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Grubhub - Market Analysis & Business Strategy

This is the course report of analyzing Grubhub's Market and Business. PDF download

Author: Arthur M Sampaio, Hongyang Wang, Hector Guo, Xiaojun Li

Date: November 26, 2016

You can have a look at our presentation slides: Grubhub Business Analysis and Prognosis

Executive Summary

Grubhub has been a profitable business and registered an average of 24% growth yearly, but investors seem to be backing off about holding on to their stock due to seasonality of revenue, and possible risk of price drop due to the entrance of new competitors with great recognition and resources such as Amazon Restaurants, UberEATS, DoorDash and Eat24.com (Yelp). The market of food delivery in the United States is at a total volume of $ 70 Billion. However, investor consensus seem to point out that Grubhub was being overvalued and will experience a price adjustment in the next period.

Analysis of Current Conditions

As of February 19, 2016, Grubhub had 1,105 full-time equivalent employees. The company’s market share is 17.79%, Grubhub is positioned in this market with a total revenue of $2.3 Billion per year [19]. In September 2016, the company’s operating margin goes to 16.82% [8].

Grubhub’s core competency is managing two-sided network: providing restaurants on its platform with an efficient way to generate more takeout orders, and providing diners on the platform with an easy-to-use, intuitive and personalized platform. 23% [17] of Grubhubs customers are considered heavy users, meaning they have ordered from the service 10 or more times. Grubhubs primary revenues are the commissions earned from restaurants for consumer orders generated on its platform.

Based on Steve Blank’s Business Model Canvas [21], Grubhub’s value proposition is providing a scalable delivery solution that there is no need to hire delivery personnel and outsource IT to Grubhub. Commission out of each order and marketing & branding programs for restaurants are the company’s revenue model. Salaries to permanent employees and technological setup, cloud servers and running costs are its cost structure. Its customer segments include diners (People who want food to be delivered at their doorstep), restaurants which do not have delivery service, distribution channels (website and mobile app). Grubhubs customer retention rate has been up to 71% [16].

Grubhub’s strengths includes high profitability and revenue, stable performance in domestic market and 24/7 customer support. However, the company does not expect to maintain high growth rates for the next term, it depends on the companys ability to continue to expand its network of restaurants and diners in a cost effective manner.

External Analysis

According to Business Insider, within the United States, customers spent $70 Billion on restaurant takeout but just $9 Billion of that came from online orders. There is indeed space for online ordering to grow which has raise the interest of other players to attempt entrance in this market.

Amazon launched its own meal delivery service, Amazon Restaurants, last November, and rapidly expanded across the United States and already supports 28 cities exclusively to its Prime members. Still incipient against the 1000 cities supported by the Grubhub-Seamless base but there is the Amazon brand and logistics power behind the concept which might give the product the potential to convert users and restaurants. Amazon is promising not to charge a delivery fee. That goes directly against the business model of Grubhub which is entirely based on fee charging of restaurants to participate in the platform. This was also pointed out in the company quarterly report as a probable influencer in the stock price for the next period. In terms of Geographic presence, Grubhub is a company that operates mainly within the United States and has successfully managed to acquire and establish solid presence with 45,000 takeout restaurants in over 1,100 U.S. cities and London.

UberEATS is an on-demand meal delivery service powered by the Uber app. The giant San Francisco based transportation network company is also pivoting into the online food delivery market. The service started as UberFRESH in Santa Monica, CA, but was renamed in April 2015 to UberEATS, when it expanded the service to include Barcelona, Chicago, New York City, San Francisco, Philadelphia, Toronto and Washington D.C. The real threat posed to Grubhub in this sense is that Uber is a brand that has 16 million active users per month only in the United States and 40 million frequent riders worldwide [13]. That represents a huge user base that is already there waiting to be offered new products and services, which is exactly the main reasoning behind the strategy for Uber to pivot into this $9 billion market of which Grubhub was only capable of acquiring $355 Million.

Another important player in this market is the Eat24.com brand that currently holds about 20,000 restaurants on its platform across 1,500 cities. This company reported net income of $32.1 million. The important factor here is that this company has been recently acquired by the Yelp.com brand for an amount of $134 million, with $75 million in cash and the rest in Yelp shares, for the comapny. The thinking is that this acquisition should help in giving the company more contact points with restaurants as well as helping the company enter the food delivery market and pivot away from only offering recommendations, which for them represents a new revenue stream [14].

Even with competitors already in the space and powerful new entrants in the market Grubhub’s CEO, Matt Maloney still claims that the market is big enough to accommodate all the players as well as make them really compete in terms of quality of service and price attractiveness to the customer [15].

The political field would initially not seem to have a huge impact on GrubHub’s operations, but Matt Maloney, CEO, recently experienced a hit from an email he sent to the company’s employees on November 9th 2016 expressing his feelings about the election of Donald Trump for the presidency of the US. This has induced hatred and the company stock dropped 3% the day after. Even if the political scenario wouldn’t seem to influence the amount of food ordered online, the company’s image can be influenced by its leadership’s political views and positioning [18].

The Economics scenario influences consumer purchases in general. It generally declines during recessionary periods and other periods in which disposable income is affected meaning that GrubHub’s business should be directly affected by the economics panorama in the United States [19]. As for social factors it is perceived that certain zones of metropolitan areas might be particularly dangerous for delivery. This can pose challenges to delivering at certain areas during certain periods of time. Technology trends will influence GrubHub as well because the company relies on the use of the Internet via websites, mobile devices and other platforms which mainly relies on the perceived security of information or privacy protection.

Potential liability, expenses for legal claims and harm to the business relating to the nature of the takeout food business, which represents the Legal challenges that the company might face. Food tampering and other factors might as well influence the amount of legal suits that GrubHub faces. They are a integral part of their business model, which the company informs that they have faced this in the past and expect to continue facing in the future [19].

The last point that accounts for PESTLE analysis are the Environmental and Ecological factors. Quality of water and sanitary conditions may endanger the customer as well as foodborne illnesses and injuries caused by food tampering can create bad reputation for GrubHub so those are points to be monitored and enforced in the company’s business model.

Strategy Identification & Assessment

Current Business Strategy

Grubhub’s goal is to make it easy for people to order food online from a variety of food joints in their city as well as to help businesses serve a larger audience by being an online and mobile food-ordering company that connects diners with local restaurants [1]. Its platforms and services focus on making takeout better through innovative technology, ease of use and an enhanced delivery experience. The company’s strategy includes acquiring as many active diners as possible by implementing effective order processes and creating strong partnerships with restaurants. The revenue stream of Grubhub includes three parts: 20-40% delivery fee, 12.5% basic commission on each deal, and up to 17.5% extra commission for higher rank of restaurants. First of all, the 20-40% delivery fee is charged to customers as an effort-based revenue logic. Customers pay for the delivery service to Grubhub. Then Grubhub pay for the efforts to deliveryman, as well as getting avenue for providing them job opportunities. Secondly, the way of taking 12.5% basic commission on each deal is a typically Revenue Sharing logic. Viewing from the restaurant’s perspective, Grubhub is an Application Service Provisioning (ASP) platform providing sale channels. For the profits made from these channels, Grubhub and restaurants share the profit together. Finally, theextra commission is kind of a license sale revenue logic. Several levels of extra commission: 0%, 2.5%, 7.5%, 17.5% [3] are set for different rankings in the same food category. And this kind of hierarchy ranking is the default sort method when people searching for food.

Apart from revenue stream, cost structure of Grubhub is consisted by three parts: salaries to deliveryman / employees, platform setup / running costs (including server fee, storage fee), and advertisement fee.

Grubhub used to be the leader of the delivery market, and accumulated a bunch of customers. The high brand value and user base are two main competitive advantages. But in recent years, it encountered fierce competition. Two of the main competitors are EAT24 and UberEats. They both have the competitive advantages of user base and convenient resources(restaurants and delivery car), which put Grubhub in a disadvantageous position.

Grubhubs future strategies include two parts: declining the delivery cost and acquiring more users. On one hand, to make deliver fee lower, Grubhub starts its own delivery service and cut down the middleman by making partnerships with drivers [5]. Apart from the offline solution, Matt Maloney, CEO of Grubhub, also takes big data as a possible solution by using big data to scale to delivery from multiple locations to multiple recipients [6], hence the lower delivery cost. On the other hand, to aquire more users, one direct way is to buy local compnaies and this strategy helped Grubhub to keep the growth of net income even facing fierce competition in 2016 [7]. Another way is to create better food dicover experience in product by leveraging big data, which has already been used by EAT24.

Business Strategy Logic

Grubhub was one of the first entrants to the online food delivery market which entered in 2004. [20] This lets them gain customers early and have customer basis of this industry compared to their competitors. Since then Grubhub focus on food delivery industry - most their products and services are about food delivery which aiming to optimize customer experience and gain more customers. Grubhub aim to use innovative way to innovate food delivery industry. Their platform empowers diners with a direct line into the kitchen, avoid- ing the inefficiencies, inaccuracies and frustrations associated with paper menus and phone orders [19]. To make this direct line more convenient, the company expanded their products covering multiple devices including Website, Mobile, Apple Watch and Apple TV applications for both diners and restaurants. This kind of multi-platform product makes diners order easily and makes restaurants manage order efficiently, which can grow relationships with both diners and restaurants.

In addition, the Company has a powerful two-sided network that creates value for both restaurants and diners which means that increase of each side will result in increase of the other side. As mentioned above, the revenue of Grubhub generated mainly from commission fee of each order. In other words, more diners, more restaurants, more orders and more revenue. Because of this, the company define their strategy to attract both more diners and restaurants. The key strategies are optimizing customer service to give what customers want and acquiring companies to expand market. Review and rating system, 24/7 customer service for diners and Orderhub platform for restaurants are good execution example for their strategy. In overall, Grubhub has gained sustainable profit and growth in past years because of their strategy. But current strategy of the company doesn’t estimate any sustainable growth in the future. Because the growth rate is decreasing in recent years.

Strategy Recommendations

The food delivery industry now is so crowded that Grubhub face great challenges from competitors. To address this kind of threat, the company has perfect customer service and various products to gain customers. This part of strategy is very useful and should be used in long term because this makes diners and restaurants dont want to switch to other competitors. As mentioned above, food delivery market is currently at $70 Billion per year in the United States from which $9 Billion is Online while Grubhub food sales in 2015 is only $2353.6 Million. Grubhub still has a lot of space in U.S market that they should invest more on marketing to attract more diners and establish their brand. The company can put its logo in restaurants and buses where have more hungry diners. Also another good strategy is acquiring companies to expand market. This also should be executed better to capture great opportunities within U.S.

However, comparing to their competitors, the weakness of high commission fee may make Grubhub lose relationships with restaurants. Thus Grubhub should reduce the commission fee to face competitors threat and come up with new sources of revenue to eliminate threats of single revenue source. New product line like door-step good delivery to be new revenue source is a good idea because Grubhub already have their own delivery personnel. Another opportunity for Grubhub is the global market. Now Grubhub focus on U.S market which is limited and crowded by competitors. As estimated, Grubhub’s market could be saturated within seven years if only focusing on U.S market. Thus capturing global market maybe the alternatives of current strategy.

Conclusions

Due to the high revenue and sustainable profit of Grubhub in recent years, the current strategy of Grubhub is successful. Based on their business strategy, the company gain significant customer basis and sustainable growth since founded. But the competitors of this industry emerge in endlessly, some parts of current strategy may not be successful in the future. Whats more, Grubhub now has no sustainable competitive advantages which can make them succeed in a long period.

Grubhub should maintain good strategy like perfect customer service, various products and continuously acquiring companies which help them gain current customer basis. Mean- while, Grubhub should reduce vulnerability to external threats and succeed in long time. First, global market is important because U.S market is limited and crowded with many competitors. Focus more on global market can make Grubhub prepare for domestic market saturation. Second, reduce commission fee is necessary because other competitors set free commission fee to grab market. But commission fee is the main revenue source for Grubhub which means that reduce commission fee may result in decreased revenue. Thus coming up with alternative revenue generation strategies such as other goods delivery except for food is another suggested change for Grubhub.

References

  1. Ajay Deep, Insights into Grubhub Business & Revenue Model: Know How It Works, Juggernaut 2016. 8, Oct. 2016
  2. Grubhub, Grubhub: Grow Your Restaurant Business, Delivery & Takeout Orders. Grubhub 2011. 8, Oct. 2016
  3. Tribeca Citizen, Why Restaurants Hate Grubhub Seamless tribeca citizen, 2016.3, Oct. 2016
  4. Leita Hart-Fanta, CPA Accounting DeMYSTiFieD 2nd edition, P13-15
  5. Grubhub Will Dominate the Food Delivery Market by Cutting Out the Middleman Eater, 2015.10
  6. Grubhub CEO Thinks Data Not Content is the Future of Restaurant Discovery 2015.10
  7. Grubhub Inc., Grubhub Acquires Delivered Dish, prnewswire, 2015.12.07, Oct. 2016
  8. GRUB:NYSE Operating Margin
  9. GRUB: NYSE Forecasts
  10. Grubhub growth slows in Q1 2016
  11. Grubhub Third Quarter Report
  12. Grubhub Reports Record Third Quarter Results
  13. Uber now has 40 Million Monthly Riders
  14. Yelp buys delivery network Eat24 for $134M to ramp up in food operations
  15. Why Grubhub’s CEO Isn’t Worried About Uber, Postmates, or Even Amazon
  16. Why Grubhub-Seamless (GRUB) is outlasting food delivery startups ... 2016. 15 Nov
  17. Grubhub and Seamless have the most heavy users - Atlas. 2016. 15 Nov. 2016
  18. Grubhub faces backlash after CEO’s anti-Trump email to employees 2016. 19 Nov. 2016
  19. GRUBHUB INC. Annual Report 2016. 10 Nov. 2016
  20. GrubHub and Seamless feel the effects of increasing competition. 2016. 11 Nov. 2016
  21. Business Model Canvas 2016. 19 Nov.

(picture source: Maggie Sichter on Behance)

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