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Anonymous

Former Director, Product at Grubhub 

Online Food Marketplaces: Differentiating the Supply Side

{audio:0:00:00} Can you provide some context on the industry structure when you first joined Grubhub in 2015?

{audio:0:00:11} Earlier in 2014, Grubhub had been growing at a rate above 100% a year, closer to 120%. They went public and merged with Seamless, which owned the New York City market; by far the biggest in the country. I joined a few months after they’d completed putting those two companies together, as well as the software and products behind them. They were at a crossroads. At the first quarterly earnings after I got there, European growth had gone down to 27%. So, you go public, growing at over 100% a year, and now suddenly, your growth has slowed to 27%, your stock is gone from above 40 to below 20. At that time, they really didn’t have strong competition. They still had over 70% market share, a lock on the NYC market, and strong percentages in most other markets. There were a lot of competitors, but they were all small companies that never went very far.

{audio:0:01:54} A big reason behind some of their success and early loyalty was based with Seamless and the NY market. The way Seamless started was to focus on businesses, particularly the financial services market. I think some of the early VC money came from people in NYC who had strong relationships with the financial services companies, so they were able to get Seamless into those companies. The selling point was, you are paying your workers to buy lunch and sometimes breakfast and dinner because they’re working here around the clock, and you expense these meals. With Seamless, you give them a bunch of restaurant options, they can order wherever they want, and we can automatically bill you. Your employees don’t have to expense anything, and you can set up rules about how much money they have, use it or lose it, every day, for each person. It’s pretty slick.

{audio:0:03:05} But what happened was, a lot of people were getting three meals a day through Seamless. They had to find selection and variety or else they’d go crazy. People would build up all these go-to restaurants. That industry churns and burns people, most of them are out in two or three years. But in NYC, they’re so used to Seamless, every day, and all their favorite restaurants, and they’ve still got the app, so it carried over into their next life, wherever they went to work. That’s a big reason why they got this lock on the NY market.

{audio:0:03:49} Why did growth fall off a cliff in that first quarter, post-IPO?

{audio:0:04:00} I don’t know all the reasons. Part of it was, they were a lot smaller, no-one had heard of them, then they went public and were in the public eye. They weren’t spending a ton of money on marketing, but they got a bunch of free marketing at that time, through going public and all the news about the merger.

{audio:0:04:27} One of the biggest struggles during 2015 was that merger, when they were trying to move quickly to bring the companies together. Seamless and Grubhub had different feature sets with their products, and there were certain features that couldn’t be supported in a combined back-end experience. There were some features and, in particular, affirmating data that were lost; the personalization, people building up their list of favorite restaurants and meals. There was a lot of frustration with customers, and even though there weren’t a lot of strong competitors at the time, there were still competitors that were giving away free money.

{audio:0:05:19} You’d get on the subway and it wouldn’t just be Seamless that would be mentioned. There would be delivery.com and Eat24. There were a lot of companies vying for business, trying to give $10, $15 off your first meal. It wasn’t the crazy Uber Eats and DoorDash money that would come soon thereafter, but there was still a lot of money being thrown out there. So, when Grubhub and Seamless hit that rocky patch, people opened their eyes and said, “People are throwing money at me, let me try these products.” I think that caused that temporary bump in the road.

{audio:0:06:03} What was the impact of DoorDash and Uber entering the market?

{audio:0:06:12} In 2017, Uber Eats really started to gain ground. At the time, Uber had over $7 billion in VC money waiting to be spent, and the only company Uber was running besides Uber itself, was Uber Eats. They were able to invest a lot of money, and they did a really good job putting a big team together that would go from city to city curating restaurants. They would do research to find the most attractive restaurants and go hard to bring those restaurants on. And they had a nice advantage in that they already had their delivery network in place. They, essentially, required that drivers would take Uber Eats orders mixed in with their rides.

{audio:0:07:19} When Grubhub started trying to build that up, they had to build it from scratch. They didn’t already have people giving rides that could take on meal orders as well. They had to build up supply and demand at the same time, and it’s difficult to get that balance. Uber Eats had a nice advantage, and they moved into some markets in a much bigger way. Grubhub had been in Miami for some time but hadn’t focused hard there because it wasn’t doing super-well. Uber Eats went in and created a great experience in several Florida cities, but Miami is a good example, where they became ubiquitous. Everybody knew Uber Eats. They were able to go in and win some markets where Grubhub hadn’t focused.

{audio:0:08:22} We had maps, at Grubhub, color-coded, where you could see who was number-one in each state. Early on, in 2014-2015, Grubhub and Seamless owned most of the map. Then, as these other competitors came up, you’d see it start to shift. The first to market was often the winner, or the one to go seriously into the market, so it was interesting to see that evolution.

{audio:0:09:02} Then DoorDash took it up a notch. They did a great job of building up their delivery network of Dashers. Their twist was not necessarily having to have a contract with a restaurant to put them on the network. Grubhub’s CEO really cared about restaurants. He wanted them to be successful. He felt it was disrespectful not to create a contract with a restaurant. He wanted something that would work for the restaurant, Grubhub, and the consumer.

{audio:0:09:45} DoorDash didn’t care about that. They were just adding the very best restaurants that consumers wanted. If they didn’t have a contract with them, they would just stand in line and buy an order like a normal person and then deliver it, without any kind of relationship with that restaurant. That opened a lot of doors and let DoorDash scale much more quickly. They could then focus on getting that delivery network right, getting enough Dashers in place, but they didn’t have to spend as much in selling restaurants. They could just add whatever restaurants they wanted and move ahead quickly. So, a hardcore Seamless or Grubhub fan moves to the suburbs, there wouldn’t be nearly as much selection. Then they see adverts for Uber Eats or DoorDash with free money to try it out, they go on there, and there’s serious restaurant selection. You’d see these companies start to grow in those areas especially.

{audio:0:10:59} Were Uber Eats and DoorDash scaling in more rural areas where Grubhub didn’t have the density of orders?

{audio:0:11:12} I would say Grubhub was especially effective in the biggest markets. It had focused marketing efforts in the biggest markets. Uber Eats moved out into some of the smaller markets, like Miami. It was what we would consider a tier-two market. They really started to target the tier-two and tier-three markets. But DoorDash took it to another level; they just wanted to go everywhere. Anywhere they could add a great restaurant, they would add it to the platform and try to get Dashers in place to support it. They went an extra level deeper, for sure.

{audio:0:12:01} I would say, what really got Uber Eats on the map was their co-branded partnership with McDonalds. It’s everywhere. Any town of significance has a McDonalds; sometimes dozens or even a hundred of them. Any person can find a McDonalds near them, so that put the reach of Uber Eats to most people in the country. And the co-branding was fantastic. They were losing a lot of money. McDonalds didn’t pay them any money, but they were getting incredibly strong brand recognition. They created relationships with several national companies, TGI Fridays and Olive Garden, things like that. But McDonalds was the one that put them on every corner. There would be signage in the window, on the counter. Everything said, “Order McDonalds through Uber Eats.”

{audio:0:13:18} Initially, people at Grubhub questioned if that was really the right co-branding to have; to associate yourself with McDonalds. Grubhub had just rebranded and tried to move beyond the college student approach of, “Hey, I just order to my couch,” to, “We’ve got food of all quality and variety for students and families, anybody.” Did you really want to be so closely associated with a fast-food brand as the main way people get to know you? Well, it proved to be a huge growth engine for them. Everybody knew who Uber Eats was in the course of six months because of that relationship.

{audio:0:14:07} In Grubhub’s annual report in 2014, the annual frequency per customer was 13 times and that’s treaded down towards 9 times per year in 2018. In Q3 of this year, due to the huge choice available on Uber Eats and DoorDash, Grubhub has seen lower frequency of ordering from customers. How do you look at consumer behavior in this type of landscape?

{audio:0:14:59} I think you have to look at the data. The data was skewed by heavy metro areas, especially NYC. You might say, “Well, that’s only one city,” but it was a major impact on all our metrics. We would separate out NYC metrics from everything else, because they skewed things so heavily.

{audio:0:15:30} Is that because of the Seamless deal, that they had existing customers and businesses that would order every day, and it would inflate those numbers?

{audio:0:15:39} And they still do, to this day. But all the alumni of those companies that left but stayed in NYC were Seamless customers for life. They had 30 go-to restaurants and they could order in two seconds from wherever they like on a whim. Seamless is a way of life, it’s a verb in NYC. They might order 50 times a year or 300 times a year. Some people are ordering every day from Seamless, so those numbers skew the person in Charlotte who might order once or twice a month, seven times a year, three times a year. It was just expected that, as you ramped throughout the country, you would see some of those numbers go down, as you move into places where people weren’t likely to order as frequently.

{audio:0:16:45} What do you think the average annual frequency is in NY?

{audio:0:16:50} I honestly can’t remember, but for those companies, it was probably 7 or 8 orders a week at least, so you’d be looking at 300, 400, sometimes 500 orders a year. Then people who left weren’t getting it for free, so that changes things. Price is a big part of what drives behavior, but they’d still order usually a couple of times a week. You’d still maybe get 100 or more orders a week from those people.

{audio:0:17:32} What percentage of Grubhub’s NY business is those alumni or existing Seamless business deals, roughly?

{audio:0:17:41} I would only be guessing, but my gut feels it’s 70%. Seamless is a brand because it’s so ubiquitous in NY. When Grubhub bought other companies like Foodler in Boston or Eat24 in San Francisco, they converted all those people to Grubhub and never used that branding. But Seamless is such a strong brand voice, they’ve continued to market that in NYC. You go on the subway and you still see all the advertisements for Seamless. It’s how NY eats.

{audio:0:18:23} It’s almost like a B2B business, rather than B2C, in a way.

{audio:0:18:30} It is, but it’s a completely different platform, and they’ve worked to update and integrate it with the current stack. By now, they have finished that, so it continues. Selling into businesses and offering this easy way of letting people order meals, have it auto-expensed, managing that expense at an individual level with rules; that’s something that still goes on, and it’s a strong driver. They’re trying to expand it into other markets.

{audio:0:19:09} Uber Eats has their own solution along those lines as well. It’s important and creates a strong loyalty, but I would also say, as far as the reduction in frequency per customer, the other huge thing is the big injection of money from DoorDash and Grubhub. It’s not just one order. There are all sorts of ways they’ll give you free money, free delivery. They’re always throwing promos at you, losing money hand over fist. Where Uber is public, you can see their quarterly reports, they’re just bleeding money. It’s one of Grubhub’s biggest advantages in this battle.

{audio:0:20:06} When I got there, 95% of our business was restaurants that did their own delivery. Delivery’s a big expense, but strategically, to bring on additional restaurant chains, Grubhub has beefed up their own delivery. They still have a very healthy portion of their business that is restaurant delivery, which is much more profitable, so they balanced it better. They have strong growth and they’re healthy, but this is a gold rush. Uber Eats and DoorDash are pumping money into this, so we’re just ploughing our profits back into growth. Wall Street doesn’t like that, but I think longer term, Wall Street will like it because they’ll see, “Okay, they’re profitable.” If they wanted to pull back a little with growth, they could still be growing 20%, 30% per year and have very healthy profits.

{audio:0:21:13} Matt Maloney mentioned, roughly 80% of orders are from those independent restaurants on the platform, which I assume is mostly restaurants that do their own delivery?

{audio:0:21:30} Yeah, a lot of independents tend to do their own delivery, especially pizza and Chinese restaurants, a lot of those are independents.

{audio:0:21:50} Do you think it’s possible to drive customer loyalty in this landscape?

{audio:0:21:56} I do, but I think it’s tricky. I haven’t seen an example like this, where you have a new incumbent, profitable and growing, and then multiple companies come in with billions of dollars to spend, with no care about profitability. Uber’s obviously gone public in the last year, and you can see what’s happened to their stock, they’ve really been clobbered. But DoorDash is still in a state where they’ve got billions of dollars sitting there. They’re not public yet, and they’re spending like crazy.

{audio:0:22:44} I think loyalty is difficult when people throw money around. 20+ years ago, in the US, there were a lot of competing telecom companies. Your phone bill would be $120 a month, and there would be competing phone companies trying to win your business saying, “Hey, sign up with us, we’ll give you $150 cash.” Then you could quit that one two months later, because another one was offering a similar deal, so you’re practically making money off these people. There was no logic to the market, it was a free-for-all trying to win customers, there was so little loyalty. It feels like that’s the case right now.

{audio:0:23:38} However, I do think there are some options to improve loyalty, and I think it’s one of the reasons they’re all successful in different areas. One of them is restaurant selection. You need the best restaurants in the area, and some competitors don’t have them. If I want to order from North Italia, I’ll go and see which platform has it. Then I know Grubhub’s got North Italia, so I’ll just go on there for now. People have more loyalty to a restaurant than they do a platform. If a restaurant is always on the one platform, they might not even try the others. Companies are also trying to create a loyalty program. Uber is trying to do it. They’ve already implemented it on the Uber side, but I haven’t noticed it on the Uber Eats side yet.

{audio:0:25:00} The problem in this market is there aren’t huge margins. Starbucks can let people order six coffees and then give them one for free, because their cost is almost nil. With Grubhub and other companies, margins are slim, so you give away one free meal, after 10 orders, and lose your entire margin.

{audio:0:25:31} Why wouldn’t a restaurant be on all the platforms, because it’s all incremental revenue and profit for that restaurant.

{audio:0:25:40} It can be, and some restaurants do, but there are plenty who don’t like the hassle of delivery people from four, five, six companies coming in. I’d walk into a restaurant to order and see all their little tablets there for Grubhub, Uber Eats, Amazon, DoorDash, Postmates, Caviar — the list would go on and on. I’d talk with them about it, and it could be a big hassle. You have a process; some follow it, and some don’t. You’re looking at all these different tablets. It’s kind of a mess for some restaurants. So, they’ll choose to just stick with one sometimes because it’s easier. They can co-brand their window and counter and say, “Hey, you can order with DoorDash,” so everyone who comes in there knows DoorDash is the place to go for this restaurant.

{audio:0:26:45} But there’s no advantage there for each of the players? The restaurant looks at the demand they get from each platform, so the biggest players will typically win. If there’s two or three, it’s still quite a commoditized offering?

{audio:0:27:04} Yeah, it just depends. For example, Caviar did a really good job of differentiating themselves. “We are the cream of the crop.” It was interesting that they were just bought out by DoorDash. They were like, “We won’t work with you unless you’re exclusive with us, and you’ll want to be exclusive with us, because you don’t want your restaurant showing up next to Taco Bell or some other lousy restaurant, where it just diminishes your brand.” They did a good job of sticking with the very best restaurants. They were upscale, they were expensive. Caviar wasn’t for everyone, but their value prop made restaurants willing to work with a delivery company and stick with one.

{audio:0:28:00} To some degree, every one of those companies is try trying to sell why they’re so much better. Grubhub just won the contract with Shake Shack. Others might show up, stand in line, and place orders, but Grubhub’s the only one that has a contract and does all the deliveries officially. With the Shake Shack one, they did a competition. They would do DoorDash for a month, then Uber Eats, then Grubhub. They did separate tests to see which one they liked working with best, which one had their act together. Cheesecake Factory did the same thing; a lot of these big chains did the same thing. They get an impression of which one they like best, so they might just go with the one. Some decide whatever, we’ll just go with multiple, but some don’t want to make all franchises deal with multiple. “We’re just going to go with one, and this is the one.”

{audio:0:29:24} Matt Maloney also mentioned in the 2019 Q3 results, Grubhub and Seamless’ higher number of independent restaurants gives them an opportunity to have a price advantage.

{audio:0:29:41} That’s true, it goes back to my point about selection. If I pull up the Grubhub app in a town that’s 15 miles outside Kalamazoo and I’ve got three restaurants, then I open up DoorDash and they’ve got 40, who do you think I’m going to order from? If these three with Grubhub, they’re free delivery or low-price, then I look at DoorDash and it’s $2.50 or $5, there might be a little decision there, but it gets blown out of the water when I see North Italia’s on DoorDash — done. I’ll pay the five bucks, have it delivered. Price matters, but if you don’t have the selection, it doesn’t even come down to price. If North Italia was on both platforms, it would come down to price. Price is a very important part, but it’s not the driver. Selection is the driver, then price.

{audio:0:30:52} Maloney said, “We’re going to scale the non-partner restaurants on our platform to compete. Then we should have a price advantage, when we have similar restaurant inventory that should allow us to keep our profitability.”

{audio:0:31:14} Yeah. I don’t know how that would work because they would be in the same situation as DoorDash. If they’re adding non-partnered restaurants, they’re not going to be getting that revenue, so they’re going to have to make it up some other way, which means they’d have to charge higher delivery fees. Maybe what he’s saying is, “We’re offset by all the independents we’re delivering, so we can afford to take the hit on the other restaurants, because we have this buffer.”

{audio:0:31:54} What do you think is the biggest risk for that strategy?

{audio:0:32:00} The biggest risk is just that you lose profitability. If you’re going to subsidize restaurants you want on the platform with all the restaurants you have, that’s one thing. They’re already facing a challenge with restaurants who are paying saying, “Woah, what? You’re subsidizing these other restaurants with what I pay you? This isn’t good, I want to be a free restaurant.” So, they’re dealing with that backlash. It’s not a piece-of-cake decision; they’ve got to figure out how they balance that.

{audio:0:32:53} Let’s say you’re an owner of an independent restaurant; what’s your incentive?

{audio:0:33:02} I would be saying to myself, what would it look like if I could increase my sales 30% or 50% and I was paying this much to a company like Grubhub? Let’s say, I want them to do delivery, I’m paying 25%, so what kind of margin does that look like? So, if I increase my sales by 30%, how much more could I make? I’d be able to scale, so if I bought more chicken and salad, I’d be able to negotiate better rates. You just have to crunch the numbers and realize that scale can make you more profitable. It’s not going to be 1:1 because you might have a 30% or 40% margin of everything in-store, but then you might have only a 10% margin on stuff you do through Grubhub. You just have to decide if that’s what you want to do. The good thing about Grubhub is you don’t just pay out of your pocket in hope, you only pay for every order you get.

{audio:0:34:28} How would you choose which platform to be on or would you be on all of them?

{audio:0:34:36} I would go on all of them and see what happens, which one I like to work with, which is giving me the best economics, bringing the most traffic to me, the most orders, at the highest profitability. I may decide to stay on two of them and drop the other ones. But I can see your point; why wouldn’t you just go on all of them? Then you get all the audience, more orders coming in, but there are some downsides to that, going all-out. What if it rains? When it rains or snows, people order like crazy, and you can’t predict it. Then, you’re getting all your normal orders plus all these apps bringing insane amounts of orders. You can’t handle it all, and you provide a horrible customer experience.

You’ve got to figure out what you can handle and balance and grow it up over time. Grubhub does a good job of creating targeted promos. I can go into my dashboard and create time-bound promos, certain times or days, targeting certain customers. I can turn those on and off to juice and dampen my sales as needed. If I want to be put a hold, on Grubhub, for a certain period because I can’t handle the volume and it’s going to be a terrible customer experience, I can call up and ask to be put on hold. You want to balance what you can manage with your appetite for growth.

{audio:0:36:34} It’s very tricky for the likes of Grubhub to compete, specifically against Uber, due to the scale of the business and brand. Everyone knows Uber, it’s a global brand, so if you’re competing on audience and you have restaurants willing to test these two platforms, plus the capital that Uber has, it becomes a tricky game of trying to outlast Uber. How do you think about that?

{audio:0:37:13} In these head-to-head competitions, Grubhub does well because they’ve already got a lot of volume. They had 70% of the market when I started there. I think they’re at 33% now, but the market’s much bigger, so they’ve continued to grow. They bring the volume, that’s not a problem, they’re not losing out.

{audio:0:37:44} One thing they are concerned about is brand awareness. Not only does Uber have a huge name, these companies are spending like crazy and have a ton of cobranding relationships. Their name is everywhere, in restaurant windows, on the counter. One of the ways you can measure brand awareness is branded organic searches; when someone goes to Google and types in “DoorDash delivery” as opposed to “food delivery.” That lets you know they want to order food and they specifically name DoorDash. That’s a big indicator of brand awareness, and even before DoorDash had overtaken Uber Eats, much less Grubhub, you could already see that trend. Their brand awareness was going through the roof because they were spending so much money. Grubhub built all this content to get people to do Google searches and land on Grubhub, but the best converting SEO is to have people type in your name on Google and come to your home page. That’s where DoorDash and Uber Eats were doing a great job. Does Grubhub really want to ratchet up marketing spending? When you compete for the same keywords, you’re asking about cost of acquisition. That’s going to continue to spiral upwards.

{audio:0:39:36} According to Grubhub’s reports, their customer acquisition cost was $45 in 2017 and rose to $53 in 2018. How much higher do you think VC-funded competitors like Uber and DoorDash will drive this cost?

{audio:0:39:54} I think it’s tough for them too, but it’s less tough for DoorDash, because they’re not being scrutinized like Grubhub and Uber are. How many times in the last year have you seen a headline, “Uber loses 1.5 million billion dollars in Q2”? It’s a travesty how much money they’re losing. Now, the market’s shifting, they’re gearing for a recession, and they’re saying, “We don’t really want growth at all costs anymore, we want companies that can actually make money.” I think that’s going to turn in Grubhub’s favor, but in the meantime, companies like DoorDash are continuing to spend like mad without serious repercussions. It will be difficult for them to go public unless they show a trajectory towards profitability. For now, they seem to be happy leading the charge in the gold rush.

{audio:0:40:56} Say you’re CEO of Grubhub and you see new competitors distorting the economics, paying through the roof in customer acquisition costs. How do you stop yourself investing heavily and competing?

{audio:0:41:18} I think that’s what they’ve been grappling with. Matt Maloney said, “Hey, we’re investing a lot more in marketing, and number two, I love restaurants. I feel like the right thing to do is have a relationship, but you know what? We’re not going to let someone else eat our lunch. We’re going to add a lot of great restaurants in a premium model so all customers have the best possible selection.”

{audio:0:41:53} They’re going to go hard after that, really get their selection rounded out in the smaller markets. And then they’re going to double down on their loyalty program. They bought Level Up, a company that has a restaurant-centric view of loyalty. You could be running lots of different loyalty programs within your app, one for every single restaurant, and see how you’re tracking for getting free stuff from any restaurant you order from regularly. It’s a way for restaurants to get traction with you as a customer on a platform, instead of being one of many. I think they’re trying to engender more loyalty where consumers say, “Hey, I can go to Grubhub, I’m going to get credit for my purchases with a particular restaurant, and I can get free meals, but if I spread out my orders between the different platforms, I’m not going to get that.”

{audio:0:42:53} Those credits in the loyalty programmed, I assume they’re only from partner restaurants?

{audio:0:43:02} No, they can be from any restaurant on the Level Up platform that configures their loyalty program. Then Grubhub can offer it for that restaurant. If you’ve got a restaurant page, you can see, here’s their menu, and by the way, here’s their loyalty plan. Every time you order, you’ll be able to see your progress towards getting your free meal or whatever they’re giving you for free.

{audio:0:43:30} Why can’t Uber do that?

{audio:0:43:37} They could do that, but they don’t. Grubhub bought Level Up, which already has all that functionality. Uber would have to build it from scratch and get all the restaurants on the platform. I think part of the problem is, once you have a solution, you tend to have inertia. They have a loyalty program with Uber, getting money back or credits towards future rides, but it’s not restaurant-based, because Uber itself has nothing to do with the restaurants, only Uber Eats does. They have this loyalty program they’re planning on applying to Uber Eats, but it’s Uber-based, it’s not restaurant-based. They’re having to pay the cash out of their own pockets for the loyalty program, whereas through the Level Up platform, the restaurants can decide what they want their program to be, and restaurants will be the ones paying for the rewards. I think Grubhub’s approach is a much more scalable, profitable approach that’s great for restaurants because they control it, but it’s great for Grubhub because they can offer it to their consumers and it doesn’t cost them any money.

{audio:0:44:54} It’s also more expensive for restaurants if they’re paying for it, and you can drive loyalty via Uber Eats without paying for it?

{audio:0:45:04} It’ll be something the restaurants would have to figure out, but they already have these programs in place. Most of them have a punch card system or something like that, so it’s no different to what they already have. They’re just able to extend it, and I’m sure Grubhub shares data with them that shows how their order frequency goes up when they offer that loyalty program.

{audio:0:45:35} Do you think that’s a competitive advantage for Grubhub?

{audio:0:45:39} They haven’t even rolled it out yet in any big way, but they’ve talked about it for some time, so I assume it’s coming. It would definitely be a competitive advantage and something that could, over time, create the stickiness they want. They would hope to get some traction and a head-start, before DoorDash or Uber Eats comes up with anything competitive. DoorDash has taken a loyalty approach, related to delivery fees. You can pay a monthly fee and get free delivery, so they turn it into a subscription model. That can potentially work too, but if Grubhub charges lower or no delivery fees for a lot of the restaurants I order from, it’d be cheaper to do Grubhub and have the loyalty program where I’m getting some free meals along the way. It should be a competitive advantage for Grubhub if they do it right.

{audio:0:46:52} It seems like these companies can offer loyalty with or without the restaurant in some way, and it’s going to be roughly the same price, especially when they all offer the same delivery.

{audio:0:47:11} Except a large portion of Grubhub’s delivery, they don’t do it themselves.

{audio:0:47:21} But for the restaurants that require delivery, it’s a commoditized business.

{audio:0:47:33} So, Grubhub’s competitive advantage, does it come from these independent restaurants that offer delivery themselves, so they’re using the online platforms for demand generation?

{audio:0:47:51} Yeah, and they usually have their delivery down, they cost that. Grubhub’s fees are lower for those companies, because if they’re not doing their delivery, depending on the company, they’ll charge 8% to 20%. If the average is 15%, that’s much lower than the 28% Uber Eats are charging.

{audio:0:48:17} Is the biggest question how the independent restaurateur behaves in the long term?

{audio:0:48:29} I think that’s a big point. Another one is, do Uber Eats and DoorDash look to Grubhub as the sentiment changes to profitability and start bringing a lot of those “no-delivery-needed” restaurants onto their platform? They could copy what Grubhub does, it would be a decent effort. They could balance out, inject some profitability.

{audio:0:49:02} So, the independent restaurateur would have to be willing to go onto Uber and DoorDash. Is there any reason why they wouldn’t, apart from jamming their restaurant full of delivery people? Now there are many different platforms that have different or possibly larger sets of demand like Uber, it’s particularly interesting for an independent owner of a restaurant.

{audio:0:49:43} Some of them might do that. I think it’s a little bit trickier for Uber Eats and DoorDash. All their technology and processes are based around, “We do 100% of our deliveries.” It’s a big decision for them to decide this is a delivery we’re not going to do. It would be a significant investment for them. They would have to decide if it’s worthwhile to make those changes to their platform.

{audio:0:50:28} Are they not offering that already?

{audio:0:50:31} No. In fact, it was a year-long effort for Uber Eats to even release pick-up as an option, where you could choose to have it delivered or pick it up. It was a pretty significant undertaking for them to support that. Offering for the restaurant to deliver, you would still have to support the delivery, but you would no longer be showing the customer. You know, they have their map and can see the delivery on its way? You would no longer have the ability to do that, unless you forced the restaurant to use your app, and nobody wants to do that.

{audio:0:51:21} They’d have to make some customer experience decisions, if they’re going to degrade it. Consumers don’t get it. If they order from a restaurant that does their own delivery, they don’t understand. “Why can’t I see where my Uber Eats order is? I can’t see who’s delivering my food. This is lame, why did they take this big step back?” It’s a big decision they would have to make to move into that.

{audio:0:51:50} If they don’t move into the marketplace business but they do enter those regions with the independent restaurants, how attractive is it for them to outsource delivery to Uber? Do I want to pay 15% extra take rate and let Uber or DoorDash take over the whole operation?

{audio:0:52:36} They could, and I think some have. Uber Eats and DoorDash work with a lot of independents that didn’t do delivery before, so they’re doing all their own delivery. It’s the ones that do their own delivery that they would have to convince. They probably convinced a few, but I think a lot of restaurants feel they can have more delivery people on site. “We can send them home if it’s dead, we have really great control over our labor costs, I think we do a better job, and we can already model it out.” It’s an 8% cost, and a platform that charges an incremental 15% cost doesn’t make sense for them. It just comes down to economics.

{audio:0:53:30} That’s why Maloney is scaling the non-partnered restaurants, because he realizes, if Grubhub can no longer be a demand generator for independents who deliver themselves, you’re going to see attrition of those restaurants, where they’re looking for demand. And if Uber has the best selection with the most restaurants, they could potentially move into that offering.

{audio:0:54:07} How do you think this is going to shake out between the three major players?

{audio:0:54:11} There’s going to be a push towards profitability, which will turn the tide a little in Grubhub’s direction because DoorDash and Uber Eats won’t be able to spend as wildly as they have in the past. I’ve seen Uber Eats pull back already. They’re already getting so much pressure. I think you’ll see DoorDash do that as well.

{audio:0:54:39} Then it’s going to come down to selection, speed, and price. The one big advantage DoorDash is going to have in some of these markets they’ve moved into that are smaller, but taken in total, they have a good business they’ve grown out of it. The first mover advantage is real. There may not be a lot of loyalty, but if you’re with DoorDash in a small town and you already have good selection, you’ve found a few good go-to restaurants, you might go for $15 discount offer to try Grubhub, and some do, for sure. But there’s a certain percentage that have inertia, they’re fine staying with what they’ve got. The people that are ripe to change are using DoorDash, but they’ve only got a handful of restaurants. They go for the free one-off meal with Grubhub and see they’ve got all these restaurants. I think it’s really going to come down to selection, speed and price. Selection, number one.

{audio:0:55:53} As Grubhub and Uber Eats build out and get even with DoorDash, it’s going to go to the next thing, which is price. If Grubhub can subsidize with the delivery restaurants, they would potentially have a price advantage that could help them in the longer term. Then speed; that’s something I think the others have advantage on, because they own their own delivery, whereas Grubhub don’t. It’s a two-edged sword; they get better profitability, but they don’t have as much control. People like to see where their meal is, they like to see minute-by-minute how soon it’s going to be there. Grubhub, in many cases, can’t do that. It’ll shake down to how many customers care about that feature versus price. What I’ve seen, based on actual test results and data, is people care more about price than they do about being able to track their order. After selection, it’ll be a battle with price and speed.

{audio:0:57:22} Let’s say you’re Maloney, it’s Q3 2019, we’ve seen a huge influx of customer acquisition from DoorDash and Uber, and they’re scaling massively. The independent restaurants are all non-contracted independents; what do you do?

{audio:0:57:52} A couple of things. One, they really need to be hitting on their strengths saying, “We’re a profitable company, growing aggressively.” At some point, even halfway through my time at Grubhub, only 15% of Americans had ever ordered a meal online. There was still a huge opportunity, and as people order a meal online, they realize there’s a lot of selection. “I can order from one of my favorite restaurants. I was sitting here debating whether I leave at half-time and go out and miss half the game, or I just sit here and hang out, they’ll deliver it to my door, and I can just eat it on the couch. That’s a slam-dunk. I’ll pay five bucks extra for that service. And if they deliver for free, why was I ever going out to the restaurant?” I think there’s still a ton of opportunity out there, it still is a gold rush. At this point, I would guess it’s still only 30% of Americans have ever ordered a meal online and had it delivered to their house.

{audio:0:59:53} I would be saying, “We’re going to spend, we’re going to invest and acquire as many customers as possible, and we’re going to do that with partnerships where we have strong, nationwide co-branding with popular brands like we’ve done with Yum Foods, with Taco Bell, Pizza Hut, KFC.” The relationship with Shake Shack is huge. I think that’s important, to invest in those. Number two, have strong marketing where it’s expensive but you build up as much brand awareness as you possibly can. I think they’re very much moving ahead with the loyalty program that will hopefully be differentiated and restaurant-specific, something that restaurants and consumers love, that they don’t have to pay for.

{audio:1:00:55} Then going very heavy into the non-contracted restaurant push. They need to add every single attractive restaurant in the entire country, where they can offer delivery and focus on ramping that delivery as quickly as possible. That selection is key. Those would be the main areas I’d be working on over the next six months.

{audio:1:01:32} You said the first mover advantage is real. Do you think “the winner takes all” is real?

{audio:1:01:43} I don’t think there’s such a thing as winner takes all. There’s still 70% of the country that’s never even heard of or ordered from one of these companies. There’s still a ton of opportunity to be the first one to get your app on their phone or have them order from you. I think there’s more than enough room for three competitors. If you look at almost any market with this kind of growth potential, there’s room for three more. Postmates is doing fine. But the pressure on Grubhub, it’s like, “You guys are the undisputed heavyweight of the world, and now your market share is tanking.” It almost ignores the fact these guys are still growing over 30% a year and they’re profitable.

{audio:1:02:54} If you’re a serious business, you want to be the best, you want to be number one. I think that’s the goal Maloney needs to be putting out in front, and these efforts need to help lead them there. I think the free-wheeling spending days are over for Uber Eats and they’re coming soon for DoorDash. Then, Grubhub will be on much more equal ground, when it comes to bidding for keywords, advertising space. All the marketing channels will become more even, where everybody’s responsible for their cost of acquisition and can’t be spending $120 to acquire new customers.