Last week I explored the trends and issues that have been pressuring shares of publicly traded restaurant chains and came to the conclusion some were getting close to buy points. We identified key support levels for MCD, JACK, BWLD and TXRH and so far all four stocks have held or bounced a bit.
Today I want to look at one company actually benefiting from some of those same trends of eating home more frequently, choosing local establishments over chains and leveraging digital platforms.
Grubhub (GRUB) is the dominant online and mobile platform for restaurant pick-up and delivery orders. The company connects more than 40,000 local restaurants with diners in more than 1,000 cities across the United States. The company’s target market is consists primarily of independent restaurants and it has recently pushed into “virtual’ restaurants – businesses operating on a delivery only format.
After a very rough 2015 shares of GRUB have been a strong performer in 2016, especially over the past few months. The stock has gained some 95% year to date and 35% in just the last two months following its strong second quarter earnings report.
A recent pullback towards support at the $40 level sets up a decent entry point heading into the Q3 report due on October 27.
Big Picture Growth
One of GRUB’s biggest differentiators is that the company got into the food delivery industry early and it has been very focused on developing its platform, such as on the front of API and technology integration. This is lacking and cannot be easily built by its competitors. Over time, we have seen such investments paying off. Platform improvements around search, page load times, and onboarding continue to positively impact conversions and order frequency. 30-day orders per ending active diner declined less than 1% year over year, the smallest year over year decline since GRUB went public.
The company also made a lot of improvements to the product in Q2, including improved layout of mobile web restaurant landing pages, personal recommendations, simplified search, and funnel improvements. Additionally, GRUB is aggressively adding ratings and reviews, generating 70K consumer data points daily.
This has all led to strong revenue and margin growth. In Q2, performance from GRUB’s own delivery network proved to critics that it is the right investment to boost company’s growth. Delivery accounted for 12% of gross food sales in the quarter compared to 9% in 1Q. The company will continue ~$4 million investments per quarter. This points to more room for revenue to grow. Currently delivery is only available in 50+ market but the goal is to expand to 70 markets by the end of the year.
Furthermore, GRUB’s own delivery network is effectively improving demand. It allowed for addition of restaurants unable to participate in GRUB due to lack of delivery offers. These restaurants tend to skew to the mid to upper end which provide much higher margins.
Based on feedback of restaurants who joined the GRUB delivery network, they saw 10% more orders per restaurants and 60% more new diners per restaurant than other restaurants on the platform. This amount of high traffic also locks in loyalty on the supplier side. They are willing to pay for the higher commission rate charged by GRUB. Average take rate or fee reaches a new high of 16.5% per ticket.
Loyalty Tipping Point. In the latest quarter 90%+ of sales on GRUB is from repeat sales. Perhaps the more astonishing fact from Q2 is despite persistent growth in active diners, sales and marketing expenses have been falling as a percent of revenue. New diner acquisition costs has also fallen down to historical average.
Grub has also started a corporate program that helps businesses address problems in food ordering and associated billing. In certain markets, the company also provides delivery services to restaurants on its platform that do not have their own delivery operations. It essentially can act like as a platform for catering or outsourcing corporate cafeteria needs, which creates a steady revenue stream.
Going Virtual: The company has taken this concept a step further and has recently teamed with some high profile chefs in New York and San Francisco to act as the delivery service for their new “delivery only” business models. This is where chefs such as David Change can house two or three concepts out of one kitchen in a smaller space in a lower cost neighborhood.
“Brick-and-mortar is a hard scene,” says Stan Chia, senior vice president of operations at Grubhub/Seamless, which has been supporting a few delivery-only concepts. “We were actively looking for how to solve this problem.” Restaurants have to pay a commission on every transaction, whereas rent is a fixed cost.
Seamless is still the biggest name on the market. It’s still the website where most people decide what to order for delivery, even with Amazon (AMZN), Uber, PostMates, and other start-ups getting their hands in the game. For better or for worse, Seamless is Main Street for people looking for delivery, and having your own app and website is kind of like setting up shop on a side street. Some of the delivery only restaurants pay as much as 30% of all sales to the platform, a rate that means delivery-only restaurants are essentially swapping rent for GRUB’s fee. In this sense Grub is becoming a virtual landlord for the restaurant industry.
Last quarter’s earning shed a lot of light on the latest operational improvements within GRUB. The fact the company was able to capture such high growth in the short time these new improvements were rolled out point to the strength of the company. The re-acceleration of the business has only just started. Competitors cannot keep competing on their loss-making platforms and will eventually be squeezed out of the market.
— Steve Smith