Grubhub Has Made Its Biggest Move Since the Seamless Merger | Street Fight

Grubhub Has Made Its Biggest Move Since the Seamless Merger

Grubhub Has Made Its Biggest Move Since the Seamless Merger

grubhub-300x300In the most important move since its merger with Seamless, Grubhub has acquired two delivery companies in an effort to build its own delivery network. The move marks a transition in the company’s strategy from a focus on moving an existing delivery market online to using the web to expand the delivery market as a whole.

During an earnings call with investors Thursday, the Chicago-based company said it has already closed the acquisition of the Boston-based DiningIn and will complete a deal for Restaurants on the Run, a delivery services based in California, by the end of the second quarter. The company said the deals, which are valued at over $80 million, will give the company a combined relationship with over 3,000 restaurants over 15 markets in the U.S.

Matt Maloney, the chief executive at Grubhub, said the move was intended to expand the total addressable market from restaurants who already offer delivery through phone calls to restaurants who may offer take-out but not delivery itself. He also said the company will be able to reduce the cost of delivery, and the fees passed onto consumers, by combining deliveries from multiple restaurants.

“We believe that delivery is a way to accelerate both our ability to capture of our existing market and grow that market generally by adding new restaurants,” said Maloney. “But it’s not just about growing the market. It’s also about increasing the level of service to our customers by increasing the delivery speeds, [which] gets better when you add scale.”

The company said it plans to essentially break even on the delivery service, and use additional cost savings to reduce delivery fees paid by customers. In addition to those fees, merchants will also pay a nominally higher commission rate for deliveries operated by Grubhub.

The critical question for Grubhub is whether it would have been more efficient to partner with an existing set of regional food delivery services rather than operating its own proprietary network. If delivery is a commodity, a service defined only by price and availability, then the company would be better suited to maximize reach and reduce liability by leaving the operations to third parties. If not, then the move will help Grubhub enter a potentially massive market.

During the call Thursday, Maloney argued that the size of the company’s network paired with its existing insight into the order flow would create both economic and service advantages for a Grubhub over a third-party logistics strategy. The company could reduce the cost per delivery by bundling deliveries from multiple restaurants to similar locations and improve service by accelerating delivery time. Most restaurants today wait to deliver until they have a meaningful number of orders — a length of time the company can reduce with its own network.

The move presents a stark contrast the strategy taken by Yelp, an eventual competitor, in developing its online ordering business. The local search company decided to develop its ordering network through relationships with software companies who already manage online ordering, appointment booking and other commercial services for business.  Yelp uses its substantial scale and power in the market to negotiate favorable rates and ensure plenty of interest.

One of the challenges for Grubhub’s own operations, and a potential delivery network, is that the network effects it sees within a given market typically do extend to others. A typical consumer may order food from a few locations within a market — say, work and home — but they would likely not order food to their hotel when they travel. So it’s unclear whether Grubhub’s scale between markets actually improves the economics or quality of a delivery network in a given market.

In many ways, Grubhub’s bet is no different than those made by Instacart, Postmates and a handful of other next-generation delivery services. These companies are betting that the introduction of software into the logistics business will increase the economies of scale operationally, and move the logistics business from a commodity model, which operates most efficiently at a market-level, to a globally scaled business.

But what many overlook is that what’s driving the success of these new logistics models is less about consumer products and more about labor models. The crowd-sourced contract labor models these companies use offer a degree of flexibility previously unimaginable. They only pay contractors when they complete orders, and avoid the costs of latency.

It’s unclear whether Grubhub plans to replicate models developed by Postmates, Uber and others. Even so, these models present their own liabilities in the form of potential regulation, unionization and other factors that may increase costs.

Steven Jacobs is Street Fight’s deputy editor.