I was riding the red line T this morning on my way to Harvard Sq when I saw adds for both GrubHub and Foodler. It is interesting to see GrubHub, based in Chicago, advertising in Foodler’s territory. I am not surprised, though, as Boston is a high density location with long winters which makes it a great target for online food ordering.
I can’t avoid thinking about a Groupon vs. LivingSocial deja vu. Groupon achieved a $11.2B valuation at its IPO in October 2011, just to see 80% of it evaporate by July 2012. The stock achieved a high of $31 and is now trading at around $6. What happened? Low switching costs is what happened (not to mention class suits around expiration dates, but that’s not the point).
The business concept around online food ordering and online discounts does create value. It adds convenience for users to order food they like, when they want it, and using the device of their choice. It also adds convenience for restaurants to market their menus, and manage orders in one place. Both GrubHub and Foodler created a user-friendly experience where it’s easy to discover menus and order. No one is debating that. Similar to discount sites there are strategic choices to be made around switching costs and multi-homing costs and I think both GrubHub and Foodler learned lessons from history.
Let’s take a deeper look. Both companies offer similar services – restaurant and menu discovery, customized website, no setup or monthly fees, social media integration, and advertisement. There is some differentiation where GrubHub offers 100% Fraud protection and Foodler offers management tools for restaurants. GrubHub offers a flexible commission rate tied to the relative priority in the sorting algorithm. When restaurants setup their accounts they have to enter menu information, delivery limits, order minimums, etc. No payment upfront. This is a little harder than setting up your weekly discounts (at Groupon) but it doesn’t create very high switching costs. In fact, while there is no direct network effect on the user side (you don’t care if your friends are using GrubHub and/or Foodler) there certainly is an indirect network effect. Users will tend to gravitate to providers with the largest number of food options and vice-versa. As a result more restaurants will opt for the provider with the largest number of users which may reduce the individual value to each restaurant over time.
What are some of the strategic choices available to GrubHub and Foodler to promote lock-in? GrubHub decided to extend its platform to developers and is opening new APIs to share restaurant, menu, and other data. This will help it create an ecosystem around new services it can offer to restaurants. LinkedIn tried to do the same thing and eventually had to implement strict access controls. GrubHub also connects with local social network data to list favorite restaurants among your neighbors. Foodler lists specials and discounts and they accept bitcoin. A cursory look at pizza places in Cambridge, MA led me to 20 options from GrubHub and 20+ options from Foodler. Four restaurants overlapped between both sites, or 20%. Granted, penetration is very local and could vary dramatically by region. It is also important to make sure users don’t go around the platform once they establish a relationship with their favorite restaurants. In this category, GrubHub and Foodler are also competing with good old-fashioned menu flyers that restaurants distribute locally.
GrubHub acquired Seamless, CampusFood.com, and DotMenu as another way to gain share. They went public in April 2014 which has tremendously helped them attract talent. Last, there are traditional and new players in this service segment. DiningIn has been around for over 20 years and is mostly focused on catering. They also deliver themselves. Newer entrants include Eat24, Forkable, OrderAhead, delivery.com, and Foodtoeat. Here are some interesting questions. Is there a First Mover Advantage in this case? Will this market tip or become saturated? Let’s grab some food and find out.