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.
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:
- ‘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.
- 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 – https://www.bamsec.com/filing/156459015010630?cik=1594109
4 Morgan Stanley “These Unicorns Won’t Deliver”