In 2011, Grubhub* was one of the most innovative companies in the world.
The company had just successfully raised $20 million to expand its operations all across the United States, and a year later they would raise another $50 million. By 2014, the small food delivery startup would merge with SeamlessWeb and hit the NYSE with a valuation of $2 billion and go on to seemingly secure its dominance of a category of dining that hadn’t existed before: technology-driven food delivery.
Five short years after Grubhub’s iconic rise to becoming a public company, Vox reported at the start of 2020 rumors the company may soon be up for sale.
How did that happen?
Food delivery is a case study unlike any other, where an unprecedented amount of capital backing a handful of competitors aggressively entered the market (with varying success), and dethroned the market leader.
Here are 3 takeaways from the battle that occurred between Postmates (launched in 2012), DoorDash (2013), Uber Eats* (2014), and Grubhub for the large and growing food delivery market.
1. If you’re looking for a vulnerability in an incumbent marketplace, see if there is a way to dramatically increase supply.
Grubhub is an incredible company. It’s hard to blame them for underestimating just how aggressive the private markets would be in funding loses in search of market share. However they made a strategic error that left them vulnerable in the first place and cost them their dominance of the food delivery category.
Grubhub’s original model was a marketplace for consumers to order food from independent restaurants that already had their own delivery fleets. Though this was a game-changer for consumers, it constrained supply to only listing restaurants that could perform their own deliveries. This was a mistake.
Postmates and DoorDash were the first to realize that if they could provide the broader group of restaurants that did not do delivery with the ability to do deliveries, they could dramatically increase the number of restaurants that could exist in the marketplace, thereby leapfrogging Grubhub’s selection (and liquidity).
Once they realized this Achilles heel, Postmates and DoorDash raced to exploit the vulnerability with a growth-at-all-costs mentality. Grubhub was caught backfooted. Grubhub thought that they had saturated the market, but they had only saturated a subsection of the market — independent restaurants that made their own deliveries. Meanwhile, DoorDash, Postmates, Uber Eats, and all other food delivery startups were racing to capitalize on the newer, bigger definition of the category.
This vulnerability is not unique to food delivery. The same pattern of leapfrogging an incumbent by dramatically expanding the potential supply-base happened in home-sharing and travel.
Not that long ago, HomeAway and VRBO dominated the home sharing space, if you defined home sharing as vacation home rental. Then Airbnb came into the market and redefined the atomic unit of supply — suddenly it wasn’t just about a full house rental, but full house, room, or bed, in cities or vacation spots, and anything in between. Creating a more flexible unit of supply enabled greater liquidity, leapfrogging HomeAway and VRBO.
Something similar happened in travel. Expedia and Priceline were the incumbents when Booking.com entered the market with an agency model and lower fee structure. Booking.com’s lower fee structure let them dramatically increase the types of hotels that could afford to join their marketplace, thereby leapfrogging the depth and breadth of supply vs the incumbents.
It’s a reminder that even seemingly dominant incumbents can be vulnerable.
2. Private vs public companies have been playing by different rules.
When you are a public company, public investors are valuing your company based on the net present value of future cash flows, and additional capital raises are the exception. Between 2014 and today, this meant Grubhub’s incentive was to orient themselves as a business toward profitability.
Private companies in the last 5+ years have had every incentive to forgo profitability for a different metric: growth.
In 2012, when Postmates entered the market, generating cash flow was the last thing on their minds. What they worried about was how quickly they could scale. Same with DoorDash in 2013, and Uber Eats in 2014 (remember Uber didn’t go public until 2019, so they were able to play by private company rules in the beginning). Those that were able to scale the quickest, were most successful in raising capital, creating a very clear incentive. DoorDash alone has raised an extraordinary $2B.
Postmates and DoorDash pursued this growth-at-all cost mindset so aggressively that they listed restaurants and stores that weren’t even signed up for either service. Doing so let both scale supply faster than a sales team would have been able to, but it obliterated the unit economics early on. Because neither were integrated on the backend of the restaurant, they didn’t know when the food would be ready. In a business where unit economics are driven in large part by how many deliveries a person can squeeze into an hour, this meant a lot of wasted time (and money). It also meant that both services ended up having to offer consumers promotions and refunds to make up for delayed or cold deliveries, further eroding their unit economics.
Grubhub was playing from a completely different rulebook. Not surprisingly, while Grubhub generated $186m of non-GAAP adjusted EBITDA in 2019, Grubhub’s competitors were all burning cash. Indeed, DoorDash is rumored to have lost upwards of $450 million in 2019.
The question of course is what will be the reward for this burn? And that leads us to #3.
3. It’s not a race to big aggregate growth numbers — it’s a race to winning a market.
There’s been a lot of growth in the space, but big GMV numbers by itself doesn’t translate to equity value.
Schibsted, which has a global portfolio of online classified marketplaces, found that across their portfolio, the profitability of one of their marketplaces came from how much bigger the #1 was vs the #2.
In other words, dominance in a market, not aggregate GMV across many markets, is the goal of any marketplace and ultimately what determines equity value.
Online classifieds is likely a >90% contribution margin business. Food delivery is far from that. In food delivery, given the costs involved, yes profitability accrues to the leaders, but serious costs accrue to everyone else. Postmates had to learn this the hard way.
Postmates was the first to recognize Grubhub’s vulnerability, but the strategy with which they raced to exploit it had its own weaknesses: Postmates dove headfirst into San Francisco, and they went after everything — restaurants, retailers, cafes.
DoorDash, on the other hand, started by focusing almost exclusively on the greenfield opportunity of restaurants in the suburb market of the SF Bay Area — a market overlooked by the other competitors in the space, in part because of how challenging it was given the lower density.
By targeting a very focused greenfield opportunity, DoorDash was able to efficiently prove their model, building liquidity and market leadership. Meanwhile, by spreading themselves thin and going after a large competitive market, Postmates grew GMV quickly but struggled to build market leading liquidity, especially as its ambitions took them to new cities like New York and Los Angeles. Their execution could have been flawless, but it was just too much to bite off.
And this brings us to the marketshare positioning we have now. If you rank Vox’s data by which cities have the most dominant leader, it’s a tough picture for Postmates:
Looking at the above table (which I recognize is not a complete view of the United States), the lion share of Postmates’ equity value must derive from Los Angeles, where I bet Postmates is fighting tooth and nail to maintain its tight leadership position. You can add up the GMV in all the other cities and I’m not sure it’s worth much.
With the benefit of hindsight (which I recognize is 20/20), Postmates had the right vision and insight into the market, but they would have been better off pursuing a more focused strategy with far fewer cities and categories. This is because marketplaces are not a race to growing GMV, they are a race to creating the most value for both the supply and demand side (liquidity).
When you start in a small, focused market, it’s a lot easier to build liquidity and get to a meaningful percentage of that market, becoming the best place for both the supply and demand to go. When this happens, your network effect kicks in and the market tips towards you, accelerating your lead. On the other hand, when you go after a big, competitive market, you’re setting yourself up for a long, uphill battle before you have a chance for a network effect to kick in and the market to tip. It’s always better to find where you can win (what I think of as finding your red hot center) and then expand from there, than try to go after the big hairy audacious goal from the beginning.
With Postmates, winning a city like New York City was an ambitious idea with a big prize, but the cost of every dollar and hour that got deployed towards the goal of trying to win it isn’t just the total dollar or hour amount; it’s the opportunity cost of those dollars/hours if they had been allocated to a city like Los Angeles instead.
DoorDash on the other hand has clearly been far more successful at winning market leadership, but they have done so at an even more extraordinary cost. Time will tell whether the model DoorDash used to grow was an innovative way to grab market share, or a way to do so subsidized by venture dollars that structurally won’t translate into the IRR numbers its investors hope for.
That said, two things are for sure: First, that the opportunity Postmates saw was Grubhub’s to lose, but Postmates ran at that opportunity too aggressively while Grubhub ran at it too slowly. And second, as DoorDash battles two public company competitors in GrubHub and Uber Eats, staying private is a weapon I suspect they won’t be eager to give up.
*Denotes Benchmark portfolio company.