Grubhub Inc. (GRUB) CEO Matt Maloney on Q1 2020 Results - Earnings Call Transcript

Grubhub Inc. (GRUB) Q1 2020 Earnings Conference Call May 7, 2020 9:00 AM ET

Company Participants

Adam Patnaude - Head of Investor Relations

Matt Maloney - Founder & Chief Executive Officer

Adam Dewitt - President & Chief Executive Officer

Conference Call Participants

Andrew Charles - Cowen

Stephen Ju - Credit Suisse

Ron Josey - JMP

Abigail Zvejnieks - KeyBanc Capital Markets

Brian Nowak - Morgan Stanley

Heath Terry - Goldman Sachs

Ralph Schackart - William Blair

Maria Ripps - Canaccord

Deepak Mathivanan - Barclays

Adam Patnaude

Good morning, everyone, and welcome to Grubhub’s First Quarter of 2020 Earnings Question-and-Answer Call. I am Adam Patnaude, Head of Investor Relations. Joining me today to discuss Grubhub's results are our Founder and CEO, Matt Maloney; and our President and CFO, Adam Dewitt. This conference call is available via webcast on the Investor Relations section of our website at investors.grubhub.com.

Today, we'll be answering questions about our first quarter results, which were contained in our press release and also discussed in our shareholder letter. Both the press release and shareholder letter have been attached as exhibit to our current report on Form 8-K filed with the SEC and are posted on the Investor Relations section of our website. I would like to take this opportunity to remind you that during this call we will make forward-looking statements, including guidance as to our future performance. These forward-looking statements are made in reliance on the Safe Harbor provisions of the Securities and Exchange Act of 1934 as amended and are subject to substantial risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements.

For additional information concerning factors that could affect our financial results or cause actual results to differ materially, please refer to the cautionary statements included in our filings with the SEC, including the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 28, 2020 and our Quarterly Reports on Form 10-Q for the quarter ended March 31, 2020, that will be filed with the SEC. Our SEC filings are available electronically on our Investors’ website at investors.grubhub.com or the EDGAR portion of the SEC’s website at www.sec.gov.

Also, I’d like to remind you that during the course of this call, we will discuss non-GAAP financial measures, in talking about our performance. Reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release. Finally, as a reminder, all of our key business metrics exclude transactions where Grubhub only provides technology or fulfillment services.

And now, I would like to hand the call over to Matt Maloney for a few opening comments. Matt?

Matt Maloney

Thanks, Adam, and thanks for joining us this morning. I hope you and your loved ones are staying safe and healthy during this challenging time. Every day we are confronted by the devastating toll of the COVID-19 crisis on our communities. We recognize the massive appeal that has taken place across the country for restaurants that are doing what they can to stay open, pay employees and feed their communities as well as for the drivers for them to stay safe while working extra shifts. We're also inspired by our diners. We've seen kind notes of encouragement in their special instructions and have dramatically increased tipping during the crisis. In the past 8 weeks, Grubhub has undertaken a number of programs to support all aspects of our marketplace, restaurants, drivers and dinners. And as we pointed out in our letter yesterday, we are prepared to do much more in the months ahead.

Specifically we have deferred a significant amount of revenue as cash flow release to restaurants as well as pump tens and million of dollars directly into rewards and our marketplace to stimulate over $150 million in food sales for our partner restaurants this quarter. We also rolled out numerous protections for our drivers, including sick pay, contact-free pickup and drop-off, as well as free personal pick-up of equipment in which we've distributed nearly 100,000 kits. With the intent of further assisting restaurants in need, a number of municipalities are considering measures that will unfairly penalize delivery platforms and leave untouched other stakeholders in the restaurant ecosystem, from landlords and food suppliers to other digital advertisers and payment processors.

While we are aligned with the intent of helping restaurants [indiscernible] are ineffective at best and actually harmful at worst. As you all know from our public filings, delivery platforms assume significant costs on the restaurant's behalf when we deliver their meals. And we are responsible for these costs. And the fees we collect from our restaurant partners are subsequently capped like the emergency legislation currently enacted in San Francisco, Seattle and a few other jurisdictions.

We must fund deliveries by increasing the consumer fees and spending less on marketing in the diners, both of which would reduce overall orders. We’ve already seen negative impacts of this in San Francisco. Our preliminary data shows that on average, our independent restaurants are seeing over 10% fewer orders since the fee cap. Many of these orders have shifted to our large brand or QSR restaurants that were not impacted by the emergency ordinance.

That's not good for small businesses. And even worse, these loss orders also result in lost wages and tips for our delivery drivers. We are open to reasonable measures during the pandemic that will help and not hurt restaurant revenue.

Over time, we believe that reasonable governance will prevail. But because of the fluid and very nature of the current situation, it’s too soon to determine how it might specifically impact our business. With this in mind, we do not intend to address the fee cap situation any further on this call.

With that, we'll now open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Andrew Charles with Cowen.

Andrew Charles

Great. Thanks, and glad to hear you, guys, as you're staying well. When you talk about restaurants reopening having negative impact on dining order habits, can you talk about the early reads you have in markets that have seen dining operations resume like in Florida, Georgia and Texas?

Matt Maloney

Yes, hey, Andrew, how are you doing? Look, we're obviously watching it really closely, but it's way too early to really give you a read. If you look at those markets it's hard to know whether –and just to clarify, when we're talking about restaurants reopening we’re talking about dine-in reopening as oppose to restaurants being available for takeout and delivery, and kind of how that would affect – how the opening of the dining rooms would affect demand for delivery and takeout.

And so you look at Atlanta or some of the markets in Texas and it’s far too early. Even there’s a couple levels, right. There are still some restrictions on a lot of the restaurants and a lot of the markets in terms of dining room capacity. A lot and what we are seeing or what we are hearing anecdotally and also seeing the data is that a lot of restaurants are choosing not to open their dining rooms yet anyway. So I think it's a little too early to tell. As we noted in the note, we are still seeing very strong demand for delivery and takeout right now.

Andrew Charles

That's helpful. And then one thing I was hoping to reconcile as well from the shareholder letter is it said it they are not seen competitive headwinds in April that obviously had been seeing in more recent quarters. I guess, how does that reconcile with the heightened use of diner promotions utilized throughout the industry so far in 2Q is obviously delivery platforms, obviously want to bring more customers to the restaurants?

Adam DeWitt

Yes. I can tell you look from what we are seeing and from what we are doing, what we said in the letter is pretty clear. We are having no issues. And in fact, it's a lot easier for us right now to acquire new diners. Our existing diners are ordering more frequently from us.

New diners are coming back more frequently and ordering more frequently, so we are not seeing any of the competitive pressure. The reason that you are seeing more promotions is kind of the theme that we are laying on the letter, which is given the challenges that Matt highlighted in his opening remarks, we are obviously very sympathetic to our restaurant partners, whose business models have been turned upside down, right.

They lost 100% of their dining room business and so in order to support them, support their employees, drivers, support the ecosystem, so that as we get to the other side of this, the ecosystem is in the best place possible. We're reinvesting or spending our cash flow to drive even more orders. But without that spend; we would still have a significant increase in orders and even more significant increase in gross food sales.

Andrew Charles

Thanks, Adam. Stay well.

Adam DeWitt

You too.

Operator

Next question comes from Stephen Ju with Credit Suisse.

Adam DeWitt

Hey, Stephen. Stephen?

Operator

One moment, please.

Stephen Ju

-- has any of your thinking really changed in terms of the competitive landscape. You have largely post-supply gap with some of your competitors, so from a selection standpoint there really isn't that disadvantage. So, is the goal here to really win on service as well as loyalty? Thanks.

Matt Maloney

Yeah, Stephen. So, let me kind of address the initiatives we talked a lot about before I specifically talk about the supply gap that you mentioned in your question. So, pre-COVID, we were pleased with our progress on initiatives. We were ahead of plan for sure. The restaurant supply and diner royalty for the first ten weeks, we saw market share and diner cohort stabilization. So, we launched our suspension program at Grubhub+ or Seamless+ in late February.

We completed our product suite around SMB loyalty. We saw dramatic adoption added to the already rich rewards system on our platform including more than 20 enterprise brands that were applied their loyalty programs to our marketplace. So, we are really building a lot of inertia behind the reward concept and the financial incentives to attracting diners.

And then we reached our goal of doubling the restaurant count through non-partnered inventory nine months earlier than expected. So, we absolutely close to that supply GAAP very aggressively and at the same time, we were really dramatically expanding our salesforce in order to fast follow behind the non-partnered to get that critical partnership with the independent restaurants that we are building out.

So, then when the environment changed, some of the initiatives move forward, while others are kind of in a holding pattern until restaurant supply improves. In line with the rest of the industry, we really cut back on non-partnered inventory. We had no line of sight into who was open and how the hours modified. So, we cut back on that but then we have since brought most of that contents back online to be able to provide the non-partnered content and continue to have as robust selection as possible.

Obviously, our increased salesforce was really able to process more inbound sign-ups over the past 60 days than we would have without those investments, so we are glad to have done that and our promotional stimulus what we are doing $10 off for a $30 minimum order, really trying to drive higher AOB and increased sales to restaurants. We executed that across our new loyalty infrastructure that we got done building recently.

So, we are funding the initiatives that make sense but really focused on driving as much sales in this challenging environment for our restaurant partners. Now, your question was specifically about, what does that look like from a supply imbalance or potentially competitive perspective. We have been talking for over a year about how supply and fulfillment eventually will be commoditized. But it seems that this COVID crisis has accelerated that trend, because so many restaurants are hurting and some of the restaurants reached out to every platform and said, I need to be on right now. We've seen that. We've had a lot of new restaurant sign up. I am sure the other platforms in the space have also.

So we've been preparing for this for a long time. And signing up is really the first part of working with an independent restaurant. Our partnerships – our partnerships have the lasting competitive advantage that we have and we help restaurants maximize their digital orders with products and services way beyond logistics.

So we have the leading platforms in pickup, a lot of you saw the Ultimate platform we launched earlier this year. We have an extremely strong catering platform. We have all of our university integrations, and obviously loyalty, which is one of the most valuable assets on our platform.

These tools, they've been evolving for five years with the best-of-class enterprise brands. Every year we're increasing ROI for our enterprise clients and the migration of those tools to independent restaurants really help them drive sales, drive new diners, drive repeat purchase, and clearly, there is a strong flywheel benefit with increasing diner frequency.

So I would say that, I think that the supply – we've been planning for the supply rebouncing for a while and were really going to continue to accelerate on our financial incentives to consumers and really being the most attractive platform in the long-term for diners to get the – get what they’re looking for.

Stephen Ju

Thank you.

Operator

Your next question comes from Ron Josey with JMP. Please go ahead.

Ron Josey

Great. Thanks for taking the question. I appreciate the commentary on what you're seeing in the quarter. Matt, maybe just bigger picture, as you add record partnered restaurants and you've fix the issues with non-partnered or most of the non-partnered restaurants. Can you just help us understand in this environment, why would a partner – why wouldn't a restaurant want to be a partner in these times, just given overall demand and what you, as a platform, are doing to drive demand for that – for the business? Thank you.

Matt Maloney

Yeah. Sure, Ron. Restaurants have it really hard, because they have to close their dining -- their dine-in. They lose a ton of sales. So you're exactly right. Anything that will increase their gross sales through delivery and pickup really is what they're looking for. So I don’t – there's no reason not to sign up right now. And we have a very flexible pricing program to a lot of restaurants to come out – come on the platform at a variety of exposure levels.

But what we're really doing is, we're taking all of the profits that we're making and we outlined it clearly in the letter, and we're just driving it through the platform. There's many ways we can do this. We can increase our advertising to get more new diners. We are – the one thing we found specifically beneficial is that, we're driving promotions across our promotional platform, with higher than normal minimums to increase the average order size.

And we're messaging in around support your restaurants, but also order lunch tomorrow when you order dinner tonight. And things like some bundling tactics that we're using, is really driving much higher AOV, which is driving more diners – more dollars to the restaurants and then we're supporting that by augmenting their promotions and the way we positioned the current, the $10 off the $30, is that we're front-loading the rewards for the restaurants. And then we're asking them if they want to continue the campaign on their own time over time or potentially modify it to something that they're more comfortable with. So by funding rewards to attract new diners and increase frequency is really our primary tactic in trying to help restaurants by driving as much sales. And Adam, do you want to add anything?

Adam DeWitt

Yes. Thanks. So Ron, just to be clear, yes, Matt outlined kind of all the rationale. But I don't know if it came across in the letter clearly or not, but we're seeing unprecedented sign-ups on that -- on the independent restaurant side right now, really across the board, not just independents, but enterprise as well. We had more restaurants -- new restaurants go live as partners in March and April than we did in the last six months of 2019. And I think it's a combination of two things.

One is the demand kind of that you're alluding to. But then, also, I think our investments in the sales force and that restaurant team that we built up towards the end of last year and through kind of January and February, put us in a place to convert a lot of leads to live partner restaurants. I mean, at one point, we had so many inbound leads that we weren't making outbound calls. We were just getting as many inbound leads on the platform as quickly as possible. So to your point, yeah, the demand from the restaurant side is very strong.

Ron Josey

Super helpful. Thank you.

Operator

Next question comes from Ed Yruma. Please go ahead.

Abigail Zvejnieks

Hi. This is Abbie on for Ed. I was just wondering, as you cut off the non-partnered restaurants for a period of time, did you see them converting to partnered? Or what was the dynamic there?

Adam DeWitt

Yeah. I mean – thanks for the question. As Matt mentioned, kind of by mid-February, I think we had most of the restaurants that would likely be Grubhub customers at some point on either in a partner state or non-partnered. So by definition, most of the restaurants that we were signing in March and April were non-partnered restaurants. But I think it's important to note that there is a – from a restaurant value perspective, there's a massive leap, right, from becoming a non-partnered to a partnered restaurant in terms of value that we bring to the table.

Matt talked earlier about how valuable it is to be a partnered restaurant for us with Grubhub and kind of all the things that we do. But at the end of the day, we're also talking about many multiples of volume because of our ability to present the -- that partnered restaurants at a much lower price to diners than the non-partnered. And I think Matt has a couple of thoughts as well.

Matt Maloney

Yes. Abbie, thanks. I think your question was likely targeted towards independent restaurants, but I just want to chime in with a bit of enterprise. Pre-COVID, we had a lot of enterprise restaurants on the non-partnered basis, because we're really showing the brands how effective our platform could be. Immediately, with the crisis, we had a conversation with every enterprise brand. In fact, right now, save one or two, we've either already signed or actively negotiating with every brand that makes sense with our platform. And the enterprise brands are really pushing hard -- even the ones that were just non-partnered a few months ago, they're pushing hard to get as many of their locations live as fast as possible.

Obviously, the master services agreement, the MSA, is the first. And then you have a bunch of work to convince franchisees. That whole process has been accelerated. And these brands are very focused on getting as many locations and getting integrated. In fact, we signed Chipotle in the past few weeks, and they went live immediately across the country on our non-partnered place-and-pay methods because they wanted that volume as fast as they could. And just now we're finishing our POS integration.

Other partners that were non – other enterprise brands that were non-partnered that have recently signed; 7-Eleven, Cracker Barrel, Pollo Tropical, Landers, Mortons, Dairy Queen. Big, big brands that were at varying phases of signing with our platform have all just accelerated, and they're now partners.

Abigail Zvejnieks

Great. Thank you.

Operator

Okay. And we have a question from Brian Nowak with Morgan Stanley. Please go ahead.

Brian Nowak

Thanks for taking my question. I have two. Just the first one, Matt, could you sort of – as we look at how the industry has changed a lot from COVID and kind of all of the – everything that's gone over the last couple of months, talk to us about how the –if we look into 2021, what do you think one or two of the biggest structural industry changes you think or the way you guys are going to operate are going to change coming out of all of COVID and everything you've learned so far?

And then secondly, on the macro front, talk to us about how you think about the risk of consumer expenditure weakening in the back half and the fact that, in some cases, food delivery is still relatively expensive to other alternatives. Is that a risk to the back half? Or how do you compartmentalize that?

Matt Maloney

Sure, Brian. I'll take the first one, and Adam is going to take the second. So looking forward, I think one huge takeaway is delivery, specifically, is front and center for restaurant side. It has been growing over the past five years. Every brand had a strategy, has a plan and they're looking to adapt with COVID immediately. The bit flipped, and delivery and platforms are here to stay.

There's no question about it. It's a major part of revenue. It's a sole revenue right now, but clearly, it will pass and it will just continue to be a very major part. You're seeing millions of diners try delivery platforms for the first time as they're locked inside their houses. And I think you're seeing restaurants realize the benefits we bring in terms of higher efficiency, better products, tighter integration, for us, at least, a really strong loyalty platform.

So I think you're seeing the realization that our industry is extremely important, and it will be forever. I think that's also a lot of the impetus for the political activity that I mentioned in the beginning of the call. So I think that's here.

In terms of how we're going to be operating, we just need to address our concerns. We need to make sure we're a strong and good partner to build and support restaurant growth over the long-term, which we feel we have been doing and have continued to invest in, obviously, with our short-term expenditures on driving demand, but also in the platform and the products and the services we're providing.

I think from a driver perspective, we're also being very cognizant of the experience that we are providing our drivers. They're concerned. They're scared. They're having the -- in Manhattan, bike around the empty streets and risk their own safety and security. And so making sure that we're treating them as a -- not just a partner, but a customer, someone who is really integral to the value we provide. And so we've introduced a lot of support measures for our drivers to really take care of them and be a positive partner. And I'm really proud to see those come out, and we're absolutely going to continue that also. Adam, do you have thoughts on the macro?

Adam DeWitt

Yes. And before I start, just plus one on the drivers, for those who are listening, we super appreciate everything you guys are doing. In terms of the macro, we talked in the letter, there's definitely a lot of influences, right?

On the -- you talked about the recession in the back half, but I think it's helpful to think about what's happened over the last two months in terms of, look, the average order size is way higher, which means a lot of folks are using the platform in ways that they have never used it before, right? And so they're ordering more for families. They're ordering on more occasions. And so that's changed over the last couple of months. We've also seen a lot more new diners flood into the -- flood on to the platform. I don't think we went into a lot of detail in the letter, but the -- our new diner numbers have been even more robust than the order numbers in kind of March and April.

So we're seeing, over the last couple of months, even millions of new diners trying Grubhub for the first time, and then we're also seeing just more use cases from our existing diners. So people are using -- have tried Grubhub in different ways than they have ever used it before and in more ways, all positive, right? And so as you're thinking out towards the future, if any of that sticks, right?

And we assume some of that will stick, right, we assume that people will or have enjoyed their experience and will continue to use us on more use occasions, will use us to order more for families, et cetera. And so we assume some of that will stick around. I think that will be balanced out by, to your point, discretionary income and unemployment. I think we've always had the -- I think, there is two sides to that argument in terms of the recession, right? One is with less discretionary income, people go to restaurants less, right? But on the other side on the flip side, ordering in is a cheap replacement for -- a cheaper replacement for going out. And so I think those two kind of potentially balance each other out. And so I think we'll see how kind of it all comes out in the wash over time.

Brian Nowak

Great. Thank you all. Very helpful.

Operator

Next question comes from Heath Terry with Goldman Sachs.

Heath Terry

Great. Thanks. Matt, kind of a higher-level question. I guess you touched on this in some ways with some of your comments about the political efforts that you've got. But I'm curious how much thought you give or whether it's something that you guys are able to really affect any change when it comes to sort of the narrative that's out there about Grubhub and the food delivery industry in general.

I mean you guys are providing an essential service, you're -- you have been a lifeline to a lot of the restaurant industry. And maybe it's just for those of us who are a little bit too tied up in social media, but the narrative around your business seems to be a lot more negative than at least the reality that I think a lot of us see. People posting their Grubhub bills and the issues, obviously, that have been raised in San Francisco in a very, very direct way.

Is there anything that you can do or any way that you see to sort of recast the narrative? I mean, particularly given the fact that you're essentially operating at breakeven during this time, you're not making any money off this crisis and understandably so, to sort of recast the narrative around Grubhub and the work that you -- your drivers, your teams are doing?

Matt Maloney

Yes, great question. And you said essentially breakeven, I think we're literally there at this point. I -- it's a tricky question. I think that restaurants are in a lot of pain. I think that people see their local restaurants and they're afraid they're going to close. And the majority wants everyone to do as much as possible, which we are.

We are bending over backwards, deferring revenue, giving profitability. We are doing everything we can imagine to help restaurants because, at the end of the day, our restaurants' business is our business. Without the restaurants, we don't have a platform.

So, it is frustrating when you see a lot of the social media posts that are inaccurate and a lot of them are politically coordinated. But I think what people forget and one thing that we are going to try to do better on is to highlight that the costs are real. If Grubhub or any platform didn't deliver, the restaurant would have to effectively pay the $5 to the delivery person. The $5 is about 20%-plus.

You have credit card fees with or without us. You have customer support with or without us. You have fraud with or without us. You're building up to this cost basis, where -- and you guys know because you scour the filings, I mean, we're making about 1.5%-ish on the order. We're not making the 30% that we're being tagged with. And that's really what the local municipalities are primarily responding to is they hear a 30% take rate, and they think that's all going in our wallet.

And so I think doing a better job of educating, both the elected officials as well as the general population, is important in the weeks to come. But at the end of the day, there's always going to be pressure from organized restaurant groups to decrease the cost for restaurants, which is very reasonable. We look to decrease our costs as well.

So, I think it's a push and a pull. And unfortunately, it's a crisis situation, and these tensions are heightened. But we're going to really focus our efforts on educating and making sure people understand the valuable role we play in ecosystem. And how -- if it wasn't Grub, the restaurants would still have to pay real costs in order to deliver food.

Heath Terry

Great. Thanks Matt.

Operator

Next question comes from Ralph Schackart with William Blair.

Ralph Schackart

Excuse me, good morning. Appreciate the added commentary about intra-quarter trends. I wonder if you could maybe expand on that, if you could briefly, what you're seeing perhaps with some of the diner activity, maybe focus a little bit on New York, if possible. Have those orders come back, maybe what you're seeing, how that's perhaps trended through May?

Adam DeWitt

Yes. Thanks, Ralph. I hope you're doing well. Yes. So I mean, look, I think we kind of laid out in the letter how things are going. I think if you back up to our pre-earnings letter that we published on April 13, we kind of gave a view into the momentum we were seeing. And to that point, we were seeing kind of 10% year-over-year growth. The -- in the letter, this letter that went out last night, we talked about how April ended up at 20% year-over-year growth. So that obviously implies, quite a bit of acceleration through the back half of April, and we haven't seen it slow down at all.

And so that increase in orders is really a reflection of a combination of a lot more new diners that I talked about earlier. Advertisings work is way more efficient, but it's not about the advertising. There's just a bunch of latent demand that we're seeing on the platform. But also those new diners coming back more frequently and more quickly, and then also our existing diners ordering a lot more frequently.

I think another point that's important to make is the average order size point, where we talked about in the letter, essentially last year at this point, we're at about $32 an order and April was at $40 an order. So you can do the math. If you're increasing average order size by 25% and orders by 20%, you're getting a gross food sales growth of closer to 50%. We talked there's a lot of different scenarios from here.

I think we are trying to be candid in the letter. A lot depends on kind of the answers to the question that the first question that we got on the call, kind of how the -- what does reopening look like? When do markets reopen? How do they reopen? What happens to restaurants? Do they choose to keep their dining rooms closed? Are they opening them? Is there a second wave, where there's more shelter-in-place? I think a lot of we don't know. So I think we were just trying to be clear in terms of where we are.

I think from a profitability perspective, I think you guys know the models pretty well. We are actively targeting that, as Matt said, kind of that $5 million, virtually no cash flow for the second quarter to help the ecosystem. But if we were just going to -- if we were just operating our model with a 25% higher average order size, 20% more orders and essentially the same infrastructure that we had from the first quarter, you would imagine that a lot of that could drop to the bottom line, right? So significantly greater than what we saw in the fourth quarter or the first quarter, which is a good thing because we have more money to spend behind supporting our restaurants.

In terms of New York, I'll give you a couple of thoughts, and then I'll let Matt add on. I mean, I think New York was certainly hit more than any other market in the U.S. in terms of the depth of the impact of the virus there. And also, just from a market perspective, where we saw a lot of consumers leaving the city, I think the pattern in New York has been similar – from my perspective, has been similar to other markets in that there was a dip.

Diner demand started to come back kind of, first, in early April. And then restaurants started taking advantage of that demand by opening takeout-only menus or takeout-only facilities. And so we saw diners kind of trough – diner demand kind of trough in the beginning of April and restaurants kind of trough in like the second week of April. And since then, it's been steadily climbing. We think it's going to come back.

We're now, in New York, at about 75% in terms of total restaurants that are available on the platform, which is up from 50%. So we think it's going to keep going up from here as more people come back and life kind of normalizes a little bit. So that's kind of what we're seeing. I don't know if Matt had a few extra thoughts about New York.

Matt Maloney

Well, actually, you've – you summarized it really well. I would just underscore that they're harder hit than any other U.S. market. It's super reasonable it takes longer to come back. We definitely saw the dip to be way larger in total also as a percentage than any other market.

But just like every other market, and we saw this in Detroit, we saw this is in Philly when the hotspots flared up. They dipped. They recovered. And then, in many cases, they're over-indexing versus pre-COVID. So I don't know if the over-index – we're not expecting that in New York, for sure. But we absolutely expect it to recover over time, and we are seeing that both in the consumer ordering patterns.

And also, as Adam said, with the restaurants coming back online, and we are very happy to see more restaurants come back online. I was – I think we were very afraid that this would sort of really decimate some of the neighborhood places. And we're not out of the woods yet, but we're on the right track, which is good to see.

Ralph Schackart

Great. Thanks, Matt. Thanks, Adam.

Operator

Next question comes from Maria Ripps with Canaccord.

Maria Ripps

Good morning and thanks for taking my question. Just to ask about your take rate slightly from a different angle. Given what's going on in the industry today and looking out a few years, how do you think about the take rate structure for the industry? Obviously, with more competition, but also with more demand coming in, so how do you think whether your current take rate is sustainable? And what would the model look like if there is pressure?

Matt Maloney

Sure. So let me take a step back and maybe outline our philosophy on restaurant pricing, which isn't – should be more clear than this. So from the beginning, we only charge for demand. We started out not doing online orders but actually doing telephone orders and listing our phone numbers, and then routing it to restaurants' phone numbers as a way to track demand because we were able to digitally represent restaurants online and help them drive demand. That evolved over time to online orders. You guys know the rest of the story.

So the way our pricing is a floor, generally 10% to process online orders. And then restaurants pay us incrementally for more exposure, more CRM, more e-mails, their loyalty programs. They pay us more if they want us to deliver the food versus them. They pay us more to have access to the corporate infrastructure. So it's a really à la carte method of charging restaurants for only what they want.

Clearly, our competition came in as logistics platforms and charged 30% blanket fee in order to access any services because they needed to fund the driver every single time. And so I think that you have a disparity in pricing models now that it's not properly understood by, frankly, restaurants or the elected authorities.

So your question where do I think take rates evolve over time? I think we have the right pricing model. I think that all pricing models will ultimately evolve to our platform, where executing a digital order is effectively a commodity. And for years, we had a microsite program.

For example, I think you guys might remember, we got called out on it and improperly said we were cyber squatting, which absolutely wasn't the case. We were listing websites on behalf of restaurants that couldn't do it themselves. This was before there was a wide variety of third-party platforms that would allow small businesses to do their own websites very inexpensively. We would do a free website for them. We would have all their data, we would execute orders across that website. The restaurant would actually promote that website, and we would not charge for those orders, because it was a philosophical definition for us. That restaurant drove that order.

There's no reason for that restaurant to pay us with demand for that order. Now, the restaurant would pay a credit card transaction fee because that's, again, our cost. That's a pass-through. If we would deliver that order, the restaurant would pay us for the delivery of that order, but not for our marketing piece. And so thinking of it in that context is a really good way to evaluate pricing going forward, especially now there's so much more tension on our business model and the way we charge restaurants.

A restaurant on our platform is free to pay us a very small amount or a very large amount, depending on the exposure and the investment they want to make in their business. And I think that, that is the only logical outcome for pricing models in our industry. I think the one-size-fits-all model will not work, and we're seeing a huge amount of frustration and anxiety around that currently when my industry is the only ability for restaurants to make money during this crisis.

Maria Ripps

Thank you so much for the color, Matt.

Operator

And we have a question from Deepak Mathivanan with Barclays.

Deepak Mathivanan

Hey, guys. Thanks for taking the question. Matt, I wanted to ask about growth versus profitability. Why is $5 million EBITDA the right level you're looking to manage given the opportunity to capitalize on new consumer behavior and potentially shift the adoption curve at this time? And should we expect you to sort of think about the EBITDA levels consistently at similar levels for the back half of 2020 as well? And then second question, in the shareholder letter, you noted that you're not seeing the impact of competitive activity. Is that just because secular demand is strong? How are you assessing those trends? Thank you.

Adam DeWitt

Yeah. So, thanks, Deepak. This is Adam. I'll take the EBITDA question. So look, it's – as I tried to walk through earlier, from an EBITDA perspective, from a profitability perspective, there's a lot of tailwinds, this quarter specifically, right? So, if you just take our business and letter, we talked about going from 32% to 40%.

I think in the first quarter, we were at 34.5%. So even if you just talk about a $6 average order size increase, right. Our take rates or capture rates from restaurants haven't really changed from the first quarter to the second quarter. So all of that, right, drops to the bottom line.

Our operating costs really haven't gone up, right? So from a driver, we haven't spent a lot of time talking about a driver cost or fulfillment costs. But there has not been a dramatic change or dramatic increase from the first quarter to the second quarter in fulfillment costs.

And our advertising, if anything, has been way more efficient in the second quarter. And then, you add on top of that the 20% increase in orders that we had in April compared to the year ago, which, if you kind of do the math, you'll see that we have a sequential increase from the first quarter. And you're talking about more orders at a higher average order size, essentially on the same infrastructure with the same pricing, so a lot of tailwinds for EBITDA.

I think, as Matt and I have both talked about on this call and in the letter, look, the EBITDA is not -- the EBITDA is not as important right now as supporting our ecosystem, right? Our restaurants are challenged. Their business models have been turned upside down. And we think a much better use of our cash flow right now than to take advantage of these kind of massive tailwinds for EBITDA, is to kind of reinvest that into driving more sales for those restaurants. And we think we can drive -- and we talked about this in the letter, we think with this spend we can drive an extra $150 million-plus of gross food sales to our restaurant partners.

And we think that, that -- at this point in time, is the right decision, right? If we didn't -- if we weren't spending that extra money in driving that extra $150 million in gross food sales, our EBITDA wouldn't be a lot higher. And I think we're trying to be transparent in terms of how this is affecting our P&L. But, we are -- we've chosen that kind of $5 million to kind of be around the -- investing substantially all of our cash flow, because we have some additional capitalized costs. So you're talking about a cash flow of essentially zero at that point.

But we think it's valuable, because we want to drive our restaurant partners more orders, so they can keep their employees employed longer. And we can drive more volume to our drivers. So it's about supporting the ecosystem at this point as opposed to taking advantage of the pandemic and dropping a bunch of EBITDA to the bottom-line this quarter.

In terms of the competitive dynamics that you asked about, I mean it's possible that some of the -- it's possible that some of the impact is just the macro environment. But when we look at the diner behavior, we're not seeing the promiscuity that we've seen in the past to the extent that we can see it. We're seeing better frequency. We're seeing better retention rates. And we're seeing cheaper new diner acquisitions. So all the things that we would typically look at to judge whether or not we are seeing headwinds from competitors, we're not seeing. And we're generally seeing that in all of our markets.

We did talk about New York as being a little bit of a unique situation, but not from a competitive standpoint. It's from a macro standpoint, where just we've seen more restaurants closed, and we've seen more diners leave the city. Now that's turning around. And we think that New York, over time, will look just like the other markets. And if this goes on for a long time, we think that the demand for delivery and takeout in New York will eventually eclipse where we are now. But overall, it's -- we see a big tailwind.

Operator

As we have no further questions at this time, I will now close the call. This concludes today's conference call. You may now disconnect.