Grubhub

Grubhub is a pioneering American online and mobile food-ordering and delivery marketplace. Think of it as a digital middleman connecting hungry diners with a vast network of local restaurants. Launched in 2004, it was one of the first major players to bring the restaurant menu to your screen, allowing customers to browse, order, and pay for meals from a wide variety of eateries through a single app or website. For years, Grubhub was a darling of the tech world, growing rapidly and eventually going public in a successful Initial Public Offering (IPO) in 2014. Its business model is straightforward: it takes a commission on the total value of each order it facilitates. While initially focused on just connecting customers with restaurants that had their own delivery drivers, Grubhub later built out its own logistics network to provide delivery services for restaurants that didn't. This evolution, however, brought it into a brutal, cash-burning war for market share with aggressive new competitors.

At its core, Grubhub's business is a two-sided network: it needs a massive base of active users on one side and a comprehensive selection of restaurant partners on the other. The more users it has, the more attractive it is to restaurants, and the more restaurants it has, the more choices it can offer users—a classic network effect.

The company generates revenue primarily through a few key channels:

• Commissions: This is the biggest piece of the pie. Grubhub charges restaurants a percentage fee on every order placed through its platform. The exact percentage can vary based on the level of service and marketing the restaurant signs up for.
• Delivery Fees: For restaurants that use Grubhub's delivery drivers, the company charges the customer a delivery fee. This fee helps offset the high cost of maintaining a fleet of independent-contractor drivers.
• Marketing and Advertising: Restaurants can pay Grubhub extra for premium placement in search results or for targeted marketing campaigns within the app, helping them stand out from the crowd.

For a value investor, a company's story is less about hype and more about durable competitive advantages and sustainable profitability. Looking at Grubhub through this lens reveals a fascinating but cautionary tale.

An Economic Moat is a company's ability to maintain a long-term competitive advantage. Grubhub's early moat was its first-mover advantage and its growing network of restaurants and users. However, this moat proved to be shallow and easily crossed.

• Intense Competition: The arrival of deep-pocketed and aggressive rivals like DoorDash and Uber Eats ignited a fierce battle for dominance. These companies spent billions on promotions and marketing to acquire customers and sign up restaurants, often at a loss.
• Low Switching Costs: The industry suffers from extremely low switching costs. For a customer, downloading a rival app is free and takes seconds. For a restaurant, listing on multiple platforms is common practice. This lack of “stickiness” means loyalty is fleeting and must be constantly bought with discounts and advertising.
• Eroding Margins: This hyper-competitive environment forces companies to spend heavily on marketing and driver incentives, which relentlessly squeezes profit margins. The dream of a profitable, winner-take-all market has remained elusive, resembling more of a costly stalemate.

While Grubhub consistently grew its revenue for years, translating that top-line growth into consistent net income was a significant challenge. The high, variable costs associated with delivery and the constant need for marketing spend meant that as the company grew, its costs grew right alongside it. This is a red flag for value investors, who prefer businesses with scalable models where profits grow faster than revenue. The fundamental economics of picking up a $15 meal and driving it across town simply proved difficult to make profitable on a consistent basis without significant scale.

The intense competition and profitability pressures ultimately led to a major shift in Grubhub's story. As a publicly traded company, it is no longer an independent entity.

In June 2021, Grubhub was acquired by Just Eat Takeaway.com, a massive European food delivery conglomerate, in an all-stock deal valued at $7.3 billion. The logic was to create a global powerhouse, combining Just Eat's strength in Europe with Grubhub's presence in the United States. The hope was that the combined entity could achieve greater economies of scale, share technology, and have more leverage in the global food delivery market.

You can no longer buy shares of Grubhub directly on a U.S. stock exchange. To invest in the business, you must now purchase shares of its parent company, Just Eat Takeaway.com, which trades on the Amsterdam and London stock exchanges. This acquisition has had a rocky history. Just Eat Takeaway.com has struggled since the merger, facing the same competitive pressures in the U.S. that plagued Grubhub as a standalone company. In 2022, the parent company announced a massive writedown on the value of Grubhub, acknowledging it had paid far too much. For investors, this serves as a powerful lesson: even in a growing industry, the price you pay for an asset is paramount. The Grubhub story is a textbook example of a great product and a familiar brand that operates within a brutal industry structure, making it a challenging, if not impossible, business to own for long-term, value-oriented investors.