Morningstar | Grubhub Requires Significant Marketing Costs to Remain Ahead of Its Peers
While Grubhub is currently the market leader in the fast-growing online takeout food space, we do not expect the firm to maintain its strong top-line growth and margin expansion in the long run. We believe Grubhub will have difficulty differentiating itself from small or large and well-capitalized competitors, as evidenced by its declining market share.Founded in 2004 and being one of the first players in the space, Grubhub provides an online ordering platform for consumers, or diners, and restaurants. Consumers use the firm's website and its mobile app for easier takeout food ordering, while its restaurant partners utilize Grubhub for more effective marketing and more efficient order processing. The firm's revenue is based on each order received and completed, as it charges restaurants a commission that has averaged 13%-16%. It does not charge any subscription fees.After merging with Seamless in 2013, Grubhub became the unquestionable market leader in online takeout food. However, we don't think the firm has developed a sustainable network effect by pairing consumers with restaurants, as the market is now crowded with many other players. We also do not see Grubhub benefiting from any switching costs, as most--and perhaps almost all--partnerships with restaurants are nonexclusive. We expect pricing, or commission rate, to become the main differentiator, creating some margin pressure for Grubhub and its peers in this growing space. While the firm is attempting to build some brand loyalty by marketing more aggressively on various mediums, including television, we do not anticipate these efforts to bear fruit across the U.S.Given Grubhub's declining market share, in addition to expanding the lower-margin delivery service to more cities, the firm will likely take the acquisition route to maintain its leadership position. It faces competition in that area too, as some players in the space have access to more capital to complete timely mergers and acquisitions, or M&A. Fierce competition during the consolidation phase could raise acquisition prices too much for Grubhub, more likely than not minimizing return on such a necessary investment.Grubhub and its wholly-owned subsidiaries provide an online and mobile platform for restaurant pick-up and delivery orders. The company connects diners and restaurants through restaurant technology and platforms. Diners enter their delivery address or use geo-location within the mobile applications and the company displays the menus and other relevant information for restaurants in its network. Orders may be placed directly online, via mobile applications or over the phone. The company primarily charges the restaurant a per order commission that is fee based. In several markets, the company also provides delivery services to restaurants on its platform that do not have their own delivery operations.
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