A number of struggling restaurants have cited delivery as part of their turnaround plans, and in this segment from Industry Focus: Consumer Goods, the team debates the potential of this service.
While chains like Panera Bread have had success with delivery, the challenges it poses for competing restaurants will be tough to overcome. But across the industry, it may be the delivery platform itself that will benefit most from this growing trend.
A full transcript follows the video.
This podcast was recorded on Feb. 24, 2017.
Vincent Shen: I just wanted to talk a little bit about an idea that you presented to me that I thought was funny, that's the idea that a lot of companies in retail right now see delivery as their next savior, their next pathway to growth.
Daniel Kline: Restaurants specifically, right?
Shen: Yeah, specifically with restaurants. So, I was looking through options right now, because it's still earlier on in this trend, and there's a ton of competition. You have GrubHub (GRUB +0.00%), publicly traded, probably the leading player, very much a nationwide presence. But then, you also have things like Uber Eats, Yelp, Eat24, DoorDash, Postmates, and even Amazon Prime is throwing its weight in to Prime members.
Kline: Sure, and in my market where I live, there's a company called Delivery Dudes, there's another start-up called Cravy. The problem with this is, they're competing for a limited piece of the pie. We have talked about this on the show before. The reason pizza delivery or Chinese food delivery works is because soggy pizza is still awesome. Kung pao chicken or General Tso's chicken or whatever it is you get from the Chinese place, throw it in the microwave and it's still pretty good. But one of the ones we joked about earlier is Bloomin' Brands, which is Outback Steakhouse, Carrabba's, Bonefish Grill. They are talking about delivery, whether it'd be their own or a third party, being a big driver, their number two potential driver of sales, beyond just improving their regular business.
And I look at this and say, "Do you want a 35 minute old steak and some broccoli and a baked potato? How is that going to reheat? How is your fish from Bonefish Grill going to be when you have to throw it in the microwave?" Not every food works this way. So I see delivery, if you are Panera Bread, and I could order 30 bagels and some sandwiches and those big things of coffee for the office, I see some logic in that. But Panera Bread -- we just talked about this, they charge $6 for delivery when they're across the street. It's because they don't want to bring you and I a cookie when we finish the show. They want us to order enough that $6 isn't a relevant number to the cost of the order. So all these restaurants that are building around delivery, unless they can change the technology so that the fries show up and I don't have to put them in the oven for 20 minutes because they're soggy, and my steak isn't dried out or whatever it is -- most food does not travel well. And that's why we go to restaurants. That's why you buy, if you buy a ready to cook meal, it's only 75% done and you have to finish it. So, this is one of those fake holy grails, it's like 3D television and augmented reality and things that seem like they're huge markets --
Shen: But have not proven out yet.
Kline: They're niches, they're novelties. From a technology point of view, there might be a day where I can get a plate from Outback Steakhouse, press a button and it's hot and it's just like I ordered it there. But the reality is, if I get takeout from there, if I go and pick it up sometimes, and it is so much worse than if you eat at that already kind of mediocre restaurant.
Shen: Okay, so takeaway here, if you're an investor and you're reading through management comments from an earnings call, and you see a specific restaurant mention, "Delivery is going to be our next major pathway to growth, or a big area to focus on, a huge opportunity," maybe take that with a few extra grains of salt.
Kline: Well, you have to look at their food. Starbucks and Dunkin Donuts and Panera have cater-able food. Subway even has caterable food. So, yeah, if it's a sandwich place, if it's a pizza brand that wasn't doing a lot of delivery. I mean, it wasn't that long ago that Pizza Hut didn't significantly deliver. So, if it's a brand like that, yeah. But if it's a sit-down, semi-casual family restaurant, or even more upscale, and they're talking about delivery --
Shen: It becomes much more challenging.
Kline: Yeah. And if it's a third party and there's little integration cost, and they say, "This could be a cherry on our sundae," great. But if they're saying, like Bloomin' Brands is, "We're going to invest heavily in this, and it's going to be our number two growth area," that sets off a lot of warning bells to me.
Shen: Yeah. I will say, in terms of an investor approach to this, you have GrubHub, they're probably the leading name in this space with that national presence. I was impressed to see that they have 50,000 restaurant partners, over 1,000 cities represented through their service. Here, this is a case where you are investing in their business model. They are facilitating the transaction between the customer and the restaurant through a platform. They're not worried about making the food or things along those lines. So that seems like a much more stable model. And in the past year, their stock has recovered quite a bit from the lows of early 2016.
Kline: I do see GrubHub working. We talked about this -- in the 80s and 90s, most towns got the phone versions where you could literally call and place an order. You got a big menu as part of your phone book, or as a big mailing, and you could order and they would get your order from maybe more than one local restaurant, and it would take two hours for your food to show up. That was a novelty. It was difficult to do. Who wants to call and place an order? Now that it's digital and I can go on to GrubHub and say, "Order what I ordered last time from the sushi place --"
Shen: And you have the optionality of all these different restaurant partners.
Kline: I used GrubHub when I lived in Connecticut and it was harder to get to food three or four times a week. It was a very useful tool. And I see that market growing. But I also see a huge shakeout. There's no need for local services, GrubHub, Yelp, Uber Eats. Now, some of these, like Uber Eats, if it's a tack-on to something else that they're doing, there might be some business logic behind it. But I don't see any of these local people surviving, because there's no scale, and there's no real reason to use a localized provider when they don't have significant exclusives. They might have one restaurant that GrubHub doesn't have, and GrubHub might have seven that they don't have. So, this is going to be a place where the giants win, and GrubHub is leading that pack right now.
Shen: Sure. And I think I'll end with the idea that, as you have big entities like Uber and Amazon jump into this, that will be something to watch with GrubHub, with this company, they're going to have to invest a lot more, spend more to keep up and make sure they're leading the pack in that sense. So it'll be interesting to watch.
Kline: And I could see them buying or even taking some ideas, like, Delivery Dudes, one of the local players near me, I'm not sure how regional or big they are, they have their own pantry. If I'm ordering, and maybe I'm getting Chinese food, but I realize I need a 2-liter of Coke and the Chinese place carries Pepsi and I want a Milky Way and if you other things, you can fill in from their house supply, you can order milk and some other things you might need. So you might see GrubHub borrow some of those ideas. If they're already driving to your house and they can also bring your printer paper, well, there might be some benefit to that, and some ways to expand upon what they do, because they already have the delivery cost. But other than that, I don't see anybody except Yelp and Uber and GrubHub, maybe Amazon, having a big play at this.
Shen: Yeah. And I'll also note, for GrubHub, they have already taken a pretty acquisitive model. They have taken over Seamless. Their portfolio also includes Restaurants on the Run, Dining In, Delivered Dish, so we'll see what happens with that company.
