Grubhub Is Pouring Money Into Rapid Expansion Across U.S. Markets

Grubhub recorded yet another quarter of double-digit growth in overall revenue (up 52 percent compared to the same quarter last year), number of active diners on the platform (up 67 percent), and daily orders through the service (up 40 percent) in the company’s third quarter earnings report today.

Due to increased spend around growth and expansion in new markets, however, the company lowered profit expectations for the rest of the year, sending stock sliding up to 18 percent in early morning trading.

Like Uber Eats, DoorDash, and other national competition, Grubhub is pouring money into rapid expansion in second and third-tier markets across the U.S., planning to open in 100 new markets from October to December 2018 alone.

Grubhub CEO Matt Maloney declined to break that coverage out in terms of population percentage (Uber Eats plans to cover 70 percent of the U.S. population by the end of the year) but noted on the company’s earnings call that by the end of the year, Grubhub’s reach would extend to the vast majority of the U.S. population, and “virtually all of the major population centers” in the country.

“We will spend easily more than $200 million on growth-related initiatives in 2018,” Adam DeWitt, Grubhub’s chief financial officer, said on the call. “That we can generate significant profit per order while maintaining an aggressive growth posture is a testament to the strength of the business model.” Currently, the company measures a $1.57 profit margin (calculated as earnings before interest, taxes, depreciation, and amortization) per order, up 3 percent from last year.

Read Our Interview With Outgoing COO Stan Chia

“Momentum in these markets has been so good that we’ve accelerated our investment in Grubhub Delivery market launches to take advantage of latent demand,” DeWitt added, outlining Grubhub’s plan to increase marketing spend in order to launch with bigger splashes in these new markets. Grubhub may spend anywhere from 10 to 20 million on marketing in the fourth quarter this year.

Maloney also announced on the call that Stan Chia, Grubhub’s chief operating officer, is stepping down in November. “We are excited for Stan and look forward to seeing him succeed in his next role, as CEO of a private, local company,” the company said in a separate statement on the news. “In his nearly four years at Grubhub, he helped significantly grow our restaurant network, led the buildout of our delivery network, and leaves behind a world-class operations team. He will depart Grubhub on November 16.” Chia will be moving to Vivid Seats, a ticket-selling marketplace.

In a separate regulatory filing, Grubhub stated that it wouldn’t be filling Stan’s role, but rather eliminating the position of chief operating officer altogether.

The Plan for Recent Acquisitions

It’s been a month since Grubhub’s acquisition of LevelUp was finalized, and Maloney sees unending potential for the new part of the business.

“Primarily, LevelUp is doing point of sale integration for us. It’s really why we acquired them,” Maloney said. To show how the integration will affect restaurant partners, Maloney gave an example from Potbelly, a Chicago-based sandwich chain.

“They rely on LevelUp to run their branded applications, their website, their customer relations programs. And it makes sense for Potbelly to execute in partnership with LevelUp. Potbelly is also simultaneously a customer of Grubhub, where they tap into our marketplace when they need growth, either in specific restaurants or across the board if they’re doing something special,” Maloney explained. “So, the ability to put those two products together and make it really easy for Potbelly to manage their digital customer base, to grow their customer base and to have insight across the board as to what’s going on with their digital customers is really beneficial. And that’s how we’re thinking about leveraging LevelUp in a go-forward way for some of our key enterprise partners.”

LevelUp also has a very strong order pickup business, which Grubhub plans to scale for a future in which Maloney predicts many of the billions of dollars in this market will go towards food pickup. “We’re the only player that has an aggressive pickup pipeline, and we see pickup as a giant opportunity,” he said.

Similarly, Grubhub’s acquisition of Tapingo last month wasn’t just to have another delivery service to fold into Grubhub. Tapingo primarily services half a million college students across 150 university campuses, according to the company. Now that Grubhub owns the product, the company plans to reach college students by letting them use their dining meal credit on Grubhub (a feature that Tapingo previously offered to participating universities).

“Imagine college students ordering on Grubhub using meal plan dollars instead of a personal credit card,” Maloney said. “The acquisition of Tapingo will open up more growth channels for us.”

Better Restaurant Partnerships

Ask any restaurant operator about delivery, and eyes will roll immediately. Profit margins on delivery are abysmal, unsolved packaging problems continue to ruin customers’ meals, and any time a customer experiences an issue with a delivery order, their first line of attack is to the restaurant not the delivery service.

“Restaurants are increasingly frustrated,” Maloney acknowledged. “Management teams don’t really know where to go.”

In a perfect world, Maloney knows that operators would like to completely own the process from start to finish, and avoid incremental fees on delivery orders. But in reality, that’s not possible given the amount of product development and technology infrastructure that each restaurant would have to incorporate. So operators turn to third-party services, but then, as Maloney put it, each operator now has to deal with a 30 percent drag on any future growth.

“And so we, you can tell, made a market shift in our acquisitions from just scale to strategic product fits that continue to increase what we’re able to do for our restaurant partners,” Maloney said. “So when you think about LevelUp, I want to help build a branded platform for them. I want to support their pickup business. I want to support their customer relations management, and I want them to be able to tap into my network whenever they want additional incremental growth. That’s a way to create a sustainable long-term revenue model on a digital basis with a third party for restaurants. I think that nobody else in our industry has figured that out, and we’re absolutely pushing as hard as we can, not just to grow our marketplace but to grow the way we’re able to partner with restaurants and support their long-term business goals.”