The Knives Are Out For GrubHub

Summary

• GrubHub is facing tremendous competitive pressure from savvy new entrants.
• If the SF Bay Area is any indication, each market will be its own brutal battleground.
• Recent operational missteps will compound GrubHub’s growth woes.
• The biggest risk is GrubHub becoming a footnote - like Myspace or AltaVista.

GrubHub (GRUB) has been a tremendous growth story. To date, it has been impressively managed and operated. They merged with their biggest competitor, Seamless, to dominate restaurant food delivery in major markets, like New York and Chicago. Their profitable rollout plan has been solid.

A not-famous German general once said "no plan survives contact with the enemy." And their enemies are multiplying.

GrubHub Competitors

GrubHub's small competitors have collectively raised over $650 million. The fundraising table below does not even include the four big players that have all recently entered the space: Uber (Pending:UBER), Yelp (YELP), Groupon (GRPN) and Square. Those companies have raised billions collectively.

GrubHub (and its subsidiary, Seamless) is well positioned relative to these new entrants. But these new entrants are living by Jeff Bezos' famous mantra: "Your margin is my opportunity." For GrubHub, revenue will be pressured, it may even fall in the next couple quarters. Profits will be squeezed as GrubHub will step up promotional activity to combat the new entrants. Recently, for example, they raised their introductory coupons from $7 to $10.

The good news is that this space seems to be experiencing tremendous secular and geographic growth. Obviously, takeout and delivery are not new. However, in the past, either the delivery options were limited (pizza, Chinese), ordering was inconvenient and takeout was just a huge waste of travel time. These services are rushing to fill this void and consumers are loving the newfound convenience… and of course the venture capital funded promotions. The most important point is that the winners have not yet been solidified with challengers on all sides.

Challengers from Below: Doordash, Delivery.com, PostMates and Favor. A year ago I would have guessed that GrubHub/Seamless had the market locked up. Bam. Then came Doordash. This YCombinator company is in the process of crushing GrubHub in the Bay Area market. Why? They don't just have restaurants that sign up with Doordash - they have EVERY restaurant that allows takeout. Including your favorite one. In the Bay Area, GrubHub's list is incomplete and on the whole subpar. GrubHub's restaurants outside of New York and Chicago have the whiff of adverse selection - restaurants that are not busy and not popular are more motivated to push takeout and delivery. The equivalent would be Uber only taking you to some places you want to go, but not your favorite places. Meanwhile, Doordash is expanding into other cities. Doordash's model is probably not sustainable as configured, but they will negotiate a revenue share with restaurants while stealing market share in the process. You can be sure all the other players on the competitors chart are watching the Bay Area closely. Below, you can see how successful Doordash, Eat24 and Munchery have been in gaining mind share in the Bay Area over the past couple of years.

SF Bay Brawl: In the SF Bay Area, Doordash has blasted past GrubHub and Seamless in Google Searches. Eat24 and Munchery have made strong inroads as well.

Battle for Seattle. Yelp's Eat24 currently leads the market for searches in Seattle (Doordash has not entered yet).

Challengers from the Side: Munchery, Blue Apron, Sprig, Spoonrocket and Plated. These services will all eat into the home food delivery niche by providing a convenient but healthier alternative. While I'm somewhat skeptical of them given the quality of my personal experiences, these companies are motivated, funded and their products will get better.

Challenges from BIG players: UberEats, Groupon To Go, Yelp's Eat24 and Square's Caviar. Yelp and Groupon are both very hungry for new sources of growth. Square and Uber are just plain aggressive competitors, although I wonder how committed they are to this space. The most established of these players is Yelp's Eat24. They have steadily grown share. With Yelp's marketing muscle and an existing sales force on the task, GrubHub should be worried. Meanwhile, Uber and Groupon all have massive traffic but do they have the operational excellence to take down GrubHub?

Searches for Yelp, Uber and Groupon vs. GrubHub and Seamless in the US.

Challengers from Abroad? Just-Eat and Delivery Hero are the GrubHub and Seamless of the international world. These two are probably not content with sitting out of the US market forever. Expect an acquisition (or three!) from these guys over the next two years.

Execution Missteps. GrubHub and Seamless both grew well. But their integration after the merger has been slow. Just recently they relaunched in NY on a unified platform. It has not gone well. The analysts at Cowen did a survey indicating power users are shifting some spend away from Seamless. I have a friend in New York who was so annoyed by how bad the transition was that he has sworn off Seamless for now. He has plenty of options at this point and he is not alone in his complaints. Some more from Twitter as well: one, two and three.

An expensive operational switch. Doordash, Postmates, Uber and others are leading the way in showing that the true drivers of the business are good food delivered quickly. GrubHub relied heavily on restaurants that delivered their own food and elected to sign up for their platform. This is the capital light eBay model and it is great if you have no competitors. But it may be the wrong strategy in this space as it results in slower deliveries from the second tier of restaurants. To its credit, GrubHub is starting to do its own deliveries. Robert Faulkner correctly points out that this shift doesn't have the same attractive economics as their original model. It will be another reason profits will be pressured.

How much room is left for monetization? One of the impressive elements of GrubHub's business is its 15.5% take rate, or percent of each bill GrubHub gets, as of the latest quarter. It is probably why so many companies are attracted to the space. It is also a problem. Restaurants, the lifeblood of GrubHub's business, don't have a lot of margin to spare. They like the revenue they get from GrubHub, but I suspect GrubHub may have reached the limit of how much of the ticket they can take, since most restaurants average less than 4% overall margin. Interestingly, the take rate percent may increase over the coming quarters, but it will be an illusion, since it will likely come from delivery fees added as part of their shift to delivery on behalf of restaurants. Sure it's more revenue, with a much less profitable (profitless?) cost structure.

Slowing growth? While I anticipate the true competitive impact to be felt over the next 6-12 months, the cracks are already showing in GrubHub's growth:

• Q2 2015 was the first quarter of Q over Q revenue decline
• Grubs per active diner has been on the decline and hit a new low in Q2: 3.38
• Active diner growth hit a new low in Q2: 5.9% quarter over quarter (NB: I don't like 12 month rolling metrics - they can easily obscure a quarter over quarter decline)
• Daily average grubs declined 6.2% quarter over quarter, its biggest decline to date

Given that grubs per active diner, revenue per dine and take rates are all either declining or profit constrained, the only profit growth driver left will be new diners. GrubHub's competitors will be fighting for every one.

The market is GrubHub's to lose, but it's worth laying out what conditions would cause GrubHub's stock to drop dramatically:

• GrubHub loses out to Doordash, Yelp or someone else.
• The online ordering market is a free for all (not winner-take-all or winner-take-most like many investors assume).
• Market saturation is closer than many think. Perhaps the market is already nearly as big as it will get.
  
• Competition will erode the 15% take rate.

Searches for "Seamless" in NYC. Saturating?

If this market is winner-take-all, saturation is not near and take rates remain high - then whatever company wins, GrubHub or otherwise, will likely be worth a lot more than $2.6 billion. This is the bull case. Given the current competitive environment, there is high risk for GrubHub shareholders.

What's next? Revenue declines, profit evaporation, mergers and perhaps irrelevance? I expect GrubHub's profitability will evaporate over the next 12 months. If it wants to win I would argue it should. The right strategy is probably to follow the Uber model and press their advantage with aggressive sales and marketing. The worst-case scenario would be an outright quarter over quarter revenue decline of 5%-10% or more. Some seasonal weakness is expected in Q3, but they have still grown revenue every quarter until Q2 2015! Given Grub's nosebleed 70 PE, growth worries can take the stock down pretty far, potentially well below its IPO price of $26.

While I'm intrigued by the business model and think there is opportunity for geographical expansion, it will be a bloodbath for a while. The bloodbath may not end until many of these competitors abandon the market or go bust. Don't get me started on how ugly it would get if we have a recession. There will be a lot of M&A in the space - likely with tons of dilution for GrubHub shareholders. The biggest risk for GrubHub investors is that they are one of the eventual losers and become a footnote to this space, losing to Doordash or Yelp like Myspace to Facebook (FB) or AltaVista to Google (GOOG) (GOOGL). Seems unlikely given their historical momentum, but as of now they are being out-executed.

Analyst’s Disclosure: I am/we are short GRUB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am long GOOG

Comments

[Kevin Berk]

Add another massive competitor to the pile, Amazon: http://read.bi/1VQombu

[Michael Kudrna]

Market still young and undeveloped, plenty of room to grab market share before being saturated. Overall market will grow exponentially as the younger generation moves towards ordering via technology

[enzyme]

Amazon has no earnings. Grub does. Is that not a variable in your thesis?

[Sergio Heiber]

Kevin, nice job on your article. I think that what's going to kill GRUB is that there's no barrier to entry. I just moved and was too tired to think about food. My kids where with me and they checked what restaurants where in the area. They selected a Thai restaurant and placed an order online, which was serviced by On24. It's interesting because they didn't go to a delivery site firs. They checked what was available and then ordered. Restaurants have a lot of choices on who to go with for online ordering and GRUB may be the largest player but as more and more restaurants find online partners, GRUB doesn't offer a clear advantage. I was positive on this stock, but have since changed my opinion.

[k8c8]

Kevin, great comments. First mover advantage for GRUB is crucial for its success and I completely cede to you that barriers to entry in this space are very low. However, getting brand recognition and customers on your platform will take a while and the VC money may burn out well before a GRUB competitor can make any serious inroads against them.

GRPN's entry into this space is the same formula they have done with their core business, which is offering discounts to first time consumers of a product and service. So people who use GRPN are looking for an event or some type of activity to try out for a discount. For them to offer 10% off on restaurant deliveries is utilizing the same business model. However, once the discount goes away after the first order, because it can't go on indefinitely, will new GRPN users stay with them? I say not, because they still don't have the depth of restaurant offerings that GRUB has and eventually they will go back to the platform that has the most offerings.

YELP's entry into this space with Eat24 is interesting at first glance, because paring reviews with a consumer buying portal looks to make sense. Let's say, it's not YELP, but Tripadvisor that purchased Eat24, does that make sense either. Probably not, because TRIP is so branded as a review site, just like YELP, you wouldn't even consider going there for local take out food. You would go their for restaurant reviews where you would actually dine at the restaurant. So, Eat24 may provide YELP with a little more lifeline, it is clear their core business of business reviews are declining and declining fast. They are not going to transform into a GRUB any time soon.

Your thoughts on regional players has many valid points. GRUB happens to be a player in two of the largest takeout markets in the US, however, outside of several large cities, they are not a household name. Whether one can see this as additional runway for growth or a hindrance, only time will tell.

Net net, for an internet tech play, GRUB is pretty good. It is a dominant player in its space, it has good cash flow, it has no long term debt and over $300 million in cash. Many tech firms would be envious. Where do we go from here? Well, GRUB can continue plugging away with getting new business, which they have been great at doing despite competition or they can become an acquisition target. However, I think once GRUB announces that they are going to get a few large franchise restaurants (eg, Pizza Hut, Dominos or large restaurant chain) on their platform, that would solidify their market position and a new source of dependable revenue stream. Either way, there is a good chance the stock price will go much higher from here.

[Kevin Kuo]

Good comments. I still believe you are not giving enough credit to the competitive threat companies like Postmates etc. post to GrubHub. For example, some of my favorite restaurants in NYC only offer take out delivery through Postmates; I've tried looking for them on Eat24, Seamless/GrubHub but couldn't find them. GrubHub is already seeing signs of saturation in Chicago and NYC which make up 70-80% of their overall orders. I have no attachment to any food ordering platform, so when I look at GrubHub, Eat24, Postmates I'm pretty platform agnostic. Those who use GrubHub/Seamless will probably continue to use those platforms. However, GrubHub's current valuation (P/S > 8) is predicated on their ability to continue growing food sales 20%+ yoy. The last two quarters have shown growth deceleration, either that's due to increasing competition or market saturation (perhaps temporary) or both. The other point is that GrubHub's leadership in one region does not guarantee leadership in another. For example, being a leader in Chicago and NYC, does not necessarily translate to LA, SF or other cities. Because they are a local vertical aggregator, each region is up for grabs. GrubHub will have to defend and grow market share in cities where they haven't penetrated as deeply as NYC and Chicago. Investing in expansion to outgrow competitors will likely hurt margins.

Your comparison with Priceline.com's is a fair one, but the company's stellar growth is mostly due to Booking.com, which had the benefit of a large and growing European travel/leisure market with little if any meaningful competition. GrubHub's only global operation is in the UK and they are behind the market leader Just Eat. Hotels are also different than restaurants in that people who stay at a hotel are almost always coming from out of town, this is not the case for online food ordering. Tourists/visitors are much more likely to dine in at a restaurant than order takeout. Even though a die hard GrubHub user might travel to another state/city for work, he/she isn't going to necessarily use GrubHub there. This is what I mean when I say that the brand recognition/dominance doesn't necessarily translate to other cities. GrubHub will have to organically grow each market separately, which will be costly given numerous competitors. Even if you strip out competition from couriers, you still have Eat24 and Groupon To Go. And while, they have much smaller operations in online food delivery, both have unique advantages as competitors. Eat24 has Yelp's built in user reviews, significant restaurant relationships, and a very large monthly unique visitor base (~142 mililon as of Q1 2015). Groupon has 3-4x GrubHub's operating cash flow, 25 million active users in the US and deep penetration on their daily deals platform in many of the major cities. Currently they are subsidizing orders with a 10% cashback offer for their initial roll out of Groupon To Go in Chicago. It'll be interesting to see what affect this has (if any) on GrubHub's numbers in the next few quarters.

I think GrubHub definitely has an advantage as a first mover and current market leader, but I think it is a bit too optimistic to assume they will dominate the rest of the U.S. They are investing in a courier/delivery service to compete with UberEATS, Postmates etc. and based on management's comments they hope to break even on this service, passing on some cost to consumers and also to restaurants. Building out this service will cost precious cash flow that they could use to secure the smaller markets in which they are not as dominant. Not to mention, there is the issue of whether they can actually execute well in this area.

If you strip out delivery/courier services, GrubHub still has some noteworthy competition on the horizon and if you add the delivery services back in as a potential threat (which I think is warranted as this is a way to differentiate the other restaurant aggregators) then there's even more competition. I think GrubHub can do well, but there are significant risks to their growth trajectory and I don't think they should be taken lightly. I'm not interested in shorting the company, but I also don't find the company attractive at the current valuation.

What would you say is GrubHub's competitive advantage other than its first mover status? Why couldn't Yelp or Groupon undercut GrubHub on take rates (as well as offering substantial customer discounts e.g. Groupon) and force them to do the same in order to compete for restaurants? What would be the reason for someone who is currently platform agnostic to choose GrubHub/Seamless over any of the competition? Or someone who currently uses GrubHub but receives some cash incentives to use Eat24 or Groupon's service? Since restaurants can be on any service they choose, or all of them, if the competition all have the same relative restaurant base (Both Groupon and Yelp have substantial sales teams), the only differentiator is user base. And in this area I don't believe GrubHub has a distinct advantage over Groupon or Yelp. From my perspective it seems that GrubHub's main advantage is that they are known as the site/app you go to place food orders online. But there is nothing about their platform that is particularly sticky.

Would love to hear your thoughts. Thanks in advance.

[Kevin Kuo]

I think it depends on the kind of city you live in and how much time you have for your meal. Often, the choice of restaurant/cuisine is flexible and dependent on affordability, quality and accessibility (whether picking up or delivery). 30 min is a significant amount of time, relatively speaking if your schedule is packed and you only have an hour to have a meal. In NYC there are so many options that price/quality for any given cuisine is relatively consistent. After that, it comes down to how quickly I can get my food, finish it and move on to whatever else I have to do. If I plan ahead, then the 30 minutes isn't as much of a problem, but I've had plenty of instances where I've ordered food and it was supposed to come in 30 min and instead it took 45 or 50 min. That extra 15-20 min can mean the difference of getting to your next appointment, meeting, event on time. I don't know how many people plan their meals ahead of time, but I can't imagine it's the majority.

For cities like LA or the Bay Area, the situation is a bit different. Places are more spread apart and traffic can really eat into delivery times; in such situations delivery speed is even more important, all else being equal. Again, my assumption is that in dense urban areas there are a variety of options with similar price points for a given type of cuisine.

[k8c8]

Kevin, exactly to my point. If you are a consumer that is SO hungry and can't even wait 30 mins for takeout and you have meetings up coming up soon, you would not order takeout. You wouldn't chance it. You would just walk outside to the nearest restaurant and order your meal. There's no guarantee that a lot of these new delivery services can deliver your meal in 15 or 20 mins anyway. It's aspirational and they tout it as such, but generally, it takes least 30 mins or longer. There's no way these companies can consistently delivery food at a breakneck speed when they are utilizing different drivers and at all times of the day. Speed of delivery may be an advantage for UPS or Fedex, because they can consistently delivery packages at prescribed speeds, but food delivery is all about the FOOD first and delivery is just a small decision making factor. If a service does not offer the food I want to eat, the delivery speed is a moot point. Delivery speed is not a gamechanger because we all have different expectations of what "quick" and "fast" delivery speed. However, not charging a delivery fee or no gratuity needed for delivery may be a new selling point, but the consumer is smart enough to know the restaurant will build in the cost of delivery into the price of the food, so it's just a gimmick.

[k8c8]

I see your point of view, but there is a reason why restaurants purposely don't want to be on GRUB and it has absolutely nothing to do with either their take rate or any type of negative perception that GRUB restaurant offerings are on the lower scale.

The problem is that once a restaurant gets on to the GRUB online ordering platform.....they get SWAMPED with massive amounts of new online orders. So much so, that GRUB has to consult with restaurants on HOW TO HANDLE the new influx of business. It's a good problem to have, but it becomes completely unmanageable if the restaurant does not have the infrastructure in place for this new business (e.g., more cooks, dedicated staff to put takeout orders together and delivery). Pretty much every restaurant knows that GRUB is a Catch 22. If you don't get enough business, that's a problem, if you get too much, then that can also be a problem. So, restaurants sign up with GRUB's lesser competitors to dip into the online ordering process so as not be completely overwhelmed. Obviously, this is a concern that GRUB understands and is actively trying to work with restaurants to manage new order flows.

See: http://on.wsj.com/1cyPius

As far as delivery is concerned, it is like the last consideration for a takeout food consumer. If you are hungry, this is the decision making process:

1) How hungry am I? Should I cook, order out or immediately go out to eat?
2) Once you decide you are going to order out, then you need to decide what type of food you want to eat. Let's say you want pasta at an Italian restaurant.
3) Then you decide the following:

A) Do I have restaurant in mind? If yes, then you just place the order.
B) If I'm not sure, then I have to figure out (that's where GRUB is helpful), in this order of thought, first, what Italian restaurants deliver to my location, what are the customer ratings of their food, what is the price range and how quickly can they deliver.

Notice, if you don't know any of the restaurants, deliver time is pretty much the last consideration of a takeout order. Granted if you had a bad delivery experience with a restaurant, that would already factor into your decision making process. No one that is hungry would FIRST consider which restaurant has the most efficient delivery method. The first thing you would think about is the TYPE of food and then how much you want to spend. All else being equal, delivery speed is something that is at the bottom of the decision making process. But really think about it, if someone is SO HUNGRY, and they can't even wait 30 mins for takeout to be delivered, they would either raid their refrigerator or just go outside and walk or drive to a restaurant immediately. Suffice it to say, the so called delivery benefits of UBER, Postmates, Doordash having larger delivery structures is like putting the cart before the horse. It is nice to have, but not a competitive advantage that can overtake an entrenched competitor like GRUB.

Also, touting these competitors as offering "fresher and healthier foods" is not exactly accurate. If a person wanted to eat healthier, they would just choose the salad over the burger in a menu on GRUB. It's as simple as that! If you feel these competitors exclusively offer healthy foods, then they are direct competitors to Jenny Craig and Weight Watchers....WHICH ALSO DELIVERS FOOD!

When it comes to takeout ordering, it's all about the FOOD and how many OPTIONS of food you can chose from! That's it!

[Michael Kudrna]

Can you explain how you are coming to those beliefs/opinions?

[Kevin Berk]

You've raised some interesting questions:

1) Is Grub a firehouse for onboarding restaurants? If yes, then that is truly impressive, but also an opportunity for smaller entrants.

2) What is the process consumers go through in deciding an order. I suspect many don't just pick up the phone because it is easier to order online. I wonder if GrubHub's massive list of OK/Good restaurants is more powerful than having a list of Good/Great restaurants. In other words, do most people going on GrubHub really don't know what restaurants they want to order from or is it that the Restaurant they want is already on Grub so they order. If a better selection of restaurants / meals was a available elsewhere - would their loyalty switch? Perhaps people just don't know good restaurants nearby or don't care whether the food is good... but I doubt it.

3) Delivery times aren't important? I have to strongly disagree here... wanting your food quickly could be for any number of reasons: hunger, food quality, need to feed family before bed time, in a hurry. Across the board with products and services I have notice that Quality and Speed are very, very important.

4) Salad vs. Burger? Hmmm. I think you are oversimplifying a consumer purchase decision. Most restaurants don't optimize for healthy - they optimize for taste - salt, butter, fat, carbs - these get consumers coming back.

I stand by my assessment: "Good food, delivered quickly." Not clear that Grubhub can beat their competitors on this front.

[k8c8]

Michael, I just wrote two War and Peace length rebuttals to Berk's article. That's enough to explain my position. These are my opinions and they can stand on their own. I am frequent GRUB customer and I'm also long the stock. I'm not questioning Berk's interpretation of GRUB's balance sheet or income statement, pretty much Berk has an opinion and stated it as such and offering why he believes his position is correct. I have done so as well. No need for me to provide footnotes and sourcing like a term paper.

[Kevin Berk]

I agree that UberEats is probably over-hyped and not an existential threat to GrubHub. But UberEats, Blue Apron, Munchery, etc. do solve some of the same problems that GrubHub tries do - and in some ways better: fresher, healthier and in Uber's case faster. People only eat one lunch or dinner per day... if they buy dinner via Uber or BA, they are not buying via GrubHub.

As for DoorDash... yes, Seamless/GrubHub are dominant in NYC... but Doordash is dominant on the Peninsula in the Bay Area after just two years. Seems like Grubhub should own the Bay Area market - it is a wealthy, tech savvy market, but they are losing. Doordash just launched in NYC. We will see if they can make inroads, but if their current trajectory is any indication their model seems to resonate with consumers more than 5+ years of Grubhub in the Bay Area.

My take on why Grubhub may struggle vs Doordash / Postmates / Favor type players:

"GrubHub's restaurants outside of New York and Chicago have the whiff of adverse selection - restaurants that are not busy and not popular are more motivated to push takeout and delivery. The equivalent would be Uber only taking you to some places you want to go, but not your favorite places."

[Kirby Muxloe]

"GrubHub's restaurants outside of New York and Chicago have the whiff of adverse selection - restaurants that are not busy and not popular are more motivated to push takeout and delivery. The equivalent would be Uber only taking you to some places you want to go, but not your favorite places." - If that's the case then surely Yelp has an advantage where you can control for quality selection and get delivery?
KM

[Kevin Berk]

Yelp's advantages right now are scale of traffic and an existing sales force selling to restaurants. Their product is much more of a GrubHub clone / direct competitor. They have a lot of potential to steal share due to the sheer size of their consumer traffic. The sales force will push to add an EAT24 option to restaurants websites.

Doordash, Postmates, Favor provide more of the higher quality options.

[k8c8]

I think UberEATS is bunch of hoopla and any comparison to Grubhub is patently incorrect. In a nutshell, UberEATs is just a kitchen (kind of restaurant w/o tables) with a very limited menu of the day from a few restaurants and they have a large fleet of cars delivering the food from their kitchen. That's it! Nothing more. If you don't like what UberEats is cooking up that day, you wouldn't place an order.

However, Grubhub/Seamless is an ordering platform for 35,000 restaurants across the nation. Yes, 35,000 restaurant choices with countless menus and different offerings in different price ranges. That is what Grubhub is. UberEats is just really ONE restaurant with a limited "menu of the day" that has a fleet of cars to deliver it. In fact, UberEats would do better financially if they put their food offering on Grubhub to get more exposure to consumers. Because the only time you would open up the Uber app is when you need a car, not when you are hungry. Some industry analysts think that having a large fleet of cars is like some huge advantage for a restaurant, no it isn't! The quality of the FOOD or price advantage of the food is what drives people to chose who they would order from, no one cares if Uber can deliver its food 15 mins faster than some other restaurant if they didn't care to eat the type of food Uber was offering that day. Analysts should stop comparing Uber with Grubhub anymore, there isn't any comparison. This constant comparison between these two companies is really misleading and completely unwarranted.

In addition, why is Blue Apron even in the comparison? Just because they deliver do-it-yourself dinners? It's takes about an hour to fix a "pre-made" BA meal. If you want take out food, you order takeout food and not waste your time with this faux cooking process. See: http://read.bi/1TVbXju

Finally, why is Doordash even in this comparison? They do deliveries........yes, deliveries...from a few restaurants that may not have delivery services. I live smack in the middle of NYC in the Upper East Side, it is restaurant mecca right outside my building and Doordash has ZERO restaurants offering deliveries in neighborhood, yes ZERO. On Grubhub, I currently have 310 restaurants that can deliver to my home right now!!!!!! Not even close!!!

Also, fyi, the stock analyst promoting GRUB demise story versus UBER is the same Cowen analyst that did the hit piece on GRUB the day before they released their 2Q15 earnings that knocked the stock down 8%. Then the next day, GRUB reported fantastic earnings and the stock went up to $36 in the pre-market. I believe this analyst is trying to knock down the stock price to benefit the shortys in GRUB. He's trying every different angle to chip away at it.

[Michael Kudrna]

Technically speaking, grocery stores are competition to GrubHub because they sell a solution to meals just like GrubHub does, restaurants do, etc.... I do get what you're saying though.

If 100 people are going to eat, all 100 people are the market, if 80 of them go to a grocery store and 10 to go GrubHub and 10 to go a restaurant (regardless if that restaurant is on GH), you can "technically" argue that GH only has 10% of the total market share.

[enzyme]

Ditto about blue apron. I don't get why it's lumped in with grub.

[Kevin Kuo]

Hey Kevin (great name btw),

Thanks for the analysis! I agree that the online food ordering/delivery space will be an intense battle for market share and my gut feeling, I'll need to do some more thinking about this one, is that there won't be a single player that dominates the entire space in North America unless there is some kind of competitive advantage that one competitor has over the others. Perhaps a technological process might give the most advanced competitor a leg up in terms of efficiency in the logistics of delivery. However I don't see this competitive advantage, even if it does emerge, lasting very long simple because processes can be copied in time.

Ultimately, I think each region will have one or two dominant players and consolidation will likely follow. On the demand side, the companies with greater user traffic and the subsequent cash to build out the supply side will pose a significant threat to GrubHub. Groupon, for example, has four times GrubHub's annual operating cash flow. Uber seems to be able to fund its growth from private investors with huge pockets. There is a lot of opportunity in the market, but as you mention the competition will be fierce. It is GrubHub's market to lose.

I question the brand loyalty of GrubHub/Seamless users in the same way I question the brand loyalty of Amazon, Groupon, eBay users. Brand loyalty is less important on commerce platforms as the primary value added is the effectiveness and price charged for the service. People buy from Amazon not because they are loyal to Amazon, but because they usually have the cheapest prices, great return policy and the best delivery times. If a competitor can beat them on any of these areas, customers will switch. Fortunately for Amazon investors, the logistics moat that they've developed is substantial and given the costs needed to replicate their business model, it would be very difficult to achieve Amazon's scale. However, GrubHub's industry is in its infancy and as such has no real competitive advantage/moat other than it has first mover status in certain regions. On top of that, they have numerous competitors already taking market share in various regions that they are not dominant in. Larger competitors can undercut GrubHub on take rates, win over merchants and drive greater order volume with their sizable user bases. Given GrubHub's elevated valuation, it seems like a risky investment to me, though I am not personally shorting the stock.

Would be interested in hearing a bull case as to why GrubHub/Seamless deserves brand loyalty points. Thanks again!

[Michael Kudrna]

Do you think GRUB had 100% of the market share.

If not, what percentage do they have?

I believe it's as low as 20% and that they are the leader meaning it's far from saturated and that as time goes on, more people will convert from phone customers and walk-in customers to online ordering customers.

That means even if GRUB has more competitors, the market is far from saturated so more competitors can survive in this market.

Frankly, I think the losers will be the restaurants because GRUB and others will be able to provide better online platforms than restaurants can provide themselves...so ultimately some will leave restaurants platforms for third party platforms. This will mean restaurants like mine will have to create better incentives to stay with me rather than go to a third party platform.

[enzyme]

I appreciate the insight and effort put into these analysis. But with all due respect, in light of Grubs quarterly results, which are consistently solid, doesn't that prove these speculations overblown? I mean the "smart money" is buying this up (Nasdaq reports a > 85% institutional ownership).

[Kevin Berk]

Given the >85% institutional ownership, it would appear that smart money isn't buying, it has already bought. So we will see if they hold on to their shares as competitors eat into GRUB's market share and margins.

As for their results... they have been great, but investing is about the future. Their latest results show some weakening. I expect growth to weaken significantly over the next 12 months.... still growth, particularly in Q4/Q1, but much slower. Too slow for a company trading at a 70 PE and 8x revenue.

[enzyme]

So if sell side analysts have a 45 ish PT and institutions own most of it, who is selling? Or in other words, who is setting Grubs stock price?

[Solar18]

Not sure why some of these companies (ie: Blue Apron, Sprig) are even included here. They don't operate in the same space as GrubHub. GrubHub is an aggregator of local restaurants, whose users want a fresh hot meal delivered quickly. That's a lot different than services which deliver meals you have to cook yourself or worse reheat. Don't understand the comparison between the two.

Think you're also underestimating the power of brand recognition. Seamless is the one and only go-to in NYC, arguably the largest delivery market in the country. Also not sure why you think that using a company which picks up food from restaurants and delivers it to you would result in faster delivery times than ordering your food directly from the restaurant. You're adding a middleman with these services, along with all the related overhead, that GrubHub/Seamless doesn't have to deal with.

[Michael Kudrna]

It would potentially result in faster delivery times due to restaurants not always being full staffed due to increasing cost of labor and rollercoaster sales trends throughout the day and week. The middleman is a dedicated middleman to the delivery therefore they have a competitive focus on one task that could increase delivery times if it's true that the restaurant is seeking to maximize sales per employee instead of maximize customer service regardless of sales.

[Kevin Berk]

Blue Apron, Sprig, etc. are included because they are serving the same need - dinner! If consumers are looking for a more convenient option to shopping and then cooking their own food, anything that serves that need is a competitor to Grubhub. Warming up a meal may be more work than a Grubhub delivery, it is much less work than shopping for an preparing a full meal. Frankly, I've ordered food for delivery that needs heating up even from the restaurant.

Seamless is dominant in NYC, Grubhub in Chicago, and nationally they are the leader, but many other companies in other spaces before them were leaders before being supplanted. Disruption is the norm. I am impressed with Grubhub, but this market space is not locked up yet. Yelp's Eat24 does pretty well in certain markets and nationally. Orderup (Groupon) is pretty strong in some smaller markets. Doordash is a force - call any restaurant on the Peninsula in the Bay Area - most have never heard of another delivery service besides Doordash.

As for delivery times, I think you overestimate how efficient restaurants are! Doordash is 100% focused on delivery - they are obsessed with it. Restaurants that send out the bus boy on delivery routes don't have that urgency. Again NYC is a bit of an anomaly since it so dense... but that also makes is an easier target to make inroads operationally.