Online ordering and delivery provider Grubhub has recently been at the center of some controversies over its business practices—controversies that has led to an investigation by the New York City Council and the U.S. Small Business Administration.
This week, Grubhub Founder and CEO Matt Maloney stepped up his defense of the company on its second quarter earnings call, adding to an explanation he made to staff in an email. This time, he took an opportunity to accuse his competitors of “price gouging.”
“To be clear,” he said according to a transcript on the financial services site Sentieo, “Grubhub is a two-sided marketplace that relies on restaurants and diners to succeed. We wouldn’t be in business for over 20 years if it weren’t for our restaurant partners, and any characterization that we are intentionally misleading or manipulating restaurants at their expense is patently false.”
There are multiple controversies. In one, some restaurants have said the company is charging them for phone calls never intended for food orders.
Maloney said the company generates a unique phone number for each restaurant that is only listed on Grubhub, and the company charges restaurants when the use of its number for such orders drives business to that restaurant.
“While we strive to be accurate, we designed our system to be conservative, and believe that we are fairly charging restaurants for the value we bring,” he said, noting that restaurants can review those orders “so we are completely transparent.”
Maloney blasted as “totally false” reports that the company makes copycat restaurant websites to send more orders to Grubhub.
He said the company has historically created websites on behalf of customers to help them bolster their online presence and generate more orders without paying a full commission. Grubhub says it charges $1 or less on orders through those sites.
Grubhub never owned the domain and the restaurants could have the sites transferred to them, and the company has since ceased the practice of registering new domain names because it’s easier for restaurants to do so.
“At no time did our behavior in this regard constitute cybersquatting,” Maloney said, noting the program was “a drag on profitability” but “the right thing to do to support our restaurant partners.”
Orders from phone calls and those websites generate “a low single-digit percentage of our orders.”
So why keep doing it? If these services are a drag on profitability and don’t represent much of the company’s business, while igniting a furor that attracts government investigators, it would seem to make more sense to end such programs and focus on the services that are growing. But that’s just me.
In any event, Maloney then took an opportunity to point out flaws in his company’s competitors—arguing that many providers’ “free delivery” promotions aren’t really free.
“While it is well known that online delivery has grown dramatically over the past several years, it is less known the diners on other third-party platforms are often paying 30% to 40% of the total order value in fees and markups on every transaction,” he said.
“I can’t tell you how many conversations I’ve had with diners who think they’re getting free delivery from a competitor, but don’t realize that they are paying 30% or more to that platform because of hidden service fees and markups.”
He then predicted that these fees won’t stay hidden for long.
“It’s clear that consumers will put up with price gouging in the short-term because of the novelty of being able to receive their favorite food without leaving their couches,” Maloney said. “But throughout time, consumers have proven to be savvy and they will look at their credit card statements and realize that in total, they are paying way too much for that burrito.”
Maloney is right that customers will ultimately notice higher charges. It’s a bigger question whether they change their behavior. But it’s a clear risk for the delivery business going forward.
Hidden or not, customers are ultimately going to pay the price for delivery services. That could limit delivery’s growth over time because of the expense. Or maybe it doesn’t.