Grubhub Seeks New Path in Competitive Delivery Business

Once the market leader in online restaurant food ordering in the U.S., Grubhub now lags behind

DoorDash Inc.

DASH 1.11%

and

Uber

UBER 4.94%

Technologies Inc.’s Eats division. In an urgent push to expand its user base, third-ranking Grubhub is striking deals and promotions as it faces uncertain standing with its parent company,

Just Eat Takeaway.com

TKWY -1.88%

NV, which is considering selling Grubhub about a year after acquiring it.

This month, Grubhub struck a deal with

Amazon.

com Inc. to link part of Grubhub’s food-ordering service with the e-commerce giant’s Prime program, which has more than 200 million members.

The company is also signing agreements with big chains to deliver their food, including one with Chili’s parent

Brinker International Inc.

and a global delivery deal signed between Just Eat and

McDonald’s Corp.

earlier this year.

During the free-lunch promotion in New York,

Adam DeWitt,

Grubhub’s chief executive officer, said 200,000 new diners downloaded Grubhub’s app for the first time, and it processed 400,000 orders that day.

Still, challenges for Grubhub and the broader food-delivery business remain. Consumers flocked to food-delivery apps when the pandemic hit. Now, though the food-delivery business continues to grow, expansion has slowed dramatically from the pandemic-driven boom.

Order sizes tend to be larger but transactions are fewer, analysts and restaurant operators said. Wall Street analysts said it remains unclear whether food-delivery companies can turn consistent profits in the postpandemic period, especially in an economic downturn.

Just Eat said it expects negative margins on its earnings after expenses this year, and told investors last fall that regulatory fee caps on food-delivery businesses like Grubhub in the U.S. had drained tens of millions of dollars in profits.

Just Eat’s shares are down roughly 83% since it closed its $7.3 billion acquisition of Grubhub in June 2021. Just Eat told investors in March that it expects its profit margins to improve later this year, and that it is fighting the local fee caps, which limit how much apps can charge restaurants in commissions to handle their orders.

Grubhub isn’t alone in facing pressure. DoorDash’s shares have fallen 52% this year. Investors recently pressed Uber’s CEO about how the food-delivery business may fare in a potential economic downturn. Both companies increased their delivery revenue in the latest quarter, though the pace of growth fell sharply from a year ago.

Grubhub, founded in 2004, initially focused on advertising restaurant menus online, while restaurant operators largely used their own couriers to deliver food. That model made money for the company for years, and Grubhub launched an IPO in 2014.

When DoorDash and Uber Eats debuted food-delivery businesses beginning in late 2013, charging fees to restaurants for delivering their food to customers, Grubhub was skeptical. Executives of the company believed the rivals would quickly run out of cash, and co-founder and former CEO

Matt Maloney

said he viewed food delivery as a “crummy business.”

Japan’s

SoftBank Group Corp.

backed both Uber and DoorDash, pushing the companies to focus on gaining market share over turning immediate profits. Those efforts pressured other rivals, including Grubhub.

As DoorDash and Uber Eats expanded, Grubhub formed a unit, initially dubbed Project Reindeer, to study launching its own food-delivery operation. Grubhub moved ahead on delivery, but executives were split on the strategy, according to people familiar with the discussions. Some executives cautioned that delivery would eat into the company’s profitability and distract from its online marketing business, the people said.

Meanwhile, DoorDash and Uber Eats were investing heavily in free-delivery promotions aimed at building their user bases, and signing up more restaurants to offer the users on their apps. DoorDash and Uber Eats launched monthly subscription programs as an incentive for users to order through their apps. Grubhub executives hesitated, worried about profitability, but eventually followed the move, the people said.

Grubhub and other apps also found themselves in the crosshairs of local politicians. Dozens of municipalities passed local rules limiting how much the apps could charge restaurants to handle their delivery orders after the pandemic hit, to try to help struggling local businesses survive the health crisis. Many of those have expired, and the apps are fighting to modify those remaining in cities such as New York and San Francisco.

Last year, Chicago filed lawsuits against Grubhub and DoorDash, accusing the companies of engaging in “deceptive practices to prey on its affiliated restaurants.” Both companies have denied the allegations. The city specifically accused Grubhub of misrepresenting a campaign it advertised as helping restaurants to survive the pandemic after it first hit, accusations the company denies.

In June 2020, Grubhub agreed to sell itself to Dutch food-delivery firm Just Eat Takeaway. The CEOs of both companies said at the time that they valued their online marketing business more than food delivery.

Months after the deal closed in 2021, activist investor Cat Rock Capital Management LP, the third-largest investor in Just Eat with ties to other major investors, began pushing the company to sell Grubhub. The firm said that buying Grubhub, which lags behind competitors, strayed from Just Eat’s core strategy of running market-leading delivery companies in European countries.

In April, less than a year after the deal closed, Just Eat CEO

Jitse Groen

said the company was exploring a strategic partner or the partial or full sale of Grubhub. Both industry players and private-equity firms have had discussions with Just Eat, according to people familiar with the discussions.

Just Eat has said its deal with Amazon includes the option of Amazon taking a 2% stake in Grubhub, and that the stake could increase based on the number of orders and customers the partnership generates.

Around two million new users have signed up for the Grubhub+ subscription delivery service since the Amazon deal, people familiar with the matter said, representing more than double the total number of Grubhub+ members last reported by the company. States that typically aren’t Grubhub’s strongest, including California, Texas and Florida, reported jumps in members during Amazon’s Prime Day event earlier this week, some of the people said.

Grubhub leaders say the company is more focused than it has been in years. The company has shed unprofitable delivery markets in U.S. suburbs to focus on major cities and its executives said they believe the market could still grow by billions of dollars.

—Preetika Rana contributed to this article.

Write to Heather Haddon at [email protected]