E = MC2 (Eating = More Choices Squared) ; GrubHub and Seamless take a 13.5% cut of their average delivery order

GrubHub and Seamless take a 13.5% cut of their average delivery order

By Zachary M. Seward @zseward 11 hours ago

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GrubHub and Seamless charge an average commission of 13.5% for restaurant orders placed through their websites and apps. And restaurants pay more to appear higher in search results, which isn’t apparent to diners.

The commission hasn’t previously been disclosed, but it can be deduced from data in the company’s IPO prospectus. The American restaurant delivery startup, formally known as GrubHub Inc., takes a cut of each meal it processes. Last year, just over $1 billion in delivery and pick-up orders were made through GrubHub.

GrubHub generated $137 million in revenue from those transactions in 2013, implying an average commission of 13.5%. (See our math here.) GrubHub is free to use for diners; it doesn’t publicize the rate restaurants are charged, but previous reports have said the commission ranges from 5% to 15%.

The size of GrubHub’s cut varies depending on how much the restaurant is promoted. The prospectus explains, “Restaurants can choose their level of commission rate, at or above the company’s base rates, to affect their relative priority in its sorting algorithms, with restaurants paying higher commission rates generally appearing higher in the search order than restaurants paying lower commission rates.”

That isn’t clear to GrubHub and Seamless users. (The two services merged last year but still operate as separate brands.) Search results that have appeared higher because the restaurant is paying more aren’t labeled as such. The algorithm that ranks restaurants on the websites and mobile apps can seem mysterious.

Did these restaurants pay to appear at the top of search results?

Charging for inclusion in search results is controversial, though common in the services industry. US Federal Trade Commission guidelines call for “clear and conspicuous” disclosure of paid search results. Google last decade sparred with competitors like Microsoft and Yahoo over their disclosure policies for paid inclusion.

GrubHub describes its variable commission as an “attractive business model,” which may be true in the short term. It’s the only way to make more money aside from adding new restaurants and diners. But charging for better search results may damage the company in the long term because it degrades the user experience.

In the large cities where they thrive, GrubHub and Seamless already suffer from providing diners with too many options, which can lead to a paralysis of choice. The services aren’t good at filtering the multitude of options, in part because user reviews aren’t robust (GrubHub integrates Yelp reviews for this reason) but also because the company has a conflict of interest: It wants to keep all of its restaurants happy, especially those that are paying more. A recent email from Seamless to customers claimed to have solved “the theory of lunch undecidivity,” but in fact, that equation remains a great mystery of urban workplaces.

The subject line: “Solved! The ‘What do I want for lunch?’ conundrum.”

The filter failure may present an opportunity for other startups to provide a better way of navigating restaurant selections, the way sites like The Wirecutter provide a front door to Amazon’s abundant marketplace. But for GrubHub, the fact that its business model could preclude solving its search problems seems like a real risk. It currently enjoys dominance over restaurant takeout orders in the United States today, but less encumbered competitors—like, say, mobile payments startup Square—could easily snatch away that advantage.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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