Competitors, lagging sales take bite out of Grubhub
So it turns out that Chuck Schumer may be the least of Grubhub’s problems.
The Chicago-based company warned investors yesterday that the online food-ordering and delivery business is slowing, and that its bet on expansion into hundreds of new cities with chain restaurants such as Taco Bell and KFC isn't as lucrative as executives hoped.
Shares were down about 39 percent shortly after the market opened today to around $35.40 a share. Grubhub shares peaked at $146.73 on Sept. 11, 2018.
In a 10-page letter to investors, Grubhub said new customers aren’t ordering as frequently as earlier diners had in markets such as Chicago and New York, where it has come under fire from Sen. Schumer and other politicians for taking too big a slice of restaurants’ already meager profits. And new customers are less loyal.
The admissions fly in the face of Grubhub’s steadfast assurances that the economics of its business were holding up just fine against aggressive money-losing competitors such as DoorDash and Uber Eats.
Grubhub announced after markets closed yesterday that it missed analyst expectations for sales and profit, and it didn’t offer guidance for the coming year, fueling investors’ most pessimistic fears that competition is taking a bite out of Grubhub and that the economics of the business are weakening.
Analysts have been queasy about whether Grubhub’s margins in its core business of online food ordering got diluted and complicated by the logistics of delivery.
Grubhub confirmed those fears, saying, “What we concluded is that the supply innovations in online takeout have been played out, and annual growth is slowing and returning to a more normal longer-term state (which we believe will settle in the low double digits), except that there are multiple players all competing for the same new diners and order growth.”
The company added that “the easy wins in the market are disappearing a little more quickly than we thought ... We believe the next leg of growth will take place over time.”
What’s not clear is what the new normal looks like. Grubhub revenue grew 30 percent and gross food sales rose 15 percent in the third quarter. A year earlier, revenue grew 52 percent and gross food sales grew 40 percent.
After talking up the merits of restaurant deals with Taco Bell, KFC and, more recently, McDonald’s, Grubhub now is focusing on its core small and mid-sized customers. “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 ... Over 80 percent of our orders are generated by small-medium-sized businesses.”
Grubhub still says it can be the long-term winner. But in the short term it plans to step up investment in advertising, loyalty programs and discounts such as free delivery for big restaurant partners—all of which will eat into profits.
In an effort to double the number of restaurants on its platform, the company also says it plans to add “non-partner restaurants,” or those that aren’t paying Grubhub the traditional 15 percent commission it gets for orders. Grubhub has long derided other ordering platforms for the practice.
“This is an overdue admission by the company that they can’t just keep shrugging off competition,” said Tom Forte, an analyst at D.A. Davidson in New York. “It feels like we just entered a new chapter for Grubhub.”
Grubhub "has turned into a revenue deceleration story with compressing margins—all in the face of increased competition. Not a great recipe for success," Brent Thill, an analyst at Jefferies, wrote in a note to investors, Bloomberg reported.
CEO Matt Maloney says Grubhub has a long-term advantage over DoorDash and Postmates, which aren’t profitable. He’s betting that Grubhub, which is profitable, will win in the end.
“Everyone knows there is tremendous pressure on profits, and some of these private companies are going to be held accountable,” he told analysts this morning. “They’re going to have to spend a tremendous amount of money to keep up, just as they’re boards are demanding profitability. We see an opportunity to gain share. We’re going to go after that with everything we have.”
He’s willing to lose a few battles to win the war. But wars of attrition are long and brutal. Investors are retreating.
“What does winning the war mean at this point?" said Ygal Arounian, an analyst at Wedbush Securities. "What’s left? They used to have 30 percent margins. That just keeps deteriorating. To me the biggest question is: Can the lifetime value of customers ever be what it used to be?
''How long does the battle last? I suppose you have to give them credit for fighting back harder. It doesn’t mean this is the end of the fight. Who's to say Softbank won't double down on DoorDash?"
Pletz covers airlines and technology for Crain's Chicago Business.