In October, Grubhub sent a now-infamous letter to shareholders that can basically be boiled down to this: It’s really hard to make money on delivery as it is, and fierce competition will force companies to price in a way that will make it even harder to make money on the service.
The result hammered Grubhub stock and helped to change the conversation on Wall Street regarding the third-party delivery business.
Perhaps not surprising, then, was news from the Wall Street Journal this week that Grubhub is considering strategic options, which could include a sale of its business. That report sent its shares skyrocketing again.
The shift in tone on third-party delivery has been dramatic. One year ago, we were wondering whether restaurants could profit from the service. Then we wondered whether the business was incremental. Now we wonder whether the business model itself is even workable, at least in the United States.
While third-party delivery companies were busy disrupting restaurants, they ended up disrupting themselves.
To be sure, the questions about third-party delivery have long been there, as investors—such as infamous WeWork investor SoftBank—poured money into the business model, largely subsidizing its growth.
While restaurants have jumped onto the delivery bandwagon with both feet, a few have resisted, and at least some have questioned the model. That includes most notably Domino’s Pizza, whose stock price has largely benefited from Wall Street’s concern about the future of third-party delivery.
But it ultimately leaves the industry in a state of uncertainty when it comes to the future of a service that many restaurants are counting on for a sizable portion of their future sales.
The delivery business is likely headed for significant consolidation in the near future among the big four companies: DoorDash, Uber Eats, Grubhub and Postmates. What’s more, these businesses will have to change the model to ensure their own profitability.
Ultimately, this is going to mean a shift away from the heavy price marketing that many have relied upon to generate customer growth. As the Grubhub letter noted, that marketing has already led some customers to start shopping for delivery deals rather than remain loyal to one specific provider.
Fewer companies make that far more likely. It may also make it tougher for restaurant chains to get favorable contracts on the service.
Maybe the delivery companies start investing more heavily behind ghost kitchens, effectively becoming more direct restaurant competitors—or maybe they expand their own services to include restaurants and actually do the food preparation themselves.
And maybe they pull back from certain markets, as some services have already done. If that continues, some markets may simply be without delivery altogether because they cannot support the service.
As for how the restaurant business can combat this, well, that remains to be seen. The growth in the delivery sector has made it clear that customers do want types of food besides Chinese or pizza delivered to their homes. And a certain number of them are willing to pay for that.
Some markets are clearly quite favorable for delivery, especially urban markets where there are lots of people and restaurants in a small geographic area.
Maybe more chains adopt a hybrid model, providing more of their own delivery alongside third-party services. Perhaps the idea of self-delivery returns, in which case restaurant chains can add the service in markets where it’s proven to generate the most sales.
Either way, 2020 is going to be a year of major change in the delivery business.
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