The restaurant industry isn’t for the faint of heart, and the rough-and-tumble nature of it all has spilled over into the adjacent world of food delivery platforms.
Grubhub, DoorDash, Postmates, and UberEats are some of the most recognizable names in an $82 billion industry that’s expected to balloon to $200 billion by 2025, and competition is fierce for the number one spot. As diners enjoy the choice and convenience, we’re seeing the top players try everything they can to grab the biggest-possible slice of the market, from M&A and tech investments to deep discounts and customer loyalty programs.
Grubhub, the oldest of the bunch, is showing signs of distress. A Wall Street Journal article leaked that the company is looking at “strategic options,” including the possibility of a sale. This is proof positive that winner-take-all dynamics are happening in the industry. And may the best platform win.
Founded in 2004, Grubhub grew from its Chicago roots to become a preeminent mobile platform. Since its merger with SeamlessWeb in 2013, the acquisition of some delivery services in 2014 which added value to select restaurant partnerships, and a $192.5 million IPO, Grubhub had made a name for itself across major US markets and seemed safe at the top.
But things would take a turn. Since early 2017, the delivery giant began to see a decline in customer retention. In early 2019, a report from KeyBanc Capital Markets put the spotlight on Grubhub’s retention problems, along with its losses in initial and peak diner spend. The blame was put on aggressive competition from rivals like DoorDash, which had just raised $400 million, and Uber, which was mulling a $100 billion IPO. These newer platforms had a much wider array of restaurants to order from than Grubhub. Customers now had more restaurants they could order from and fewer reasons to stay loyal to just one app.
Grubhub tried several approaches to turn things around. CEO Matt Maloney insisted that to respond to customer “promiscuity,” the company should go outside the company’s network of partner restaurants and give customers more choice, even if that meant losing money. Grubhub admitted it needed to effectively doubling its supply of restaurants in short order. Without the supply to compete with Uber and DoorDash’s bigger networks, Grubhub couldn’t keep up.
Despite the hit it would take to its unit economics, Grubhub accordingly planned to double its restaurant selection by the end of 2020. In September 2019, it also began a program rewarding repeat customers with points towards free meals to encourage loyalty. But with the rumors around exit planning, these measures clearly were not enough for Grubhub to reclaim its commanding position.
The food delivery scene is rapidly evolving outside the US as well. In South Korea, Delivery Hero bought out Woowa Brothers, the owners of the top delivery app in the country, in a $4 billion deal. That instantly made Delivery Hero the dominant food delivery service in the country. And that came after Delivery Hero sold off its homegrown German operations to Takeaway.com at around $1.1 billion, the latter of which is now the leading industry platform in Germany.
Interestingly, what made Delivery Hero’s move in South Korea possible was the exit of UberEats. According to CEO Dara Khosrowshahi, Uber should be able to reach “number one or number two status” in every market it enters. Uber knows that platform markets are winner take all, and there’s only room for one or two dominant players. You don’t want to be number three, or worse.
Once it became obvious this was not going to happen for them in South Korea’s food delivery scene, Uber left.
This industry consolidation is inevitable, as the biggest players swallow up supply and extend their reach into the furthest corners of the addressable market. The platform that builds the strongest network is the one that wins.
The platform that can create the strongest network effects and deliver the most value to its users gets the prize. In the food delivery space, Uber is looking like it can accomplish this, with DoorDash a strong second.
Where does that leave a Grubhub, which is about as close to an original incumbent as you can get in food delivery tech, given that its multiples make it less-than-attractive as a strategic buy right now? It could perhaps be acquired by a large restaurant chain, or even a big-box retailer like Amazon or Target that has staked ground in grocery. And it’s interesting to imagine Lyft looking at Grubhub as a means of entry into the space, and a way to stand up to Uber.
But however it plays out in the end, consolidation is happening. There’s only room for one or two players at the top.