How do delivery services like Grubhub and Seamless make a profit?
Finding a restaurant that delivers, say, Chinese food is a lot easier in the Internet age. Online services allow you to enter your address, pull up the menus for local restaurants and place an order. Now, two of the better known food-ordering services are breaking bread together, as GrubHub and Seamless merge.
Ordering food to-go is big business. In 2011, Americans spent $69 billion on take-out, according to Grubhub CEO Matt Maloney.
“Almost all of it was placed over the phone. From paper menus,” says Maloney.
His counterpart, Seamless CEO Jonathan Zabusky, agrees.
“Our competition is the paper menu. Because less than 5 percent of U.S. diners use services like ours to order take-out,” says Zabusky.
Together, GrubHub and Seamless expect to take a bigger bite out of that market. Peter Krasilovsky is an analyst with the research firm BIA/Kelsey.
“As smartphones become part of the culture and everybody has their credit card kept inside their phones, and they’re able to even keep tabs on what kind of tips they want to give people automatically, this is going to become really big,” says Krasilovsky.
GrubHub and Seamless provide their services to consumers for free. Restaurants pick up the tab. To participate, restaurants pay at least 10 percent from each order. Some pay more.
“If you have a pizza place, say they're willing to give 10 percent for the incremental business, and then you have a sub shop down the street. Well, they’re willing to give eleven percent. And so we create this local competitive marketplace,” says Maloney.
Restaurants that pay more get listed higher in search results. Though Maloney says the rankings are also set by customer reviews. And he tells restaurant owners that he doesn’t want to eat their lunch. That is, profit-wise.
He reassures owners, “We don’t make a dime unless you make a dollar.”
Analysts say the combined company could prove attractive to Wall Street. Many observers say the merged company stands a better chance of going public in the future.