Grubhub has built its business on the backs of mom-and-pop restaurants. Now the company wants to expand its network to include national restaurant chains.
The Chicago-based company has already announced major partnerships with Buca di Beppo, Fatburger, Veggie Grill and Panda Express, and today it is adding California Pizza Kitchen (CPK) to the list. Grubhub said it will now process takeout and delivery orders for 117 CPK locations and provide its turnkey delivery services for 81 of those restaurants. In its Q4 2015 earnings call in February, the company discussed its push into national chains and noted that by including them it increased its total available market (TAM) from $75 billion to over $200 billion.
In large part, Grubhub has been able to pursue these partnerships as it shifted its business from being a pure online marketplace that matched diners to restaurants to a company that offered delivery services with Grubhub-employed drivers. In 2015, the company acquired three delivery services to accelerate its offering. As a result, the company has been able to broaden the portfolio of companies it partners with to include national chains that might have lacked their own delivery infrastructure. "This is a great way where a national brand can engage with us with a consistent level of service and take advantage of the scale," said Stan Chia, senior vice president of operations, Grubhub. At the end of last year, the company was already providing delivery services in over 50 markets with a run rate of more than $200 million in gross food sales.
But delivery operations are expensive to scale, so the company will help offset costs by charging companies a higher commission on orders that utilize Grubhub's delivery services. Traditionally, Grubhub has made money by taking a slice of each order placed on its platform. Restaurants can select their commission rate and those that pay more get preferential treatment in the search results. Using this structure, Grubhub believes it can keep delivery prices affordable for customers. "With the scale that we have and the investment in technology, we are still able to offer industry leading consumer facing pricing on delivery," explained Chia.
The reality of maintaining competitive pricing could prove difficult in light of the glut of competition in online food delivery. While Grubhub has a strong advantage with more than 40,000 restaurant partners in over 1,000 U.S. cities and London, highly capitalized companies like Uber, Google and Amazon stand to challenge its position in the marketplace. In Grubhub's annual report from last year, it noted that its business could be harmed if it was forced to reduce its commission percentage or make pricing concessions as a result of increased competition. And with more companies entering the space, Grubhub's stock has lost nearly half its value and is trading at $24.94, which is down from a 52-week high of $47.38.
In response to the online market competition, Chia offered a staid response. "The competitor we are going after is the phone and paper menu. When you look at some of the TAM estimates that we have of what's out there, as the national leader, we think we are only capturing about five percent of that business."