Your Mileage May Vary – Going Grubhub?

Does adding Grubhub to your restaurant channel mix help or hurt?

If the answer is anything other than, “I don’t know. Let us start with customers, business objectives and alternatives”,  it is wrong. There is one such categorical answer in recent Bloomberg Businessweek article.

The article quotes one case study, a restaurant that used to hire Seamless (now acquired by Grubhub) as sales channel found its margins go up despite smaller sales.

On its first night without Seamless (Aug. 16, a Saturday), Muñoz says Luz took $669 worth of delivery orders. That’s down about 16 percent from the $800 in orders the restaurant typically received on Saturday nights when using Seamless and GrubHub, another online delivery service that recently merged with Seamless. Instead of losing 14 percent of the total to commissions, though, Luz paid only $16 for credit card processing and other ordering-related fees, meaning the restaurant netted $653—just 4 percent off the $680 it would have made with the help of Seamless and GrubHub.

They use the word margin to refer to net amount they get to keep after transaction and channel charges.  Sites like Seamless and Grubhub create value by bringing in sales that restaurants would not have realized through other channels. They get their share of that value created by charging 10-14% commission.

As I wrote before, restaurants should be happy to pay this as long as they are making profit on each GrubHub transaction and it is new sale they would not have had otherwise.

Let us take this specific case of Luz restaurant. It appears from the numbers they have the wherewithal to generate $669 (average?) sales through their own gumption. What Seamless did for them is simply redirect $669 through its website and only added $131 worth of new sales.

If that is the case it does not make sense for the restaurant to pay 14% on $669 – sales they would have had without any help from Seamless.    Given these numbers it appears Seamless share is $112 from a mere $131 worth of sales.  The restaurant should have done this math before signing up for Seamless or explored its sales channel alternatives.

On the other hand if a restaurant has $200 in takeout revenue and Seamless increased it to $800. Then at 14% commission, Seamless share of value is $112 from $600 new sales they created. A far better number for some restaurants.

The answer for your restaurant is not a simple yes or not based on the extreme stories you see but starting with your customers, business objectives and channel economics. Do not rush to sign up or ignore Grubhub based on popular news stories.

Here is a much bigger question that even large enterprises grapple with – compensating sales team on repeat revenue.  It makes perfect sense to compensate the sales channel for acquiring new sales. But once you got that customer, aren’t they your customers? Should the sales channel be compensated for repeat revenue from the same customer? Especially at the same 14% level?

 

3 Things to Do and 3 Things Not to Do with GrubHub like Sites

Previously I wrote about the simple rule for determining whether or not a restaurant should add GrubHub like food ordering services as a sales channel. Restaurant owners seem to have indigestion from the 10-14% per order commission these sites charge. Restaurants may be tempted to recoup these charges from customers or may feel threatened by the power of such sites. Here are some Do’s and Don’ts to help your business put these channels to work for your business.

3 Things to Do

  1. Consider  Creative Packaging for Price Realization. You can serve well the customers you acquire through GrubHub and get better price realization through portion sizing. This is not same as the first “Don’t” below. This is about recouping some of excess consumer surplus you give away.
  2. Consider separate menu with premium priced items. As a simple rule customers who come through such sites have higher willingness to pay, have higher disposable income and value variety and convenience. Offer them premium products at premium prices, let them self select if they wish.
  3. Rebalance Rebalance Rebalance – You need to determine what kind of restaurant are you and what is your core customer segment. What percentage of your revenue do you want to come from takeout?  Are there other opportunities you are forgoing because takeout business is dominating? Revisit your customer mix and revenue mix every three months and adjust accordingly.

3 Things Not to Do

  1. There is a restaurant in Palo Alto that charges 10% extra on takeouts – all takeouts. Resist the temptation to do that to your GrubHub customers They do not know your cost to acquire them (the 10% you pay to these channels is your cost). Such an addition is passing on costs rather than a share of your value add.
  2. Do not sign exclusive contract with any one site. Although it is getting very difficult with their mergers you should not let any one channel partner be the source of your takeout sales.
  3. Do not pay any upfront or recurring charges however labeled they are. Just like you can’t pass on your costs to your customers these sites can’t pass on their customer acquisition costs to you.

 

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.