Delivery used to be synonymous with pizza, with almost all other kinds of food predominately catering to take-out or dine-in customers only. However, in 2004, GrubHub was founded by Mike Evans and Matt Maloney to change that. Initially, the service was imagined as an online menu aggregation tool, allowing customers to digitally view menus before going to a restaurant. However, over the course of the first decade of its existence, GrubHub evolved. From its humble beginnings, it transitioned into a platform that brings hungry customers, restaurants, and delivery drivers together. Today, GrubHub is a publicly traded company that has 22.6 million active users and processes over 500,000 orders daily!
GrubHub’s value proposition as a platform extends to all of its various constituents. For customers, it has opened up the world of delivered food from pizza to virtually any restaurant or type of food imaginable. This allows them to order food directly to their residence, work, or social events without ever leaving the premise. For many, this time savings and increase in choice represent a significant benefit—businesses can order food instead of catering, for example, and busy professionals can spend more time working without interruptions for the acquisition of food. In addition to delivery, GrubHub provides customers 24/7 customer support and order tracking (an especially important feature for hungry stomachs). For restaurants, GrubHub’s platform creates value in a number of ways as well. Because GrubHub uses its own drivers, it relieves restaurants of the burden of operating a delivery service that isn’t their operational specialty, especially for small / local venues that don’t have the resources or experience to run this additional service. In addition, it provides restaurants with an expanded customer base, partially owing to the fact that food types are searchable by its broad user base, resulting in sourcing new customers and free awareness for its partner restaurants. Lastly, it provides standardized software to the restaurant partners which facilities taking orders, thereby saving them time and resources while streamlining the delivery process. Finally, GrubHub creates value by employing drivers to deliver its food. These “gig economy” workers benefit from flexible work schedules, casual culture, benefits, and free food. Additionally, drivers can receive tips for good service, further increasing their compensation.
GrubHub captures value by charging restaurants a per-order commission via a tiered system. Higher tiers receive greater exposure on the app and thus attract more customers. In addition, GrubHub (usually) charges customers a delivery fee. This revenue offsets their marketing, salaries, and contractor costs. GrubHub is currently the only profitable delivery platform, though its margins have shrunk considerably from 2018 to 2019—down to $1M net profit from $23M net profit in 2018.
While GrubHub has managed to scale dramatically from its inception as a platform, it still faces great challenges as the market catches up. While it enjoys moderate cross-side network effects, its networks tend to be locally clustered groups (no one orders delivery from an extreme distance). Thus, they are less defensible in this respect—other companies can (and have) entered various portions of their market successfully. While GubHub has a generally positive brand image, their business model has proven to be highly vulnerable to competition. Customers simply have very little brand loyalty when it comes to food delivery, making multi-homing to competitors easy and commonplace. Differentiation in this environment is difficult, because in the end the food either gets to its destination satisfactorily or it doesn’t. Most delivery services thus provide pretty comparable services, and only compete on selection, ease of use, and price. Since restaurants and drivers are happy to multi-home as well, selection is very difficult to differentiate on. The result is virtually all delivery services have competed on price. New entrants with VC money to burn have succeeded in gaining localized market share by driving prices down. This has greatly strained GrubHub’s profit margins and called into question the long-term viability of their platform as competitors become ever more numerous.
Going forward, GrubHub may need to look to network bridging strategies to remain viable. Whether through supply chain integration with restaurants, exclusive contracts, or expanding their services beyond food to other things like groceries, medicine, or postal service, GrubHub needs to innovate quickly to find higher margin annexes to boost its bottom line. Unfortunately, many of these will ultimately be indefensible as well as time goes on. Defensive moats in commodity services like delivery are incredibly difficult to create and sustain in the presence of multi-homing and localized network clusters. Thus GrubHub may, at the end of the day, serve as an educational example for a great idea that simply was too easy to replicate.