Delivery Consolidation

This originally appeared in the May 13, 2020 edition of Expedite. Subscribe here.

One of the themes I’ve been toying with is about big tech getting bigger in this pandemic. I wasn’t really thinking about food delivery consolidation, but yesterday brought a big signal: Uber’s rumored interest in an all-stock purchase of Grubhub. Consolidation in the food delivery space has been a given for a while, though who’s buying who usually depends on who you ask and when you ask them.

There are the investment and regulatory perspectives, and there’s the what-this-means-for-everyone perspective. I’ll take the latter, but there’s plenty of good analysis on the former if you’re interested. (H/t to Stratechery, my second-favorite newsletter after my own, for a great, subscriber-only analysis of this situation, including potential regulatory hurdles.)

Neither Grubhub nor Uber have confirmed or denied the reports, but at this point, consolidation in food delivery is basically a given. Things are changing quickly in the food ordering and delivery space. The way we interact with restaurants is changing, the way we think about dining occasions is changing. These changes aren’t temporary. Grubhub and Uber Eats aren’t restaurant brands, as much as they want to be. They’re consumer-facing logistics operations operating under a marketplace layer.

It’s Wednesday afternoon and there are already more than enough Uber/Grubhub hot takes out there. Here’s one more, featuring the first things that come to mind when I think through our food delivery future.

A split between independent restaurants and enterprise (chain) restaurants when it comes to ordering and delivery:

When we (that would be the royal media “we”) write about delivery services, many of us think about the sorts of independent restaurants that we frequent ourselves. But a huge, huge part of third-party delivery comes from big brands like McDonald’s. In fact, Uber Eats tied itself exclusively to McDonald’s in 2017, using the chain’s size and scope to grow. Yum Brands (Taco Bell, KFC, Pizza Hut, now Habit Burger) and Grubhub sealed an exclusive deal in early 2018 that came with a sizable investment in Grubhub from Yum.

Exclusivity was used as a growth mechanism, but isn’t really the case anymore. Shake Shack took years to finally commit to Grubhub/Seamless, which it announced last year, but now you can get delivery on other platforms, too. In late April, it ran a promo with Uber Eats that included free delivery for orders above $15.

Caviar, which built its business by offering takeout and delivery from independent restaurants, is now part of DoorDash, which counts Chipotle among its large slate of enterprise partners. I wouldn’t be surprised if Uber Eats/DoorDash start to be viewed as part of the quick service restaurant industry, while services like Tock To Go or just traditional call-the-restaurant-to-order-takeout methods gain popularity among independent restaurants.

Plenty of restaurants differentiated to-go menu items and dine-in items in the past, offering a subset of orders for takeaway. That’s becoming more popular, as restaurants come to terms with the fact that off-premise dining is going to be with us for quite some time. I didn’t really think we’d start seeing meal kit delivery become part of top-rated high-end restaurants’ offerings, but here we are.

The services the consumer sees are just part of what these companies offer.

A fun thing about restaurant technology is that tons of people tend to have huge opinions on consumer-facing tech because “everyone eats.” People ask all the time why there isn’t a “better” version of Grubhub, or some disruptive new company that wants to overturn the space. There are many, but they’re not the type of massive consumer brands that the big delivery players have become. ChowNow is a good example, because it’s the closest to a 1:1 substitute for a Grubhub or Uber Eats or DoorDash. The company charges restaurants a flat monthly fee to accept orders directly. It can help them contract with a third-party delivery service to deliver the food, or just offer it for takeout. ChowNow CEO Christopher Webb told me that about 70 percent of restaurants that use ChowNow offer both delivery and pickup, and he expected that percentage to grow.

Grubhub spent $390 million on LevelUp in 2018 to bolster its own loyalty and personalization efforts. Now the company is marketed as “Grubhub’s development shop,” offering things like brand-specific mobile apps and loyalty programs.

The other side of this is that absorbing food delivery into a larger organization that is squarely focused on logistics might be a better idea in these market conditions. This might help allay some pressure to profit in the short term. Sure, Uber might be looking for a good way to diversify and help improve its bottom line while the rideshare business takes a huge hit, but restaurant delivery is not going to save Uber’s business. (Nor does it sound like the business needs saving at the moment.) A few earnings calls ago, Uber’s CEO said that Eats would exit markets where it wasn’t the number-one or number-two option. A Grubhub takeover would put it solidly in the top spot in the US, it’s home market. World domination is probably an even better sell when you’re killing it at home.

Online ordering and delivery are two different things, and this pandemic is highlighting the difference.

The end-to-end app experience (push button: get food) is what made these companies big, but there are a ton of small steps in that process, all of which carry some value to the restaurant and the consumer.

We’re starting to see signs of breaking up these actions. In a New York proposal, the commission fees that a third party can charge a restaurant differentiate between orders delivered using these services and orders simply placed via these services. This is an important distinction.

Online ordering and the way that these apps feed restaurants orders matters. More companies offer online ordering, especially now. Toast offers it, directly integrating with a point of sale system; BentoBox offers it as part of its website-building services. There are many, many more. These services don’t get the attention that Grubhub or Uber Eats get, because they aren’t consumer-facing. When these b2b (that’s business-to-business) programs or software work well, they’re undetectable to the customer.

DoorDash has a program called Drive, which provides restaurants (and other businesses) with on-demand delivery services. A restaurant doesn’t need to accept orders via DoorDash to use this service; it can take orders on its own and use the DoorDash fleet to deliver.

A merger, takeover, acquisition, whatever won’t curb the things consumers and restaurants don’t like about third-party delivery.

The economics of this business model are tough, tough, tough. Services lose money on orders routinely. There’s not really been a competitive rush to lower fees that restaurants pay (though DoorDash has made some real progress here, cutting commissions that independent restaurants pay in half.) There has been a competitive rush to lower fees for diners, chasing a sustainable cost per acquisition (CPA: a metric that describes the cost to acquire a paying customer.)

There’s also the business of non-partnered restaurants, which account for roughly a third of Grubhub listings. (In its most recent earnings report, Grubhub said that more than 200,000 of the 300,000 restaurants on the platform work with Grubhub directly.) The company took a lot of heat for the practice, which literally every other third-party marketplace practices. It was another way that these companies grew quickly, though it certainly didn’t curry favor with restaurants who didn’t want to be on the platforms. Proposed legislation in California, pre-pandemic, would make this practice illegal.

This might actually be good?

From where I sit, it didn’t seem that choice was making independent restaurants feel better about their delivery options. At the end of the day, all the terms are basically the same. Enterprise restaurant companies benefit more from choice and competition, because, presumably, signing an exclusive deal with one provider comes with favorable terms. Small restaurants never had that kind of negotiating power.

But this could free up some cash that could be put to better use elsewhere. Last quarter, Grubhub spent $91 million on marketing expenses. If people open your app before the other ones because it’s top of mind, that’s good business when there’s competition for every diner and every restaurant. Beyond this, delivery is not a zero sum game. A restaurant can choose to work with any number of delivery partners, and plenty are on more than one platform.

There’s a lot of hand-wringing happening here.

Delivery services aren’t “good” or “bad,” and you don’t need to delete all your apps in some grand gesture. One of the things the pandemic is laying bare is the fact that we are conditioned to a world of convenience. If we didn’t expect things to arrive at our homes for a low cost after pushing a button, we wouldn’t be here in the first place.

Before Covid, a lot of restaurants said they didn’t want to be on these platforms, but they felt they had to because of customer acquisition, incremental diners, convenience, branding, you get the picture. Now that dine-in restaurants can’t operate as they did a few months ago, delivery and takeout diners are not incremental customers, they’re the majority.

On the company’s most recent earnings call, Grubhub CEO Matt Maloney said, “If anything, this crisis has accelerated the adoption of online ordering by both consumers and restaurants, which is obviously a long-term net positive for our marketplace.” Third-party delivery companies want to be the go-to method for placing these orders, and for big restaurant companies, inking deals with them makes financial sense. For the rest of the business, the hundreds of thousands of independent restaurants trying to make it through this time and come out stronger on the other side, this could be a true reset moment. Let the burger chains have their Uber Eats and focus on a new, forward-looking, sustainable experience.