C&B Notes

Food Delivery Landscape

On our recent trip to South America, we were struck by the growth in delivery sales for large QSR brands like McDonald’s and Burger King.  We are interested in whether delivery’s impact on the global restaurant industry will be enduring or ephemeral, and we suspect that it will vary by geography given labor cost, population density, and other differences.  GrubHub’s annual letter includes a thoughtful discussion of the overall food delivery industry and explores how unit economics trend and change.

As a reminder, we believe aggregate Adjusted EBITDA per order is the best way to think about any marketplace’s profitability.  In this business, it’s easy to get lazy and focus on just order revenue less driver costs, which is one component of profitability, but we do not think that is a fair way to think about profitability when a business is “at scale.”  Marketing, care, sales, account management, driver recruiting, insurance, technology and yes, even corporate overhead, are all real cash costs to run this business.  Adjusted EBITDA per order takes into consideration all the cash costs of operating a marketplace – from demand generation all the way through customer care…

Furthermore, we believe online diners are becoming more promiscuous.  For years, we saw in our data that a Grubhub diner was extremely loyal to our platform.  However, our newer diners are increasingly coming to us already having ordered on a competing online platform, and our existing diners are increasingly ordering from multiple platforms.  We find this “sharing” to be greatest among our newest diners, in our newest markets, but believe it is happening to some degree throughout our diner base. We believe this competitive dynamic had a 300+ bps impact on our growth rate for the third quarter…

In 2015, we added delivery capabilities to enable restaurants that didn’t have delivery to join our platform.  We did this as a means to an end — we knew it would be valuable to have those restaurants on the platform.  But, we didn’t then, and still don’t believe now, that a company can generate significant profits on just the logistics component of the business.  It is a commodity and there are significant variable costs that are hard to leverage even with technology and scale.  Extremely large delivery/logistics companies can generate slim margins, but only because of the hub and spoke efficiencies they gain at substantial scale.  The point-to-point nature of our business mostly eliminates that aspect of operating leverage.

A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially.  Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner.  That takes time and drivers need to be appropriately paid for their time or they will find another opportunity.  At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time.  Delivery/logistics is valuable to us because it increases potential restaurant inventory and order volume, not because it improves per order economics.

Earlier, we talked about the great progress we are making with enterprise brands.  We love working with large enterprise brands because they help drive new diners to our platform and keep diners from going to other platforms.  That said, the biggest enterprise brands don’t need Grubhub to bring them new diners in the same way independents and small chains do because they spend billions a year on developing their own brands.  What they need most is a driver to take the food to their diners.  And, as we just noted, that isn’t cheap, or particularly scalable, so the unit economics and long term profit outlook for our business would look very different if a majority of our business was coming from large enterprise brands.

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