By Lisa Autz
GrubHub’s ingenious business model. Image courtesy of Braden Kowitz.
Two porcelain dishes chime on the smooth, otherwise empty granite counter top just outside the restaurant’s stifling kitchen window. Simultaneously, a delivery worker fetches four bag-rolled meals ready for take-out.
It’s a common ratio trend in the restaurant business.
At the Burrito Shop on Broadway and 242nd Street in the Bronx, the general manager, Jose Severino, tells BTR that for every 100 orders made, 75 are for take-out. The reason, he presumes, is the value people hold to convenience.
According to the Interactive Advertising Bureau and its Mobile Marketing Center of Excellence, researchers polled volunteers on whether they had ever placed a food order on a mobile device. Sixty-nine percent responded positive.
To capitalize on this burgeoning technological phenomenon, Severino made a decision three months ago to test out three different online delivery service companies: Seamless.com, GrubHub.com, and Delivery.com.
While polishing customer-free counter-tops across the restaurant, a loud buzz rings from the fax just below the counter, signaling a new delivery order. Severino describes the sound as his favorite feature by Seamless. It’s the perfect annoyance that is great at getting his attention over the hammering kitchen commotion. The buzz is also one of the reasons why Seamless is his preferred choice of company.
“It doesn’t stop beeping until I get to it,” Severino says. “Delivery.com sends me an email but that requires me to check on it and sometimes I don’t get to them as quickly.”
Such a small feature makes all the difference in a fast-paced industry. With an average of 5 percent annual margins, restaurants like the Burrito Shop count every measurable aspect of efficiency to increase order volume to generate profit.
Each service uses a transactional model in which the restaurant gives around 10 to 20 percent of the profit for each order. Though it may seem like a heavy cut from a low marginal market, the increase in volume outweighs the loss.
“Our sales have increased by 20 percent,” Severino says. “We found out that people are more interested in using their smartphone than talking on the phone.”
These realizations are one of the reasons why the online delivery-service industry is one of the fastest growing sectors in the US economy. The epitome of success was seen in GrubHub’s evolution into the largest online delivery service in the country. The company’s recent merger with Seamless.com has also placed itself in a dominant position over the entire New York City online delivery scene, a practice that’s notably embedded in the contemporary dining culture.
Beginning with only a few hundred restaurants in Chicago in 2004, the company now features 600 cities with 26,500 restaurants. Their revenue soared in 2013 by 67 percent to 137.1 million.
When the company went public on the New York Stock Exchange in April, its share prices rose from $26 to $34 in just a day.
The service began with two software developers who mapped out local restaurants from any current location in Chicago. Going into restaurants one by one, they were able to develop a software that supplied exactly what the restaurants demanded.
Technomic Inc., a research and consulting firm in the food service industry, has highlighted GrubHub in recent research on the consumer value on convenience.
BTR spoke with Darren Tristano, executive vice president of Technomic Inc., about GrubHub’s ability to reign on one of the economy’s fastest growing sectors. Utilizing transactional data to better support restaurants, for instance, is a system they developed to provide restaurants with services that go beyond only online delivery.
“Value is the part that I think is what operators need,” Tristano says. “Not just the mechanism for take out, but a way to learn more and be more effective with customers. They become a value-added partner to the operator so that when the operator considers other online tools, it isn’t about cost, it’s about convenience and value.”
The website has recently allocated much of the transactional data to feature popular menu items higher on a restaurant’s page. GrubHub’s offices are also built to enhance employee understanding of restaurant realities.
Slice is a model restaurant where GrubHub employees take shifts operating the cash register and taking delivery orders. It’s a method used to continue a priority on customer service as their economies of scale expands.
However, the company’s customer-based business perspective took a hit when the New York State Attorney General investigated the company charging fees on tips given to delivery workers.
The investigation launched February 2013 at Seamless before it merged with GrubHub that August. Soliciting commission on tips is prohibited by New York labor laws. The case has since settled with the agreement to rewrite a contract that secures delivery workers their tips.
The continuous inching on percentages is something that many restaurant owners fear. Peter Batu, owner of Cafe Blue and Kappock Cafe in the Bronx’s Riverdale neighborhood, tells BTR that he is weary of high commissions in a risky industry.
“The food business is an expensive business,” Batu says. “Everything is expensive. It’s not easy and 20 percent is a lot for something that does not guarantee me how many more people will be coming to my restaurant.”
Though there is no guarantee, the risk seems to be proven beneficial as technology becomes more integrated into the business. Tristano compares the online food delivery industry to that of credit-card machines years ago.
“GrubHub is a channel in which to gain eyeballs and get customers,” Tristano says. “You know years ago credit cards weren’t as prevalent in the industry… three to five percent is what you must pay a credit card company, but they [restaurants] have accepted the credit card charge because it is a part of doing business.”
Recognizing this growing area of business, Tristano explains that GrubHub needs to conduct a lot of research and continue to improve software in order to stay ahead of fast growing competition. There are already tight competitors beside this giant, such as EatStreet and Delivery.com.
“There will be a number of other technology companies that look toward their direction as an opportunity in the industry,” Tristano says. “There are kids in their basement right now plotting how they can be the next GrubHub.”