Pixel Envy

Written by Nick Heer.

Grubhub Should Be Thriving Due to the Pandemic’s Restrictions — But It’s Not

There is a lot in this report from Adrianne Jeffries, writing at the Markup, about the ways that food delivery services are struggling during the pandemic, but I wanted to direct your attention to this:

Grubhub has acknowledged that it makes more money from independent restaurants and small chains. A February 2020 shareholder letter explained that a typical order from an independent restaurant that uses Grubhub for marketing and delivery generates $4 of profit for Grubhub, while an order from a national chain generates $0. 

The independent restaurant “values our demand generation capabilities and utilizes our delivery services; we have a higher take-rate and collect the diner delivery fee,” Grubhub wrote, while the profit from the national brand “is significantly lower because the commission rate is lower AND the order size is smaller.”

For the independents, though, the delivery fees were too high “even in a strong market,” said Andrew Rigie, the executive director of the New York Hospitality Alliance. In a pandemic, they could put restaurants out of business — which would in turn put delivery apps out of business.

The letter illustrates the difference by comparing a $38 order from an independent restaurant and a $25 order from a chain. Grubhub’s commission on the first order is apparently between $6 and $8; its commission on the chain order is $2 to $4. Perhaps the delivery model doesn’t work as well for fast food chains, and perhaps you believe Grubhub’s argument that the attraction of a big chain will draw some customers to also order from places they otherwise wouldn’t. The effect is the same, however: Grubhub uses the higher fees paid by independent neighbourhood restaurants to subsidize deliveries for huge chains.