“With billions being poured into awareness campaigns, diner incentives, driver incentives and restaurant incentives, it makes sense that easy-to-access ‘analog’ diners would quickly become aware of the substantial benefits of online ordering,” said GrubHub CEO Matthew Maloney and president and CFO Adam DeWitt in a letter to shareholders.
“As a result, the easy wins in the market are disappearing a little more quickly than we thought,” the executives added.
‘Promiscuous’ customers are hurting GrubHub
GrubHub’s biggest problem may be the fickleness of its customers, who are more than happy to try multiple delivery services. There is no brand loyalty — only price matters — and that’s led GrubHub to increasingly rely on discounts and free delivery promotions to keep customers coming back. That may help revenue, but it destroys profitability.
“We believe online diners are becoming more promiscuous,” Maloney and DeWitt said in the letter to GrubHub shareholders.
Analysts were merciless Tuesday morning, with several slashing their price targets and ratings on the stock because of worries about such a competitive environment.
Oppenheimer’s Jason Helfstein cut his target on GrubHub from $91 a share to $34 in a report titled “Too Many Cooks in the Kitchen.” Brent Thill of Jefferies said in a report that “we view food delivery as a challenging industry to truly differentiate” from the rest of the competition.
A price war that nobody can win
Other analysts were perplexed about GrubHub’s decision to try to engage in a price war with deeper-pocketed rivals, such as Uber.
“The food delivery market is increasingly irrational as competitors flood the market with rewards and incentives, making online diners less loyal,” said Bank of America Merrill Lynch’s Nat Schindler in a report.
Schindler added that GrubHub’s “answer to this irrationality … seems confusing: its management letter seems to suggest that it will double down on its competitors’ poor economic decisions” and embrace free delivery for the big fast food and quick-service restaurant chains.
Guggenheim Securities analyst Matthew DiFrisco described the letter to shareholders as a “Dear John” breakup note to growth investors.
“New diners in newer markets are less loyal and purchase at lower frequencies than older cohorts. Most concerning is that the new strategic plan is unproven, creating greater uncertainty,” he said.
“Hindsight is 20/20, but we believe management should have forecasted that entering a market with larger incumbent delivery providers with greater restaurant inventory and driver networks would be a meaningful headwind,” DiFrisco added.
More M&A on the menu?
Maloney, GrubHub’s CEO, conceded during a conference call with analysts Tuesday morning that the major food delivery companies may all be in a no-win situation if things don’t change.
“Many of our competitors are private companies that are raising money right now,” he said. “And so we’re talking to the same investors that they are, and we’re hearing their stories that they are not growing as fast by any stretch.”
In an industry with few barriers to entry, being among the first is no guarantee of long-term success.