Grubhub sold at a 90% loss: What does it mean for the future?

Grubhub recently sold for $650 million, a 90% loss over the price paid of $7.3 billion in 2020. This raises big questions about the sustainability and future of delivery service models in the restaurant industry.

We are witnessing a critical reassessment of the third-party delivery model. The Grubhub sale isn’t just an isolated incident; it’s an indicator that the current model is not sustainable. The industry is likely to see a significant transformation with companies needing to find a balance between convenience and profitability.

The Grubhub sale reflects the consumer spending evolution from pre-to peak to post-COVID, and we’re seeing that what worked during the conditions of COVID is not necessarily effective in today’s market. The industry is now forced to confront questions about profitability and sustainable business models that were previously obscured by pandemic-driven growth.

Pre-COVID (before 2020)

• Delivery was a convenience-based luxury: Prior to the pandemic, food delivery was seen as more of an optional indulgence for consumers rather than a daily necessity. It catered largely to urban, tech-savvy demographics willing to pay a higher price for convenience.
• Companies focused on market share acquisition: Delivery companies prioritized aggressive expansion, aiming to dominate markets rather than achieve sustainable profitability. This strategy led to intense competition and downward pricing pressure across different platforms.
• Restaurants viewed delivery as supplemental income: Many restaurants saw third-party delivery as an additional revenue stream rather than a core part of their business.
• Consumer adoption was steady but not universal: During this time, delivery services were growing, but their reach was limited. Many consumers still preferred dining out or picking up their orders directly.

Peak-COVID (2020-2021)

• Delivery became a survival mechanism for restaurants: As dining rooms closed during lockdowns, delivery became an essential service. Restaurants that had never considered third-party delivery suddenly found it essential for survival. Furthermore, delivery services experienced fast growth as consumers relied on them to access meals safely. The convenience and necessity of delivery led to record usage across platforms.
• Valuations were driven by growth over profitability: Companies like Grubhub, Uber Eats, and DoorDash saw valuations skyrocket as investors focused on growth metrics like order volume and user acquisition, rather than long-term profitability.
• Economic realities were masked: Elements like labor shortages, rising operational costs, and restaurant pushback over high fees presented challenges, but were overshadowed by the surge in demand. Both delivery platforms and restaurants operated in an environment where necessity justified the cost. While delivery companies reported record revenues, their business models continued to operate at a loss. This created a feedback loop where valuations were inflated by pandemic-driven growth, masking underlying issues.

Post-COVID (2022-Present)

• There was a shift to in-person dining: As restrictions lifted, consumers returned to dining out, reducing reliance on delivery services. This shift disrupted the inflated demand that had become the norm during the pandemic.
• Consumer price sensitivity increased as inflation hit: As inflation increased, consumers became more selective about discretionary spending, including tips and delivery fees. Many opted for more cost-effective options like picking up or dining out.
• Value proposition of the model was reevaluated: Restaurants began reevaluating if third-party platforms aligned with long-term business goals, and many are pulling back from these partnerships. To regain control of margins and customer experience, many restaurants launched their own delivery systems or partnered with more cost-efficient and local solutions.
• Profitability concerns overshadowed growth metrics: Focus shifted from growth to profitability, a transition that third-party platforms struggled to adapt to. The Grubhub sale highlights this shift as investors are less willing to support businesses that prioritize scale over sustainable revenue.

As the delivery model evolves, key challenges include rebuilding trust with restaurant partners, reducing resources while maintaining service levels, and competing in a market that requires profitability. That said, there are also opportunities to create more sustainable commission structures and develop hybrid models that combine delivery with additional services. In some ways, delivery platforms now have the chance to adapt to the changing market and reshape the future of delivery in the restaurant industry.

Needless to say, the Grubhub sale signals an evolution in the future of food delivery services. Moving forward, we can expect more transparent pricing, consumers opting for restaurant-direct ordering systems or returning to pick-up options and a greater emphasis on loyalty programs as restaurants and platforms work to retain customers. The significant reduction from Grubhub’s prior selling price highlights the need for delivery services to adapt, exploring innovative models that balance the demands of both consumers and restaurants.