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Yum Brands unloads Grubhub stock and calls it a win

The brand operator sold all of its shares of the delivery provider and pocketed a profit, ending what had been a notable deal, says RB’s The Bottom Line.
Yum Brands Grubhub
Photograph: Shutterstock

The Bottom Line

Yum Brands may not have gotten all it envisioned out of its 2018 delivery deal with Grubhub, but at least it got $8 million.

The operator of KFC, Pizza Hut, Taco Bell and Habit on Thursday noted that it sold the shares of Grubhub it purchased in 2018 for $206 million, and that it recorded $8 million in investment income from the sale.

That implies that it acquired the shares for $198 million, representing a gain of about 4%.

The company also said it was able to learn much about the delivery business in the two years since that deal was announced. As part of that portion of the agreement, Pizza Hut CEO Artie Starrs was named a member of the Grubhub board.

“Our ability to get a board seat, participate and understand what’s going on in the aggregator space was helpful to us with that investment,” Yum Brands CEO David Gibbs said on Thursday. “And we made a little money on the investment on the side. So I think that worked out the way we essentially had hoped.”

Perhaps. But both the deal and its quick collapse both came as a surprise.

Third-party delivery was a relatively new but quick-growing service in February 2018 when the two companies announced their deal. Grubhub would become an exclusive delivery provider for Yum’s concepts, notably Taco Bell and KFC, and would provide online ordering.

In exchange, Yum was to invest $200 million in Grubhub stock. And Starrs got that board seat.

Yum provided Grubhub with a core group of restaurants, including the popular Taco Bell, giving it the scale to ramp up activity in more parts of the country. And it got some expertise in the form of Starrs, who oversees a delivery-providing company in Pizza Hut. In addition, Pizza Hut would experiment with using Grubhub.

Yum got a favorable delivery deal—it paid one of the lowest rates for delivery in the industry. And, as Gibbs noted, it got that board seat and an inside look at one of the country’s biggest delivery providers.

All looked fine until June, when Yum sued Grubhub, arguing that the delivery provider backed out of their agreement “without warning or justification.” In the process, it argued that Grubhub’s moves would raise prices for customers.

That lawsuit revealed that both companies were itching to get out of that exclusivity, and Grubhub was particularly eager to get out of that deal.

The two years that spanned the agreement and the lawsuit represented a century in the lifetime of the fast-growing world of third-party restaurant delivery. And in that time the business shifted from one favoring exclusive arrangements to one in which restaurant chains made deals with multiple providers.

The delivery providers, including Uber Eats and Doordash, all had their own groups of customers. Chains that made deal with one provider, therefore, didn’t necessarily get access to customers favoring the other provider. There were also regional differences between them.

As such, more restaurant chains began using multiple providers, and that intensified once the pandemic hit and delivery became more important. Yum, like others, quickly made agreements with Grubhub’s rivals to give its restaurants access to more providers’ customers.

Grubhub used that as an excuse to get out of the deal, or at least that’s what Yum said. “It has been clear for some time that Grubhub regrets the economics of the” agreement, the company said.

Ah, those economics. Grubhub, you see, was locked in an ultra-competitive battle for delivery supremacy before the pandemic. It has struggled to make a profit even since the pandemic started because of the cost associated with providing those services. Yum’s low-priced agreement began to look like a real problem.

Grubhub is still a delivery provider for Yum, which now has deals with multiple providers. “We want to be where our consumers want to do business with our brands,” Yum CFO Chris Turner said. “And if that’s through a delivery channel with an aggregator, we want to be there.”

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