'Promiscuous' Grubhub Customers Just Helped Lower The Company's Value by $1.2 Billion in Minutes

Grubhub has left investors with a sour taste in their mouths, tanking 20% Monday and shedding $1.2 billion in market capitalization at the close of the market.

Indeed even while the appetite for the food delivery market has grown, Grubhub has been dinged by competitors, with third-quarter revenue rising 30% year-over-year to $322 million, missing Wall Street’s estimate of $330 million. Profits meanwhile slid 94%, eking out earnings per share of a penny amid rising marketing costs.

Increasingly, it seems, food delivery players and customers don’t care who gets the green. Meanwhile regulators are feeling increasingly skeptical of tech companies and the gig economy that has sprouted around it.

“We believe online diners are becoming more promiscuous,” Grubhub CEO Matt Maloney and CFO Adam DeWitt wrote in a shareholder letter, noting that Grubhub diners were once known to be extremely loyal, but new diners have often already sought out a competing online platform. “The easy wins in the market are disappearing a little more quickly than we thought.”

Grubhub’s previous quarterly earnings provide evidence of that trend. While the company has reached profitability, its bottom line has grown increasingly thin. While revenue rose 35% in the second quarter of the year, profits failed to keep pace and fell 96%. Shares of the company are now down 70% since the stock’s peak in Sept. 2018. The company has also lowered expectations for fourth-quarter revenue to between $315 million and $335 million.

“The tech itself is hard to protect,” said Saif Benjaafar, director of the Initiative on the Sharing Economy and a professor at the University of Minnesota of the food delivery companies. “The only thing that protects you is your level of scale—now there is race to scale.”

Grubhub vs. the competition

Grubhub has spent aggressively on sales and marketing to offset a bevy of competitors that have stayed in the space, including DoorDash, UberEats, and Postmates. Sales and marketing expenses in the third quarter, for instance, rose 45% for GrubHub, with profits also pressured by Grubhub’s heavy push into new markets. Grubhub now expects to spend even more a bid to attract customers without wandering eyes, and plans increase free delivery with enterprise customers like KFC and McDonald’s.

Indeed the delivery market has been nearing a tipping point. Food delivery startups such as Spoon Rocket, Sprig, Maple, and Bento ceased operations in 2016 and 2017, while the meal kit delivery firm Blue Apron has shaken investor confidence with an IPO that priced below the range and has continued its downward slide ever since. Amazon bowed out of the battle in June, following the shutdown of food delivery startup Munchery in January.

A recent analysis from Second Measure suggests that on a national level, DoorDash is currently raking in the majority of meal delivery sales—about 34% compared to Grubhub’s 30% in September—though those figures do not include Grubhub’s acquisition of LevelUp and Tapingo.

“Competition from well-financed on-demand services such as GrubHub, Seamless, DoorDash, Postmates, Caviar, and Uber Eats, increased significantly,” Munchery CEO James Beriker wrote in the company’s Chapter 11 bankruptcy filing (Of note, DoorDash acquired Caviar in August). “These services were able to quickly bring popular restaurants on to their platforms, increasing choices for customers, and were able to invest heavily in brand marketing and user acquisition and drive adoption through free delivery and other incentives.”

Is there enough space for everyone? Certainly more than one platform will survive, but analysts say the industry is ripe for consolidation with Grubhub among the possible targets. “There is a possibility for further consolidation in the industry, especially as the regulatory environment works itself out,” said D.A. Davidson SVP and Senior Research Analyst Tom Forte.

At the same time, the industry at large is facing another potential challenge in the form of regulation. The New York City council has been weighing legislation to regulate the space. One potential measure could cap fees on deliveries from Grubhub’s current maximum of 30% to 10%, with other cities also aware of the shift happening in New York.

“In an attempt to gain the most comprehensive understanding of the third-party food delivery sector and the impact that it is having on the restaurant industry, our office has begun discussions with officials in other cities.” Reginald Johnson, Chief of Staff for the Office of Councilman Mark Gjonaj said in an emailed statement.

The movement has also struck note on the federal level: Senator Chuck Schumer (D-N.Y.) said in July that he had asked federal agencies to look into reports that GrubHub had been charging inaccurate fees for phone orders and creating fake websites for its clientele.

Now, Grubhub says it plans to spend more over the next 12 to 18 months in a bid for the kind of relationship with diners that’s seemingly hard to come by these days: the monogamous kind.