and emerging technologies to enhance the customer and employee experience. Additionally he will provide strategic oversight to our global technology risk management and IT shared services teams. These critical connections will ensure that our technology implementations are developed with the security of our data and infrastructure as the top priority.

Meanwhile as Chief Strategy Officer, Felder will work closely with the CDTO to integrate technology-centric solutions across the brands.

There have already been tech success stories already, argues Gibbs, citing Taco Bell as a case-in-point:

Digital menu boards are offered in over 1,000 locations with the new simplified menu. Delivery is now live in 4,800 Taco Bell restaurants in the US. Mobile and online ordering continue to be a priority, and we are seeing strong results with over 14 million registered users. Additionally, click-and-collect functionality is available nationwide on tacobell.com and the Taco Bell app.

Gibbs is about to assume the role of CEO at Yum! and he's making tech investment is a priority:

From a tech standpoint, we're proud of the work that we've done to-date, but there's a lot more to do. I think like a lot of companies, we have a healthy dissatisfaction in terms of our tech agenda and we're going after it much more aggressively.

For his part, CFO Turner sees three ways ahead in  which that tech agenda can be advanced:

One would be evaluating and considering potential acquisitions or investments in technology companies to help leverage our scale, bring those technologies to our stores and our franchisees.

Second could be commercial arrangements that we make with technology providers that give our franchisees advantaged economics and taking advantage of those technologies. And then third, given the strength of our team, we'll be developing internally proprietary technologies. Those will be the three ways that we can leverage scale in this area.

The areas that we will be hunting in range across the full technology spectrum, but e-commerce, data and analytics and any innovations that improve the customer experience and the economics in our stores will clearly be at the forefront.

My take

The rise of the digital delivery aggregators was a timely disruption in the food and hospitality sector, but may yet prove to be short-lived, at least in its present form.

While having a third party provider to meet the increasing consumer demand for home delivery 24/7 is convenient, it also means leaving money on the table on the part of large chains. Grubhub's Maloney gave the example of seeing a competitor aggregator delivering a $5.99 burger that ended up costing the purchaser $10 once service fees were built on. 

It’s hardly surprising then that the likes of McDonald’s and Yum! Brands are looking to build their own in-house capabilities to tap into that revenue stream and protect their own brands from failures/poor service on the part of third parties - see Domino's Pizza as prime exemplar here

Looking 5 years down the path, will be the main contribution from the first generation of digital disruptors turn out to be having delivered proof of concept for major chains, while finding their own platforms now servicing independent food outlet of the ‘mom and pop’ variety rather than the biggest franchises on the planet?

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