GRUBHUB REPORTS DISASTROUS Q3 – REALITY SETS IN, PREDICTABLY !! WHAT NOW?
Grubhub (GRUB) stock is down 20 points (over 30%)this morning. This article is written, without the benefit of the conference call, which takes place in a few minutes.
Analysts are falling over each other lowering estimates as GRUB missed third quarter estimates and, more importantly, lowered guidance in Q4 from $387M to $315-335M. Even more important, comments in the corporate release and CEO letter to shareholders provided a great deal of uncertainty as to how this industry is going to shake out. The company admitted to the intense competition and the “promiscuous diner” who (shockingly) is using a variety of delivery agents and doesn’t like paying 15-30% more for the service. We don’t have time, with the call starting in ten minutes, to say more right now, but we’ve been warning about this shakeout for months. Below are excerpts from our articles, starting a year ago. Sometimes we get it right 😊
November 18, 2018
(2) By far the issue of the day for the industry is DELIVERY. The workshops and panels dealing with delivery were standing room only. Virtually everyone is evaluating it, testing it, trying to offset lower dine-in traffic by re-capturing the customer with delivery. The big names are pretty well known: Grubhub, DoorDash, Postmates, Uber Eats. Everyone knows by now that profit margins on the delivered food is lower than within the store, due to the commissions paid to the delivery agent. It’s also obvious to most of us that loss of control over “the last mile” provides an element of risk to the brand. However, the really big stumbling block as described by many of the conference speakers is that the delivery agents retain the customer information, therefore compromising the restaurant’s degree of exclusivity with the customer. Therefore: any restaurant chain of substance, who can afford the time and money to develop it, is intent on developing an in-house capability to control the process, at least to the degree of controlling the customer information. It will likely turn out that the most customers for the delivery companies will be independents and multi-unit operators too small to afford in-house delivery capabilities.
July 10, 2019
RESTAURANT SALES AND TRAFFIC TRENDS – QUICK HINT….NO SILVER BULLET !!
We leave you with some good news. (There had to be something, right?) Though too many operators are sitting with real estate that is fully utilized only on Friday and Saturday nights, there remains a great deal of opportunity relative to food consumed “offsite”. Curbside pickup, takeout, and catering all offer opportunity, though they are different business to a degree and must be managed accordingly. At least you don’t need more square footage. Furthermore, margins on delivery service should start to improve as Doordash, Ubereats, Grubhub and the others compete for business. Delivery is a necessary evil these days, but restaurant companies can’t afford to cut 20-30 points out of their gross margin. Many operators have suggested that delivery business is largely incremental. We accept that delivery is incremental, in part, but it stands to reason that if a customer has food delivered tonight, they are far less likely to visit that same restaurant tomorrow night. Delivery will be become more profitable (at least less of a burden on margins), and delivery companies will experience margin contraction, which they may or may not be able to offset with operating efficiencies.
July 23, 2019
A reality of this new source of business is that margins for the restaurant company will be affected since 15-30% of the ticket is paid to the delivery agent. While some argue that a large portion of the delivery dollars is “incremental”, it stands to reason that a customer who receives product at home on Wednesday night is less likely to visit that restaurant on Thursday or Friday. On the hopeful side: delivery companies are already competing for market share, negotiating their fees lower, therefore improving the remaining margin for the restaurant. Overall, this is clearly a portion of dining dollars that is very much in a state of flux.
October 8, 2019
IT’S “HITTING THE FAN” IN THE DELIVERY BUSINESS
Management’s conservative guidance over the next several years is largely the result of competition on the delivery side of the business. According to DPZ management: “we are starting to see some QSR competition receiving deals that are very favorable to the restaurant…whether or not the third party providers can sustain that level is a theoretical question…..we don’t have visibility into exactly how long these new entrants…are going to benefit from the financial support of aggregators who are seeking to buy market share…pricing below the cost to serve, offering free delivery or other deep discounts that are currently enabled by investor subsidies”. We can add that time is running out for the 30% type fees charged by Doordash and the others, already at 20% and coming down, we hear. Grubhub reported “adjusted EBITDA of $54.7M in the June quarter, down from $67.4M a year earlier. Anecdotally we’ve been told that Grubhub/Uber/Doordash drivers are increasingly dissatisfied with their net pay after expenses. It all amounts to a predictable shakeout in the third party delivery space which will amount to somewhat better news for restaurant operators. Of course, one way or another, the customer is paying for the delivery service, and no doubt that is no doubt contributing to the growth of Domino’s carryout business.