Should your restaurant do GrubHub?

This morning I heard the news about GrubHub and Seamless merger. How do these services work?
From a end customer, who is trying to order take out, this is the flow,

seamless_how_it_works

From a restaurant point of view this is how it works,

seamless_how_it_worlks_biz

Both these pictures come from Seamless website.

In the same NPR story about the merger a restaurant owner had some strong words about Seamless’ commission and business practices.

“The more business we bring Seamless, the more commission they charge us,” says Pedro Munoz, who owns Luz, a Latin-American restaurant in Brooklyn. When his monthly orders increased to over $10,000, Seamless raised its take from 10 percent to 14 percent. Munoz couldn’t believe this. When he orders more from his vegetable supplier, the price goes down. With Seamless, the opposite was happening. (Source: NPR)

And then when the restaurant owner tried to negotiate he was met with threat,

“I asked them, ‘I’m bringing in three times as much money to Seamless as before. Can we negotiate the fees?'” he says. “They said they could drop me any day, and they don’t negotiate fees.”

This led me to tweet this,

But upon further reflection I want to balance my statement and discuss rationally whether or not services like Seamless and GrubHub help restaurants and whether their pricing practices are acceptable.

Services like these are two sided markets.  On one side they have hungry end consumers who want to order takeout easily (preferably from single website, app etc). On the other side they have restaurants that want to sell more takeout by reaching customers they otherwise would not be able to reach.  The market maker or the middlemen, GrubHub and Seamless, take a cut when they enable this transaction.

In a balanced two sided market there is new value created for all three players and not just value redistribution (think Groupon). The market maker gets fair share of net new value created for both sides. In some cases they may choose to let one side capture all its value without getting their share and get all their share only from the other side. That is what happens with GrubHub and the rest.

In this case the end consumers are happy and get more value from simplicity but these sites decide not to charge these consumers for that value. That is okay. Besides even though these consumers see value their reference price is low (or $0) and there are multiple alternatives (pick up the phone and order) and hence it is difficult to charge them a price to place an order.

The restaurants are able to make new sales that they otherwise would not have made. Well may be all sales are not truly incremental that depends on your existing sales channels and customer base. GrubHub and the likes get a share of this value by charging a percentage (10%) on the sales (not profit generated from the sales).

So should your restaurant do it?

If the profit from the new sale makes up for the commission you pay to GrubHub then you should take advantage of it. Note that I said profit and not just sales.

All your food costs are marginal. Say you order too much raw materials  with not enough sales to match you can always fix that with better ordering and inventory control.  All your rent/mortgage, even employee costs, etc. are fixed costs. When you sell through GrubHub you should add the commission to your marginal cost.

Gladly do GrubHub if:

Price of food order  LESS

Commission to GrubHub  LESS

Cost to prepare that single food order    IS GREATER THAN $0.

That is as long as every order is profitable, do it. If not don’t bother.

So why do they charge you more when they bring you more sales?

Shouldn’t they charge you less when you give them more business like you do your vegetable vendor?

Unfortunately no. Actually you are the vegetable vendor here. If they deliver you far more incremental sales (that is also profitable) then yes they can charge you higher rate of commission. That is just effective pricing. You do the same math as above with the new rate. As long as you make money on every single order at the new rate, do it!

BUT

About those marketing charges these sites want to charge you,

But then little things started bugging Munoz. There was a $150 a month “marketing fee” that he couldn’t understand, and Seamless only paid him every 30 days, which left him chronically short of cash.

Say NO. NO. NO.

You have your share of risk. You took mortgage, bet your future and your family’s future on this business, take loan to buy food and serve. That is enough. You do not have to offset their risk.  When GrubHub and such startups decide to run a business they have their share of risks. The primary risk is customer acquisition and retention. It is their risk and theirs alone. You amply compensate them in the form of commission on sales generated. It is up to them to make a net profit from that by doing whatever it takes to acquire and retain their end customers. You do not have to carry that risk for them.

And you should get paid right away and not let them keep the cash for 30 days.

 

They say,

sealess-what-it-does

But all that advertising and email marketing are about their site, apps and service – to acquire and retain email addresses of end consumers. Not to advertise your business. It is their cost of doing business. Their risk.

Their costs are just that, theirs. Not yours. You pay for the value you get from the incremental sales. You are done. Demand to get paid when you sell food.

So by all means give a real hard look at these services. For your restaurant these services most likely help generate profitable sales if the commission is just 10-15% and you do not have to pay anything else. They do create value but don’t let them pass on their risks to you.

 

Note: There may be cases where you may still make total profit while not every single sale is profitable. That is a complex math to figure out for your business and you have enough worries already. Keep it simple and focus on profit from each order.

19 thoughts on “Should your restaurant do GrubHub?

  1. At CumulusPoint our approach is to give the restaurant owner the tools they need to be successful in todays mobile environment – we provide restaurants with their own iPhone and Andriod ordering Apps. There is a commission if we handle mobile payments (moving money around has fees). However, if the App is cash based there is a very modest monthly hosting fee (similar to hosting a website).

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  2. Can’t tell you about Grubhub, but foodjunky.com drives an additional 50K+ a year in sales and doesn’t charge the restaurants a dime. Plus there orders are all larger and come in advance. They make their money by charging the end customer a simple 99 cent fee (not the restaurant).

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  3. after paying 20% out of the subtotal of one order, added to that the delivery man cost plus the employee cost we will end up losing almost 50% or more for one order..NO PROFIT at all unless your orders have a 80 % profit on each order then you will end with 30% and it is not very common to have 80% profit per order for the restaurant owner.

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  4. Restaurants should try and grow their brand, not grubhub’s or seamless. http://ez-Chow.com provides a way for restaurants to offer online ordering INTEGRATED with their existing point-of-sale, allowing a restaurant to keep its hard earned cash, while still offering the convenience of online ordering to its customers.

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  5. Restaurants makes profit by keep their loyal customers on their your own website rather than sending them to a third party website and paying them 10-20% on each order.

    We build Nosh a very powerful food ordering platform that is whitelabel and completely customizable, with all the features a big online food ordering site offers. Nosh offers flexible menus, beautiful food images, simple check-out and social media integration, also take order form Facebook. All for one low subscription cost $49/month.

    https://www.togonosh.com/

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  6. And then there are some businesses that don’t even allow online orders and are “phone order only” “why are you even on here?” I ask myself (of them) every time I see a business listed under this section.

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  7. There are a lot of services that either charge a percentage or charge monthly fee’s, on top of merchant services fee’s. foodjunky.com is doesn’t charge restaurants anything. No percentages, no monthly fees, no merchant services fees. And foodjunky.com pays for each order at the time the order is sent to the restaurant via credit card.

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  8. Companies that take a percentage of an online sale are bad for the restaurant industry. They didn’t make the food so they shouldn’t take the profit. Most companies only make .20 to .30 cents on the dollar. If they are paying 20% for online ordering they are basically working for someone else. Not all companies are out to steal from small businesses. Food Online Ordering Systems simply charges a flat monthly fee for the services they provide. We never take a percentage. For the cost of a daily latte we can set up a professional online ordering platform that can work independently or in combination with the current website. http://www.foodonlineorderingsystems.com

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  9. It is because of these high fees that I started foodjunky.com. We do not charge restaurants a percentage or a fee. And we securely pass CC info to the restaurant so they can get paid right away (we encourage them to run credit card before processing orders). We simply charge a flat fee of 99 cents to the company or individual who is ordering food.

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  10. I remember paying 30% to a home delivery service back in the 90’s – it was all new, incremental business and I loved the extra sales. I did not add more staff to prepare the extra food – with 26% food costs, I was well ahead. 10% seems very good, as does 14%, but their communication leaves a lot to be desired.

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  11. As a customer, I’d rather order through GrubHub if the restaurant doesn’t have a website or online checkout. However, I would still order over the phone if none of the above options are available. So in my case (and many others’), the restaurant actually loses money, which makes me think the overall cost becomes much more than 10% (or 14%, whatever).

    Restaurateurs should closely track their order stats before and after GrubHub.

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