Why GrubHub Is Building What Its CEO Calls 'A S***** Business'

Brian Solomon

A GrubHub delivery person (Photo: Jeff Sciortino For Forbes)

GrubHub shot to stardom by avoiding delivery at all costs–now it’s trying to do it right.
In 2004 Matt Maloney and Mike Evans had to build a website of their own just to find out which restaurants in their area would deliver. A dozen years later their online marketplace, GrubHub, handles more than $2.4 billion in food orders per year, making it the leader in a suddenly cutthroat chase for restaurant delivery. DoorDash, a three-year-old San Francisco startup gunning for GrubHub’s throne, just raised $127 million in venture money, 50% more than Maloney and Evans took from investors in five funding rounds combined prior to GrubHub’s 2014 IPO. And Uber, the $60 billion taxi-killing machine, just launched UberEats, a food-ordering app that takes advantage of the company’s unprecedented scale with drivers.
“This is the most exciting time in this industry, maybe the biggest since the invention of delivery food,” says Maloney, GrubHub’s 40-year-old CEO.
Pressure from younger startups hasn’t hurt GrubHub’s growth too badly yet: The company (the result of a 2013 merger between GrubHub and rival Seamless) leads the FORBES Fast Tech 25 list with 66% average sales growth over the last three years and 36% annual growth forecast for the next three to five years. And it has grown profitably, with $38 million in net income on $362 million in revenue last year. That’s because until now Maloney avoided building a margin-destroying, labor-intensive delivery network of his own. Instead GrubHub happily takes an average 15% cut of orders on its platform and lets restaurants figure out the last-mile delivery.
Maloney isn’t shy about his disdain for the startups trying to prove they aren’t the next Kozmo.com or Webvan. Postmates and DoorDash, two of GrubHub’s biggest competitors, say they’re profitable in some of the cities where they operate, but Maloney calls them liars. “People are going to look around and say, ‘Oh, crap, I can only do this for 12 months even if I just raised $100 million’ because every incremental transaction is negative,” he says.

Yet even though Silicon Valley fuels startups with shaky economics, Wall Street has turned impatient with Maloney’s efforts to capture more of the $75 billion takeout and delivery industry. GrubHub’s shares are down 50% since their peak a year ago, as investors fret over the company’s slowing growth in a more competitive market. That has pushed Maloney to invest for the first time in what he calls “a shitty business.” Last year GrubHub spent $90 million to acquire three regional delivery companies that already served more than 3,000 restaurants across 15 markets and attributed $5.5 million in additional investment in the fourth quarter to building out its network of independent driver contractors.

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“I’m running my delivery-based business with the explicit goal to break even,” Maloney says. “That’s not fun for me, and normally I’d say that’s the dumbest business you could ever be in. Why run a break-even business? That’s a pain in the butt.”
Maloney figures it costs him about $6 to deliver pad thai or lamb vindaloo to your home (although it could be more in some markets). With an average order size of $28, his company has only two ways to cover that: Charge the customer or charge the restaurant. GrubHub is doing both, grabbing an additional 10% from each order and tacking on a customer delivery fee of around $2. That’s barely enough to cover the costs in an ideal scenario–and why Maloney thinks DoorDash and Postmates, which have to make those numbers work at a fraction of GrubHub’s scale, have no hope of ever reaching profitability.

Matt Maloney, cofounder and CEO of GrubHub (Photo: Tim Boyle/Bloomberg)

Maloney thinks he can reach break-even on deliveries by later this year, while GrubHub’s pure marketplace side continues at its healthy 35% adjusted Ebitda margins. He’s focused on restaurants that don’t offer delivery of their own–an acute problem outside of big markets like New York City and San Francisco. Adding selection will hopefully drive more customers to the GrubHub app and encourage them to order more frequently–90% of GrubHub’s orders are repeat diners.
RBC Capital Markets analyst Rohit Kulkarni calls that assumption “a big if” and says Wall Street is skeptical GrubHub has complete control over its cash burn in delivery. But Maloney points to early signs of success. GrubHub launched delivery in 50 markets in 2015, and it’s already grossing at a run rate of $200 million a year. Growth in at least four of GrubHub’s ten-plus second-tier markets has accelerated after introducing delivery.
“There’s some chicken before the egg, where I have to have the supply ready to drive demand,” Maloney says. “But I have it way easier than anyone else because I’m already running 250,000 orders per day.”
As rivals play catch-up, Maloney hopes that his head start matters. But if no one is making any money on delivery, what’s the difference?