Along with stellar quarterly results, GrubHub Inc. (GRUB) announced its latest attempt to connect directly with diners. The company acquired online restaurant delivery service — DiningIn — and entered into an agreement to take over another online delivery service — Restaurants on the Run — marking its entry into the food delivery business.
According to latest news, the two deals, worth approximately $80 million, will enable GrubHub to secure delivery business from 3,000 restaurants across all major U.S. cities.
The company’s stock prices gained 6.2% ($2.33) on Thursday’s closing-trade reflecting positive market sentiment.
GrubHub primarily operates asanonline platform for connecting diners with restaurants through its website and mobile app. It is now offering delivery services to restaurants at the same margin of 14%, which it charges for its conventional services. While the fourth-quarter revenues soared 50% to $73 million, the company forecasts first-quarter 2015 revenues of between $83 million and $85, including the impact of the DiningIn acquisition which the company closed on Feb 4.
However, the food delivery business remains highly competitive and technology giants Amazon.com Inc. (AMZN) and Google Inc. (GOOGL) have been eyeing the delivery market for a while now. While GrubHub does have an advantage in the space (its OrderHub and DeliveryHub serve as basic infrastructure products), its business model requires huge volumes to be effective (since it charges a lower-than-average rate.The acquisitions are good news in this respect since they add volumes and scale to its business.
According to market reports, food delivery companies charge a 20–30% premium for their services, while GrubHub’s charges are way less. The company’s pricing model will be a positive, potentially helping it to expand rapidly. This business strategy has helped the company secure significant growth in the past (average dinners increased 47% year over year in 2014 organically).
As a result, we expect GrubHub to implement these costs over its latest restaurant delivery service supported by the vast reach of already established delivery chains DiningIn and Restaurants on the Run. However, if GrubHub makes its way through the industry with its lower-margin business model, it might put pricing pressure on competitors like Square, which recently signed a deal to acquire on-demand restaurant delivery start-up, Caviar.
GrubHub currently carries a Zacks Rank #3 (Hold). A better-ranked stock in this sector is Asure Software, Inc. (ASUR), with a Zacks Rank #2 (Buy).
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