Grubhub made news a couple weeks ago when it simultaneously delivered a very strong Q2 2018 earnings report and announced the acquisition of LevelUp.
The focus then and the subsequent coverage since has been on the positive impact of the LevelUp acquisition on Grubhub’s ability to diversify its platform offerings.
With LevelUp, Grubhub can now offer restaurants that are part of its network order ahead/pickup in-store and new CRM/loyalty initiatives to their mobile wallets using LevelUp’s white-label tech.
As for Grubhub’s core business of online order and delivery, LevelUp’s integrations to most of the cloud-based point-of-sale (POS) systems that power quick-service restaurants (QSRs), including many of the leading players — Toast, ShopKeep, NCR, Clover, Revel, Oracle/MICROS — will undoubtedly help Grubhub’s migration from tablets on counters to features inside those cloud-based POS systems.
All great synergies, but perhaps not the biggest part of the story.
The real play now for Grubhub, with LevelUp, is to emerge as the leading aggregator for food ordering across all of the channels through which consumers might like to interact with those eating establishments: online order and delivery, online ordering for pickup and maybe even, down the road, online ordering of a place in line at fast-casual, sit-down restaurants.
And to become the mobile payments platform that powers it across all those channels for those restaurants: supported by a platform-based loyalty play that keeps restaurants and consumers interested and sticky.
When asked, mobile payments as an aspect of the acquisition was downplayed on the Grubhub earnings call. My bet is that it will become an incredibly powerful pillar in Grubhub’s evolution as a preeminent restaurant ordering platform.
Remember, before Grubhub bought LevelUp, Chase put a few tens of millions into them as the technology partner that would ignite Chase Pay acceptance at QSRs.
Source: https://chasepay.thelevelup.com
LevelUp is front and center on the Chase site as its partner for online ordering using Chase Pay and Chase Commerce Solutions (aka Chase Paymentech). It’s where I grabbed this image, in fact.
Chase Commerce Solutions is the third-largest merchant services company in the U.S.
And before there was Chase, there was LevelUp, the branded mobile payments platform that used those same cube-shaped readers to enable QR code payments at the physical POS for consumers with the LevelUp app. The uniqueness of the LevelUp app was the loyalty component that tracked consumer spend across all restaurants and rewarded users with cash back when spending thresholds were met.
The silent player in all of this news is Chase and the role it could have in powering what could become one of the most interesting and disruptive plays the restaurant POS space has seen.
The Amazon of Restaurants.
The Evolution of Grub
To understand why I think this way requires a reflection on the evolution of Grubhub over the years.
Grubhub founders Matt Maloney and Mike Evans wanted to solve a simple problem in 2004: make it easy for consumers to order food from local restaurants and have it delivered.
At that time, ordering food for delivery was hit or miss — mostly miss.
Not every restaurant had a website — most didn’t back then; and those that did were hard to navigate, and most didn’t keep their menus up to date. Just like in the days before OpenTable aggregated available restaurant inventory and enabled online reservations, consumers dialed for delivery from the places in their ‘hood they knew delivered food and hoped they didn’t get a busy signal.
Building a site to aggregate restaurant menus that would give consumers one place to find restaurants that could deliver food and then place an online order for delivery seemed like a no-brainer. It was also something Maloney and Evans felt restaurants would value enough to pay a subscription fee to be a part of.
They didn’t.
So, they didn’t.
Grubhub’s value to those restaurants changed when Grubhub’s business model changed. Instead of charging restaurants to be featured on a site that may or may not drive traffic to them, Grubhub began charging restaurants a percent of the orders they generated. That shifted the burden to Grubhub to be an effective lead gen platform for restaurants and to be rewarded when an order was converted to a sale.
That model — aggregating menus from local restaurants in one place and enabling easy online ordering from that online platform — remained Grubhub’s mainstay over the next decade.
Over that time, Grubhub grew both organically — market by market — as well as through a series of acquisitions to gather more hyperlocal restaurant inventory for their platform. Back then, consumers ordered online from Grubhub, but their favorite restaurant showed up with the order. Grubhub was the enabler and got a commission on every order that originated from its platform.
In 2015, Grubhub extended its model and stepped into the delivery business, first through the acquisitions of local platforms that both enabled online ordering and offered delivery services and later through the expansion of its own delivery capabilities — recruiting drivers and building out tools to support the delivery side of its business.
In February of 2018, Yum! Brands made a $200 million investment in Grubhub, in part, to accelerate the build out of its delivery platform and to create more favorable delivery economics for its restaurant brands.
It made perfect sense.
Making great food and delivering great food requires two distinct skill sets with radically different cost structures and customer service requirements, particularly as online ordering volume grows.
For Grubhub, taking on the logistics of delivery for local restaurants left restaurants to do what they do best — make great food — while leaving the mechanics of the order-to-delivery process to a platform that was engineered to do what it does best: optimize the online customer journey and the economics of delivery across all the restaurants served in those local markets.
Grubhub claims that restaurants that use Grubhub delivery services generally see a monthly increase in takeout revenue of 30 percent as a result of having more exposure to consumers on its platform and the ability to support more delivery volume. Grubhub also reported that in Q2 of 2018, the average order size was up 3 percent: People find it easier to add to their order when they are looking at a menu online, instead of standing in a line or from memory.
Not all restaurants have bought in, including, reportedly, some of the Yum! Brands franchisees who are now being asked to get on board the Grubhub delivery platform.
Some restaurant operators believe Grubhub as an end-to-end online ordering and delivery platform has changed the relationship dynamics between their establishments and their customers — and not always for the better.
Consumers go to Grubhub to order from Joe’s Burgers. They pay for that order via Grubhub. They get their food delivered by a guy wearing a Grubhub shirt carrying the Joe’s Burgers order inside a Grubhub bag. If that burger arrives cold or soggy because the driver got lost or was late to pick it up, Joe’s takes the heat.
Now, maybe Joe’s would have gotten that heat anyway if it were up to them to handle the delivery. Or maybe Joe’s might not have ever gotten the order but for Grubhub’s ability to have Joe’s as part of its platform for millions of consumers to see and order from.
Regardless, some restaurants now view Grubhub as very different from the helpful online aggregator that drove volume their way, that also put them in control of managing those orders and then delivering them to their customers.
Big, Little Online Market Share
Grubhub may be the big dog in the online ordering/delivery space, but it’s a space with a lot of room to grow.
Grubhub’s CFO said during its last earnings call that the delivery business is worth roughly $200 billion in the U.S., with online orders maybe reaching $20 billion, or 10 percent. That means 90 percent of restaurant orders are still placed in a physical establishment, and nearly half, 46 percent, of all orders for delivery are still phoned into the restaurant.
But like the shift from physical to online retail, online ordering is a space that’s growing rapidly, driven by the consumer’s desire for convenience — regardless of whether that online order is delivered or picked up and taken out of the restaurant to eat somewhere else.
Technomic reports that 86 percent of consumers order online for delivery or pickup at least once a month, with a third of those consumers saying that’s more than they did a year ago. The delivery side of that equation is expected to grow double digits over the coming five years, they also say, fueled by those Bridge Millennials who will soon start families and turn to online order and delivery to minimize the friction associated with cooking at home and to maximize the opportunity to still eat at home.
And, as Grubhub’s data shows, all with the potential for an incremental lift in the value of those online orders and that digital consumer.
Grubhub today has an $11 billion market cap with 15.4 million active diners on its platforms — 70 percent more than this time last year and 125 chains from which those diners can order. Those diners place 423,000 orders a day for delivery. Grubhub is also now integrated into Yelp’s platform, which gives Yelp users the chance to order from Grubhub’s network without leaving the Yelp platform. To that, LevelUp adds 100,000 daily orders for pickup and 200 live establishments.
Grubhub is also the online ordering and delivery engine for restaurants that aren’t really restaurants as we think of them today.
Ghost kitchens that prepare food for delivery only have struck exclusive partnerships with Grubhub for delivery in key cities. Those restaurants appear as options when consumers search for a particular type of cuisine and may even include an incentive on the first order to try it. Consumers don’t know it isn’t a restaurant they can eat in or even order and pick up from, and if the food is great and delivery their MO, they probably won’t care.
This new restaurant paradigm is catching on as consumers’ penchant for delivery and convenience is increasing as quickly as the costs of operating a restaurant are.
Ninety percent of food orders may still be placed in the physical store, but only 10 percent of them are eaten there. QSRs, in particular, pay a premium for space and staff that the vast majority of consumers don’t use for storefronts in prime locations that carry higher rents.
Green Summit operates several such virtual restaurants in New York and Chicago, and Grubhub competitor DoorDash is opening its own virtual kitchens to give restaurant operators a more economical onramp to opening a restaurant in big cities.
The Amazon of Restaurants
If any — or all of this — sounds somewhat familiar as a platform storyline, perhaps it is because it is.
Amazon started out as an online bookseller that aggregated book titles, later CDs, and made it easy for consumers to go to one place, browse, order and pay for those items online — and have them delivered.
That strategy allowed Amazon to build a critical mass of consumers and more inventory for books and music and then lots of other things too that got their own flywheel going.
Those lots of other things were courtesy of third-party sellers, which ignited Amazon as a true marketplace and now accounts for more than 50 percent of the items sold on the Amazon platform. Those sellers have a love/hate relationship with Amazon: They love the sales but don’t always like playing second fiddle to the Amazon brand.
Amazon’s private label brands have also captured huge share, first in important categories like batteries and diapers and later in apparel and accessories. With the acquisition of Whole Foods with its own 360 private label brand, private label sales on Amazon will only continue to grow.
Those private label sales happen right alongside brands, including via branded Dash buttons: Consumers search for and with those Dash buttons, allowing them to subscribe to their favorite branded products and be replenished regularly.
Prime membership is the fuel that now feeds this Amazon engine and now offers consumers a variety of benefits that extend well beyond free shipping, which remains the core of the Amazon value proposition. Amazon Prime member spend is twice that of non-Prime members, and there’s little evidence so far to support significant Prime defections since its $20 price increase.
Partly, Amazon Prime members now have a lot more things that come bundled with that Prime membership. Prime members get discounts at Whole Foods and free two-hour delivery, discounts on car rentals through Avis, a free subscription to The Washington Post, free Kindle books, free access to the Amazon-branded suite of baby products and access to Alexa and her growing set of skills and streaming video and music.
All, of course, tied to its online mobile payments platform, Amazon Pay, and made even sweeter for those with an Amazon Prime Chase Rewards card linked to it, which offers 5 percent cash back on Amazon purchases, including now at Whole Foods.
Which brings me full circle to Grubhub, LevelUp, Chase and the Amazon of Restaurants.
The Amazon of Restaurants
The one place Amazon hasn’t made much real traction, yet, is online ordering and delivery for restaurants.
Yes, there is Amazon Pay Places and Amazon Restaurant, but both lack much local density outside a few deals with a few larger chains in a few big cities.
That’s because a restaurant is a hyperlocal business, and there are thousands of small local establishments to get on board with which to integrate POS systems. Grubhub, LevelUp and its Chase connection could power the Amazon of Restaurants.
This trifecta — with the two-sided network Grubhub has become — has the ability to get restaurants on board and give them a fully integrated POS experience, complete with a fully integrated suite of online ordering solutions.
There is the opportunity, leveraging LevelUp’s white-label tech, to make the branded mobile wallets of individual restaurants more robust and complete with those capabilities, including the ability to tailor localized offers and promotions to users.
Of course, this mobile wallet tech is also certain to introduce new features into the Grubhub mobile app, including tracking of individual orders and preferences for recommendations across the Grubhub network, as well as for those that users like and visit frequently — opening up new revenue opportunities for Grubhub and marketing partnerships for brands to influence consumer spend on those orders.
All perhaps sweetened along the way with a Grubhub network-wide loyalty program to keep restaurants and consumers sticky, powered by a mobile payments platform in very much the same way that Amazon Prime member benefits are linked to Amazon Pay. Chase Pay anyone?
It’s maybe not as crazy as it sounds, particularly given Chase Pay’s interest and investments in the restaurant dining space.
And particularly the group of players who all seem aligned around the Grubhub brand to drive innovation in the space — traditional players like Yum! Brands, online aggregators like Yelp, emerging disruptors like Green Summit and financial services players like Chase with 93 million cardholders and the incentive on the part of the Chase team to ignite Chase Pay as a mobile payments platform.
Whether it’s Grubhub that will emerge as the Amazon of Restaurant Ordering or Amazon or another player, it’s a space worth claiming — and a space that will be interesting to watch over the next several years.
What I’ve laid out here is the product of my own independent thinking based on my own brainstorming with me, myself and I on how this incredibly dynamic restaurant ordering space could evolve.
Because if I had any insight from any of the players mentioned or knew for sure, you’d have just finished reading a takedown of the Starbucks/bitcoin deal.
For that, there’s always next week.