Bloomberg / We've known for a long time of a major battle brewing in the restaurant industry over digital and delivery orders. This week, we got a clearer picture of what's to come.
Yum! Brands Inc., the corporate parent of Pizza Hut, KFC and Taco Bell, said Thursday it would buy a $200 million stake in GrubHub Inc., which will help deliver food from thousands of KFC and Taco Bell restaurants across the U.S., giving those chains a big lift in a growing market.
At first glance, this arrangement might seem unremarkable. Almost every big-name chain restaurant you can think of — from sit-down spots such as Olive Garden to quick-service joints such as Dunkin' Donuts — are dabbling in delivery.
But Yum's move is revelatory in a couple of key ways.
For one, consider that the Yum empire includes Pizza Hut, which already has significant delivery infrastructure of its own. If the restaurant behemoth already has such capabilities, then why is it seeking outside help?
Some of it is cold, hard economics. The average check at a Taco Bell is pretty tiny, notes Bloomberg Intelligence restaurant-industry analyst Jennifer Bartashus. It's thus harder to justify the expense of building in-house delivery capabilities for that chain than for Pizza Hut, which regularly delivers stacks of pizzas for office parties and the like.
But it also tells us something less obvious. Yum is essentially acknowledging that, to build an audience for KFC and Taco Bell delivery, it needs access to GrubHub's fast-growing customer base, which included 14.5 million active diners in the latest fiscal year.
It's What's For Dinner GrubHub has seen explosive growth in "active diners," the number of unique diner accounts from which an order has been placed in the past year
Source: Company reports
If even an experienced delivery provider like Yum needs help with this, then you can bet almost every other restaurant chain will, too.
And that highlights how much GrubHub and others of its ilk — Uber Eats, DoorDash, Caviar — are becoming powerful gatekeepers in the dining industry. Restaurants should not underestimate what a paradigm shift this is for them. In these digital marketplaces, the primary customer allegiance will be to the app, not to the individual restaurant.
That means restaurants will have to think hard about how to market and merchandise their offerings in what will essentially be a fiercely competitive digital food hall.
In some ways, this is not so different than the jockeying these brands do every day among themselves at the mall food court. But the winners will be decided in different ways: It's going to be about who has the most delicious-looking photos of their dishes in the app. It's going to be about how frustration-free it is to tap out the list of dipping sauces you want for your bucket of fried chicken.
Yum's move also suggests restaurants will be more likely to commit to one delivery partner, rather than scrambling to launch a bunch of non-committal pilots with several of them. McDonald's Corp., for example, has already hitched its U.S. delivery efforts to a partnership with Uber Eats. And as smaller chains contemplate signing up with these services, their decisions might be influenced by which other chains are already using the same provider.
Their choices will narrow as the category consolidates. GrubHub has been on an acquisition tear of late, and Yum's $200 million investment will help it devour even more regional competitors, notes BI analyst Sean Handrahan.
Meanwhile, Uber Eats is becoming a real threat, Handrahan says, largely thanks to the sheer size of its driver network, which lets it get orders to customers especially quickly.
A Force To Be Reckoned With Bloomberg Intelligence estimates that GrubHub had a commanding market share of online food-delivery sales last year, with Uber Eats coming on strong
Source: News Sources, Company Filings, Bloomberg Intelligence Analysis
*GrubHub agreed to acquire Eat24 in August
And so it seems the delivery race is boiling down to a battle royale between GrubHub and Uber Eats, with Amazon.com Inc. lurking in the background as a potential spoiler. The online shopping giant has experimented a bit with restaurant delivery, and its announcement this week that it would offer two-hour delivery on Whole Foods Market grocery orders in some cities hints at what it could do in the restaurant category.
Why does this consolidation matter for restaurant chains? In some ways, it makes their lives easier, because they can focus on making their relationship with one platform really great instead of trying to do business with a slew of them.
In other ways, though, it could make their situation harder. Less competition among delivery providers could make it easier for those players to demand bigger commissions from restaurants.
No matter what, though, demand for dinner at our doorsteps is rising. Yum was smart to get serious about girding for it.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners. GLOBALES: GrubHub, Uber Eats Will Be the Food Delivery Gatekeepers
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