What is Happening with GrubHub and the Food Delivery Gig


(Bick Bhangoo) #1

Two stories about the amazing rise of GrubHub. The first is around the rise of GrubHub's share value for 59 cents, and this happened because GrubHub partnered with Yum! Brands Inc. in February 2018, which pushed their shares up by 17%.

The second story is how GrubHub continues to surprise us with ways of increasing their size and scope, this time by their continued collaboration with Yelp, which is another gig platform. GrubHub together with Yelp now reaches over 80,000 restaurants, which is double its scope before the new collaboration.

These two stories merge together when looking at GrubHub from a world viewpoint.

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GrubHub is competing with UberEats, DoorDash, and other food delivery services. It is also a giant and is traded publicly which gives it access to cash, and lots of it. What is happening in this sector of industry is a lot of mergers and acquisitions (M&A) as well as collaborations between services and suppliers, such as the contract between UberEats and McDonalds.

GrubHub is competing in a new market niche, these food delivery service market. This niche is problematic, since restaurants operate at very low-profit levels, usually under 25%, I most cases around 10%. So, delivery services to open up access to more customers but can cost a restaurant its profit. There is no point in operating at a loss, so companies such as GrubHub and competition are trying to fight two battles at the same time.

The two fronts are pricing and scope. Where companies such as GrubHub operate at low-income increments, they need millions of such deliveries a day to be successful, and at the same time provide a cheap delivery service for restaurants, and customers while paying their delivery personnel properly.

Let's take a quick look at the past to get a benchmark for what is happening now.

The Past

Before the smartphone door to door, delivery was split into two groups, the supplier, and the logistics company. A supplier in this instance would be a restaurant or shop; a logistics company would either be a local small courier company or a larger logistics service such as DHL. The couriers were either kids or students working directly with the supplier or with a local courier service. The large companies employed their own staff and were categorized by the type of delivery service they performed.

So, we now see youngsters and students earning a few bucks for delivering on their bikes, or using a special vehicle supplied by the shop or restaurant. In the case of the courier service, a bike or car provided by the service, or in some cases owned by the courier. Logistics companies did not deal with local deliveries.

Our benchmark is now set: a person seeking supplementary income using a bike or vehicle to deliver for a supplier. The income that was paid by the supplier differed according to each supplier's business model, and in most instances was not a lot. Courier services either paid a base minimum wage with an addition per delivery or paid larger percentages per delivery without a base wage.

Today: the app tech of smartphones allows companies such as GrubHub to collect suppliers online and provide a comprehensive service to customers. However, they cannot separate the different business models that each supplier has, so they set a percentage fee based on the order size. Basically, GrubHub is a middleman, that takes a cut from a service that didn't use middlemen before. Add to this that the courier fee was on the customer and not the supplier, you get to see how the new model is confusing the public and is actually destroying an economy.

After all, the new gig economy is not really new; it is just a kind of middleman marketing trick to get people to think they need this new and amazing service. In reality, we do need it, but it has to be developed for a win-win situation.

This ongoing price wars destroy everyone and leave the public confused. This is the case with GrubHub et al.

The Business Model Error

What we expect to see developing in the near future is a collapse of many delivery companies as well as restaurants that cannot support the cost of the delivery. Eventually, the world will realize that the new "gig" economy is nothing but a falsely marketed middleman trial to make millions from a market that cannot generate this income.

Unless GrubHub transfers the cost of the delivery onto the customer, takes a smaller fee from the supplier and pays the courier a percentage of the income, like a partner in the business. They will eventually burn themselves out of a market.

Sure, we will see giants evolve here, companies that take over nations, with millions of suppliers on their platforms. At the end of the day, these giants will work with a different pricing method than they are at present.

The business model should be this:

  • A restaurant pays the app company 5% of the order value.
  • The customer pays a flat fee for the delivery based on distance (not time).
  • The courier gets 40-50% of all the income + tips.

This business model gives:

  • GrubHub uses 60% of all income to finance their operations, marketing, and customer services.
  • Customers pay an expected delivery fee only.
  • Restaurants pay a percentage ratio that does not damage their profitability.
  • Couriers get 40-50% of the order value + tips.