GrubHub(s) vs. Uber(s) vs. Yelp(s): Making Sense of the Mayhem in Local Commerce

Last week, ride-sharing service Lyft announced that it had closed a $250 million round of funding to compete with Uber in what will likely become a capital-intensive — and noisy — race around the world. But the battle over transportation is just one example of a wider push by tech companies to reinvent traditionally offline industries by developing lightweight marketplaces which more efficiently connect local supply and demand.

The explosion in these so-called marketplace startups comes as a more established approach to local commerce — online ordering — is just now enjoying its moment under the sun. Earlier this month, the UK-based Just Eat priced its public offering on the London stock exchange and the company’s American counterpart, GrubHub, began trading on the New York Stock Exchange (NSYE) last week.

What’s left are two models championed by companies with a lot of capital, and a need to expand into other verticals. One, a demand-generation model, rooted in search and driven by its ability to help existing businesses to sell goods and services online; the other, a marketplace approach, which aims to package a number of services on top of which new businesses can thrive. And then, there’s Yelp and Google waiting in the wings.

In between consumer brand and technology company
In many ways, Airbnb is the most mature of these marketplace models. The company is reportedly in the process of raising a massive new round of funding round to the tune of $400 million, and last week its leadership unveiled a long-term strategy which offers an important take on where the industry is headed.

“Our business isn’t [renting] the house. Our business is the entire trip,” Airbnb’s founder Brian Chesky told Fast Company’s Austin Carr in a feature published in mid-March. For the company, the decision to become a hospitality brand deeply focuses the business, moving it from a technology provider with the goal of building applications in a number of industries to an industry company focused exclusively on an industry problem.

But what’s unique about Airbnb and other marketplace companies is that they occupy a middling space between consumer brand and business-to-business play. Airbnb and Uber aim to provide the very basics of building a business in their respective verticals, a “business in a box” so to speak, and nothing more. The day that Airbnb opens a hotel, or Uber actually hires a bunch of drivers, is the day that they lose a critical edge: flexibility.

In many ways, these marketplaces could find themselves in a similar predicament as Square. They used technology to reduce the economies of scale in their respective industries, and in doing so have opened the supply-side of the market to a latent base of individual proprietors, who traditionally would have been incapable of participating in the market. The question for Airbnb in particular is whether it will be able to bring existing segments of the hospitality industry — say, a family run bed-and-breakfast — onto its marketplace.

That’s where the more traditional online ordering and booking businesses have thrived. Over the past decade, search and booking services have exploded in a number of industries  (Grubhub in food delivery or Kayak and Expedia in travel and hospitality), working as a tool to augment — not disrupt — the existing landscape of providers. However, as small businesses adopt internet-based operations and CRM software, the value that these booking and ordering services have traditionally generated from providing commerce capabilities (e.g. processing orders online) will diminish. Much of the processing will be run through a business’ back-end software, leaving Grubhub and others to compete directly with Yelp, Google and the more horizontal search industry.

A marketplace for this, a search for that
What’s likely to happen is that the marketplace companies (Uber, Airbnb etc.) will dominate the long-tail of verticals, creating a platform from which individual proprietors and very small companies can thrive. Although we’re likely to see some form of a marketplace emerge in most verticals, they will see the most success in verticals where the benefits of scale have traditionally come from solving information-related problems (e.g. connecting the supply and demand within a market). Think of the taxi industry, in which convenience, above all else, is paramount for the consumer.

However, we will likely see search businesses work in conjunction with payment firms and back-end software companies to create a tools set for the existing players in these industries. The more federated search model will play a larger role in verticals like grocery, which require more material assets like a supply chain capable of transporting perishable goods.

One interesting area to watch is retail. While retail has traditionally required substantial capital expenditures in overhead and inventory, one startup, PoshMark, has found a way to avoid these expenses. They’ve built a system by which consumers can buy and sell used items to one another, effectively replicating the Airbnb model for used clothes. But instead of an used couch, it’s an entire closet.

Steven Jacobs is Street Fight’s deputy editor.