Grubhub CEO on why his firm’s disruptive digital business model is misunderstood by customers and legislators

Profile picture for user slauchlan By Stuart Lauchlan May 13, 2020
Summary:
Grubhub's commission fees have come under fire from all sides, with 'exploitation' complaints exacerbated by the current COVID-19 crisis.

Grubhub
(Grubhub )

Grubhub has benefitted from the rise of third party digital delivery aggregation platforms, such as Deliveroo, Just Eat and Uber Eats, but pre-dates them all. As diginomica noted last year, the firm’s origins lie in a service called Seamless, launched in pre-digital devices 1999 to help New York City workers eat ‘seamlessly’ in the workplace.

The current Grubhub branding came about in 2018 and the platform currently has close to 18 million users of its app and thousands of food suppliers signed up, including some of the world’s biggest brands, such as Dunkin’ Brands and Yum!, owner of KFC, Taco Bell and Pizza Hut.

In its native New York, a city particularly badly hit by the COVID-19 pandemic, Grubhub can boast that around 75% of total restaurants are available on the platform. So it might be assumed that the firm should be well-placed for the current boom in takeaway ordering.

The reality is rather different. As rumors circulate this week about a potential takeover by Uber, they come on the back of controversy over the company’s commission fees that has grown during the pandemic crisis, with the firm accused of profiteering at the expense of restaurant margins that are already eroded and under pressure from the closure of their offline businesses

The situation has become so bad that some US cities, such as San Francisco and Seattle, have taken action to impose a cap on the amount Grubhub is allowed to charge restaurants for its services.

This is a situation that clearly riles founder and CEO Matt Maloney, who argues that delivery platforms assume significant costs on the restaurant's behalf and that capping fees isn’t going to help anyone and will lead to lower orders:

We’ve already seen negative impacts of this in San Francisco. Our preliminary data shows that on average, our independent restaurants are seeing over 10% fewer orders since the fee cap. Many of these orders have shifted to our large brand or QSR  [Quick Service Restaurants] restaurants that were not impacted by the emergency ordinance. That's not good for small businesses. And even worse, these loss orders also result in lost wages and tips for our delivery drivers.

Grubhub wants to do the right thing, he insists:

We are open to reasonable measures during the pandemic that will help and not hurt restaurant revenue. Over time, we believe that reasonable governance will prevail…We are doing everything we can imagine to help restaurants because, at the end of the day, our restaurants' business is our business. Without the restaurants, we don't have a platform.

But for now, the digital delivery platform provider is fighting a losing battle on a different platform - social media. Maloney complains:

It is frustrating when you see a lot of the social media posts that are inaccurate and a lot of them are politically co-ordinated. I think what people forget - and one thing that we are going to try to do better on to highlight - is that the costs are real. If Grubhub or any platform didn't deliver, the restaurant would have to effectively pay the $5 to the delivery person. The $5 is about 20%-plus. You have credit card fees with or without us. You have customer support with or without us. You have fraud with or without us. You're building up to this cost basis. 

We’re making about 1.5%-ish on the order. We're not making the 30% that we're being tagged with. And that's really what the local municipalities are primarily responding to is they hear a 30% take rate, and they think that's all going in our wallet. So I think doing a better job of educating, both the elected officials as well as the general population, is important in the weeks to come. But at the end of the day, there's always going to be pressure from organized restaurant groups to decrease the cost for restaurants, which is very reasonable.  Unfortunately, it's a crisis situation, and these tensions are heightened.

MIsunderstood

There’s a difference between the way Grubhub charges compared to other rivals, he argues, based on a wider digital services offering:

Our pricing is a floor - generally 10% to process online orders - and then restaurants pay us incrementally for more exposure, more CRM, more e-mails, their loyalty programs. They pay us more if they want us to deliver the food versus them. They pay us more to have access to the corporate infrastructure. So it's a really à la carte method of charging restaurants for only what they want. Clearly, our competition came in as logistics platforms and charged 30% blanket fee in order to access any services because they needed to fund the driver every single time. So I think that you have a disparity in pricing models now that it's not properly understood by, frankly, restaurants or the elected authorities.

This isn’t the first time the way the firm operates has been misunderstood, he adds:

For years, we had a micro-site program…We got called out on it and improperly [it was] said we were cyber-squatting, which absolutely wasn't the case. We were listing websites on behalf of restaurants that couldn't do it themselves. This was before there was a wide variety of third-party platforms that would allow small businesses to do their own websites very inexpensively. We would do a free website for them. We would have all their data, we would execute orders across that website. The restaurant would actually promote that website, and we would not charge for those orders, because it was a philosophical definition for us. That restaurant drove that order. The restaurant would pay a credit card transaction fee because that's, again, our cost. That's a pass-through. If we would deliver that order, the restaurant would pay us for the delivery of that order, but not for our marketing piece.

Given the increasingly competitive nature of the digital ordering and delivery platform space, it’s time for a more mature approach to understanding the disruptive business model at play, suggests Maloney:

A restaurant on our platform is free to pay us a very small amount or a very large amount, depending on the exposure and the investment they want to make in their business. I think that is the only logical outcome for pricing models in our industry. I think the one-size-fits-all model will not work, We’re seeing a huge amount of frustration and anxiety around that currently when my industry is the only ability for restaurants to make money during this crisis.

Looking further ahead, Maloney believes that COVID-19 has accelerated behavior shifts and attitudes among users of such digital platforms, both restaurants and diners:

We have been talking for over a year about how supply and fulfillment eventually will be commoditized. But it seems that this COVID crisis has accelerated that trend, because so many restaurants are hurting and some of the restaurants reached out to every platform and said, ‘I need to be on right now’. We've seen that. We've had a lot of new restaurant sign up. I am sure the other platforms in the space have also. So we've been preparing for this for a long time. Signing up is really the first part of working with an independent restaurant. Our partnerships have the lasting competitive advantage that we have and we help restaurants maximize their digital orders with products and services way beyond logistics. 

We have the leading platforms in pick-up. We have an extremely strong catering platform. We have all of our integrations and obviously loyalty, which is one of the most valuable assets on our platform. These tools, they've been evolving for five years with the best-of-class enterprise brands. Every year we're increasing ROI for our enterprise clients and the migration of those tools to independent restaurants really help them drive sales, drive new diners, drive repeat purchase, and clearly, there is a strong flywheel benefit with increasing diner frequency.

My take

Leaving aside the immediate controversy around fees - and you pay your money, you make your choice on that front - Maloney concludes that the current climate is ripe with opportunity for Grubhub:

Looking forward, I think one huge takeaway is delivery, specifically, is front and center for restaurant side. It has been growing over the past five years. Every brand had a strategy, has a plan and they're looking to adapt with COVID immediately. The bit flipped, and delivery and platforms are here to stay. There's no question about it. It's a major part of [their] revenue. It's a sole revenue right now, but clearly, [that] will pass and it will just continue to be a very major part. You're seeing millions of diners try delivery platforms for the first time as they're locked inside their houses. And I think you're seeing restaurants realize the benefits we bring in terms of higher efficiency, better products, tighter integration, for us, at least, a really strong loyalty platform.

Whether that vision remains the driver of an independent platform or one that is part of a wider empire in the shape of Uber is something  that will become clear over the coming weeks.