Q3 2019 Earnings Call
Press release and shareholder letter had been attached as exhibits to our current report on form 8-K filed with the SEC and are posted on the Investor Relations section of our website.
I'd like to take this opportunity to remind you that during this call. We will make forward looking statements, including guidance as to our future performance. These forward looking statements are meeting our alliance on the Safe Harbor provisions of the Securities and Exchange Act among 34 as amended and are subject to substantial risks and uncertainties that may cause actual results to differ materially from those in.
These forward looking statements for additional information concerning factors that could affect our financial results or cause actual results to differ materially. Please refer to the cautionary statements included in our filings with the SEC, including a risk factor section of our annual report on Form 10-K for the fiscal year ended December 30, Onest 2018 filed with the SEC.
February 28, 2090, and our quarterly report on Form 10-Q for the quarter ended September Thirtyth 2019, LD filed with the SEC. Our SEC filings are available electronically on our investors web site at investors that Grubhub Dot com, where the Edgar portion of the Fccs website at Www Dot FCC Dot Gov.
Also I'd like to remind you that during the course of this call we will discuss non-GAAP financial measures and talking about our performance reconciliations to the most directly comparable GAAP financial measures are provided in the tables in the press release.
Finally, as a reminder, all of our key business metrics exclude transactions like level up into Pinto regret not only provides technology or fulfillment services and now we'd like to open the call up for questions operator.
And before we go to questions I'd like to turn the call over to map Maloney founder and CEO go ahead. Please sir.
Thank you sort of say.
Couple of things thanks for everyone for digesting the letter that we sent out last night.
We switched up the method of communication because I think the story was.
Very complex.
And we wanted to get it out clearly and as simply as possible I think we did a.
Great job of outlining the.
The issues that the industry faces and how we're looking to address those through our strategy to the past 12 15 hours, we feel that a lot of calls inbounds.
Theres a few a few items that I just want to clarify before we get into the Q name because I think it can be helpful. Now the first as there was some.
Misunderstanding, whether this was an evaluation of Grubhubs.
Situation, specifically or if it was industry. Thus we have more experience in this industry than anyone else. This is a.
Explicit overview of.
The entire industry in every team that is executing in this space.
Needs to address their strategy in light of the facts that we outlined.
In the in the ladder.
Yes.
The overall growth rate.
Just wanted to be clear is where where we think it is right now is theres not going to be.
Artificial accelerants from any of the supply side innovation that was outlined and I think we all need to.
Yes.
Dress that as its an industry wide behavior. The second is there was some confusion around the.
Promiscuity of cohorts in around the older cohorts versus the new recovers.
To be clear, a very small fraction of our diners.
As other platforms in general and the newer diners use multiple with a much greater degree of frequency.
The the older cars are definitely more stable, but we think that small parts of those cohorts are testing the waters at different points and Thats why closing the restaurant gap is so important.
Thanks to the point of this strategy is that we're taking our profitability and reinvesting it back in the business as aggressively and competitively as we can and we would not do that if we thought the fundamental.
Profits of the business we are at risk.
There was a point in the call last night when.
Somebody brought up the analogy that we have the biggest weapon that as reloaded every single day, and we will never have to bag for ammunition, and I think thats a pretty appropriate in this case.
I wanted to address those two things before we got another rest acuity, but I'm happy to turn it back to the operator for questions now thanks.
With that I'd like to advise everyone in order to ask a question. Please press star followed by the number one on your telephone keypad he'd like to withdraw your question press the pound key thank you.
Refer everyone to have a chance we do asset you limit yourself to one question. If you have an additional question we invite you to rejoin the queue.
That your first question comes from the line of Ralph Schackart with William Blair Go ahead. Please your line is open.
Good morning, Matt Thanks for the initial comments and for all the good detail on the shareholder letter last night.
Maybe if you just give a little bit more color ensure perspective on what's working with Grubhubs current strategy and as you see at what's needed what the new strategy and the gaps you sort of talked about in the latter also maybe share some perspective on what led you to side. This is the right time for Grubhubs and best in a specific areas and then just a quick follow on how much.
In the strategy shift do you view as offensive versus defensive in nature. Thank you.
Yeah, Rob.
Great question.
So let me, let me start out by saying.
The only thing that matters now is diner site differentiation.
We're not seeing any the acceleration from the supply side innovations there three scale that national players and so our initiatives are focused on creating the most compelling platform for diners. So they don't need to look anywhere else for what they want.
If you think about.
The industry historically third party delivery unlocked new pockets of growth over the past few years.
With all the major players at least expanded across the whole U.S. delivery coverages has now been Commoditized and we've we've said stuff like this before we all have roughly the same algorithms save DRAM same driver interactions. The same etiologies five minute difference in delivery time is negligible for for diners effectively delivery as a function is.
It is commoditized and now with non partnered restaurant inventory, becoming more prevalent supply side as you need to be commoditized as well. So I mean first and foremost foremost we need to clearly close this restaurant gap.
And we're already on our way we're scaling aggressively we have tens of thousands of non partnered restaurants already listed we've been piloting for a while we've already made the call to scale. This out we're just now getting it right now.
This is one of the two letters or areas that we highlighted in the letter where we need to improve our consumer value proposition I would say this this part is the more defensive side.
As diners are starting to sample multiple platforms.
We want to make sure that Theres no reason for down into slipped back to a previous platform once weve.
Effectively stolen that diner from a competitor.
So for restaurant inventory start there we plan to expand our Unpartnered restaurant inventory and grow our sales staff to add more partners restaurant inventory.
We've tested as.
Caught place in pay.
In the past we've shared with you before it's a bad experience for diners.
It's about experience for drivers, it's about experienced restaurants, but our peers have shown real growth and not profits, but they've shown growth using a tactic and we think theres a benefit to having a larger restaurant network.
From finding new diners and not giving again diners any reason to go elsewhere. So it's more expensive for the diner.
Because the restaurant isn't paying and there are higher fulfillment care costs, and we don't make a lot of money on these orders since the nine or pays for freight and Theres definitely a mixing cost associated with these orders. In addition to the initial startup costs.
And because of all that we plan to increase our restaurant sales staff aggressively we still firmly believe that partnering with restaurants is that right path forward in this industry.
So we plan to bring a lot more employees on help get restaurants across the country sign up for marketplace immediately when we start to see.
Success in the in the place and pay.
So with that backdrop, the commoditization of that the delivery and the restaurant supply, which I think has happened more.
Happened faster than I think we thought it would happen.
So with that as a backdrop the winner in this space clearly has to have a differentiated experience for diners.
We believe we have two core advantages in the space and this is where the often starts to come in.
First we have a huge advantage of pricing we have the largest partnered independent restaurant network available.
This independent restaurant network supports 80% of our order volume now as we go into 2020 will have over 100000.
SMB independent restaurants on our platform.
And it's a network has taken us two decades to bill.
So with the significant scale in these independents, who are willing to pay for demand generation.
The key.
We can offer the lowest price as the consumers because we don't have to seek profit and aggressive consumer fees.
Many of you have done pricing surveys and consistently supported that we have lowest prices and it's extremely difficult to offer our pricing of the majority of our volume came from the largest enterprise brands.
As the only pass for delivery and they don't need as for demand generation.
The first we have a core pricing advantage and second.
Were immediately increasing our already aggressive investment in a restaurant loyalty programs.
For the Perks program as we talked a lot about last earnings call is already very exciting over 20% of our diners are redeeming loyalty rewards right now.
Restaurants have given away over $70 million. So far this year on our platform to diners and restaurants have seen that free food increases their competitiveness on our platform, which is rewarded by accelerated growth for them.
So we'll be spending a lot of money in the next 12 months priming the pump for restaurant loyalty programs to show them. The immediate ROI to generate that long term investment from restaurant groups on our platform.
We think that loyalty can be a unique differentiator a unique long term differentiator.
Because of our level of infrastructure.
Level off has been evolving restaurant loyalty tools for years now.
We also share our customer data with our closest partners.
To help them build an asset overtime and we have our in house Pos integrations.
And the in house Pos in integrations.
They allow us an unprecedented level of flexibility and sophistication to build and manage the business rules for loyalty programs. We have real time access to inventory real time access to prices and so our loyalty programs will always be better than anyone else's loyalty programs, who go through a third party integrator for Pos integration.
Yeah.
We know that diner loyalty programs drive growth for restaurants.
We've seen this for independent and enterprise partners and we know that restaurants are willing to fund these rewards over the long term as long as they show positive ROI.
We also know that our competitions diners, they're placing more and more orders in our platform. So we want to retain as many of these diners as possible.
Our goal is to build extremely engaging experiences for diners that reward usage with economic and emotional incentives.
We've seen in the data that we're able to steal share.
Diners are sampling across platforms, especially in the newer markets that we've we've entered in the last year, we want to capitalize on each of those opportunities we want to make sure that the diners when they sample our platform see all the restaurants, they want to order from and see as much economic incentive in terms of lower base.
Price as well as loyalty rewards to be as sticky as possible.
In order to emulate our pricing advantage, our competitors will have to dramatically expands their independent partnerships, which they are trying right now, but this takes a lot of time and it's very difficult.
In order to emulate our loyalty advantage.
The competition will have to give away a tremendous amount of money.
Which is a very challenging problem when they're each losing over $1 billion a year.
And things to we work recently, there's a lot of pressure to achieve profitability. So when you're asking me about the timing, there's definitely a timing element to this.
Everyone knows that there is extreme pressure on profits right now.
And so this is the time that we should be leveraging our advantages.
To create a differentiation that to replicate will be extraordinarily expensive, especially to our competitors bottom line.
And the longer term, where at least two years ahead of the industry in terms of our loyalty technology and tools.
And.
I think that we have a long runway to execute on this strategy very effectively.
Great Thanks for electrical and.
[noise]. Your next question comes from the line of Tom Champion with Cowen.
Go ahead. Please your line is open.
Okay. Thanks very much.
Good morning, guys can you provide any more granularity around the order trends that emerged in.
Yes, the letter talks about this today continue to deteriorate or.
You know has this sort of stabilized and.
Can you just talk you discussed it a little bit but can you just describe why this is.
In an industry wide phenomenon or or if it's more specific rob. Thank you.
Yeah, I'll talk about the Hey, Tom It's Adam I'll jump on the order trends and I'll, let a I'm not talking about the industry.
Comments, but the it turns or the in terms of the trends that we saw I think yeah. We tried to lay it out fairly clearly in the letter you know we noticed in in August that growth had deviated.
Noticeably from where we thought it was going to be and it has caused us to take a closer look at the causes.
And you see kind of the results in the letter, which is we saw that the newer cohorts in our newest markets as Matt said were.
Not maturing at the same level of frequency as as we had expected or we would have forecasted based on prior cohorts behavior and when we dug in further we noticed that a lot of those diners, we're coming to us.
Already customers of other platforms and yeah, I am so by nature.
You know some of them would be ordering on multiple platforms forever. Some the may stay with crop up but the maturation frequencies was a little bit lower end it jumped out.
In August when we looked in data in terms of stabilization I think.
You know the comments I'll give there is you know we're a third of the way into the fourth quarter and obviously.
Our our month or quarter to day performance is baked into our guidance and what I'd say there in terms of order growth.
It's we're currently viewing it as slightly lower than the third quarter, but not not another leg down and you.
You know most of that's just from having three full months of weaker order behavior versus the two that we had in the third quarter.
So hopefully that's helpful.
Yeah, and Tom in terms of industry versus Grubb <unk>. There's a few data points that were triangulating to make that that statement in the first is.
The third party data and I've I've railed against the accuracy of many times, but if you if you look at it and all of the data shows everyone.
Downturn and consecutively.
It is definitely something.
In that data the second thing is it's structural.
I think we did a really good job of evaluating the historical growth patterns in the industry, we look at our growth prior to that but what we label to supply site innovations.
You could see that that.
Fine nature consumers in this offline to online transition.
They do not run in mass to the online platform. It is slow and steady long term growth has been a hallmark of this industry.
Until 2017, when you saw the first innovation.
And then 2018 when you saw the second.
And.
Expectations that the industry would would maintain at that growth rate I think were or.
Exaggerated.
Now we're back down to a place where all the competitors are effectively in all of the markets with commoditized delivery as well as supply.
There's not an obvious way that anyone has an edge.
Outside of the strategy where outlining here.
And so we are all going to be held within the aggregate growth rate of the industry of whatever that ends up being.
A third point that we're looking at is.
All of this came about because we realize we were stealing share and markets, we were not expecting to steal share.
So it's kind of a surprise to us as well.
Ah interesting opportunity is how we're looking at it right now we had the incumbent mindset.
Concerned about where we were going to be losing share and here. We are in our most aggressive markets, where we told all of you guys a year ago, we were going to.
Growth.
As fast as we could here, we are stealing share and thus the share that we were stealing was less valuable than we expected it to be but that's because these weren't fresh clean brand new cohorts. These were Dolan diners, who had a history of ordering on other platforms and we didnt have the same restaurant network in many of these communities there.
We are expected to and so the fact that they're performing a little bit less I think is.
Pretty pretty a logical.
We have to we have to fix that because we hope to see those cohorts performed at or above what we were hoping.
And then finally.
Many of our competitors are private companies that are raising money right now and so we're talking to the same investors.
That they are and we are hearing their stories that.
They are not growing as fast by any stretch and so there's a lot of dancing around that fact.
And I think there's a lot of.
Its investments you'd expect if you're trying to hide the fact that your fundamental acceleration is gone.
Around international investments or acquisitions that I think.
Our just trying to.
Avoid the reality.
Of what we outlined the shareholder letter. So we chose the fact to be straightforward and transparent.
Exactly what we're seeing and address that reality in our strategy and discuss that with all of you know.
Appreciate the comments thank you.
Your next question comes from the line of Ron Josey with JMP go ahead. Please your line is open.
Great. Thanks for taking the question and appreciate the commentary I wanted to drill down a little bit more on just the lowered fourq you got in specifically and just trying to understand the delta there may be different stream demand softness that potentially you're seeing or or maybe on the revenue side, just the ramping contra revenue.
That that led to that sort of decline in guidance for Fourq revenue any bridge there would be helpful.
And then to that end talking about overall rationalization and just the 100 million in EBITDA or at least 100 million next year into 2020 can you just talked to us about where these costs might be coming from understood restaurant sales, but anything on the tech side and I ask only because you talk about the $2 per order, assuming everything would be steady state or you focus on cash flow. So.
So if you take that $2 then you get to 100, it's it's a meaningful amount of investment. So any revenue bridge would be helpful. And then and insights on where you're investing actually would be great. Thank you guys.
Yeah. Thanks, Ron So in terms of the fourth quarter I'm glad you asked a follow up there. So obviously you know I just had some comments about the growth rate in the fourth quarter, but the Eagle bulk EBITDA on revenue, we were taking down about $60 million and what I'd say there is you know rough a kind of rough brackets about how.
For that is due to the is due to volume and a half of that is gonna be on the revenue side is going to be due to a revenue per order as you said Contra revenue I do you want to highlight you know dig into that a little bit deeper because it's not a you know what we're not doing is ramping up on promotions. What we're doing is the are the things.
That we outlined in the latter you know one is supporting kind of these free delivery I campaigns with some of the larger enterprise brands, Mcdonald's KFC and Taco Bell Panera you know we found that these are really good ways to cede a you don't get our diners to.
You know first get the awareness that those that those enterprises on our platform helps attract new diners helps retained diners et cetera, a and then.
We're also using pricing levers to work on Matt talked about differentiation in the platform. So loyalty I'm working on new dire conversion and testing into kind of optimal pricing for <unk> nine partnered the loyalty programs et cetera.
And so when you look at that that's $60 million that we took down on the revenue side. That's that's that's how it breaks down [noise].
But the from a growth perspective, we're you know we're not anticipating another big step down at this point from Dag growth.
What you're looking at.
2020.
Oh I think that you know the first thing the first thing you have to realize as we we're not giving 2020 guidance right now I think the purpose of putting that number out there was to say you know it's kind of underlying you know we we firmly believe we will be generating significant profit next year.
While we're investing and our platform gives us the ability to do this and lean in on these opportunities.
And so that's not formal guidance, but if you want to think about in broad strokes. A you know we can do it from that I'll do it from the $2 [laughter] in order you can think about a more broadly from from the Street you know the two dollar numbers really saying Hey. This is if we're managing the business to a lower vice.
All you and trying to extract as much cash flow as possible.
And you know and to your point.
You know, there's a you know theres a lot of investment of widen their but.
You know, we're operating the business as though.
We are supporting a much higher growth rate right, if we wanted to get to $2.
I'll do it both ways, if we wanted to get to $2 and order. What we would do is take down our advertising by a bunch and then take a bunch of costs out of overhead.
And Hey, you know instead of investing behind initiatives. If you wanted to with the other way, which is kind of think about where the street was versus where you know versus that hundred million.
I think that's probably a little easier to to think about you know for obviously that three you know the street numbers not our number but in broad strokes, what I would say is about half of that as volume related based on current trends.
And then half of that is a investing behind these initiatives.
And so.
You know at the end at the end today. The reality is you know we are investing right all of that right. You know if we're keeping a business at the same size at a lower volume you know the implication is that we're investing so we're investing a lot more than the explicit amounts that were putting into these initiatives but.
But you know for all the reasons, Matt outlined we have a lot of confidence that it's going to drive long term growth and put us in a better spot you know in the long term I do want to you know the last thing there is what we're thinking about the spend behind the initiatives and I gave you some real.
You know some real high level brackets as to what that what we think that spend is going to be you know we got to remember that that's all discretionary right. So we have the ability to you know ratchet that down if it's you know, it's not working or a move out of it over time and so it's not you know.
It's not the same as like let's say when we launched delivery in 2015, and we had all of this expense out there and it would have been hard to unravel.
A lot of this is testing pricing levers I'm trying to accelerate a restaurant sign ups and things that we had a lot of control of so.
I hope that help give a little bit more color to both the you know the Fourq you guide.
You know in broad strokes for the fourth quarter.
Roughly half of a half of that decline is the is the initiatives and so for both Fourq you in 2020, it's about 50 50 in terms of the volume decline and then the than the initiatives.
That's helpful. Thank you.
Your next question comes from the line of Brian Nowak with Morgan Stanley Go ahead. Please your line is open.
Thanks for taking my questions guys have I have two please.
So the the first one just on the the comment about the low double digit growth rate in a way to think about the industry.
I guess, there's no Theres third party data out, we're probably going to hear from another food delivery company pretty soon over the course of the earning season homemade refute that so I guess I'd be curious sort of here what what mathematical analyses are what gives you confidence that it's actually the industry, that's slowing low double digits and not a.
The growth specific problem.
And then the second one and again the letter you say the common fallacy in the business, then avalanche of volume food or otherwise going to drive logistics costs down.
I guess you know in your previous slides you laid out how self delivery in the marketplace can sort of get to the roughly the same profit per order.
What changes now that you think the previous analyses were encouraged because you think about the long term profitability of delivery and what is the right way to think about long term profitability of a delivery order now thanks.
HM.
Hey, Brian Let me I mean, just your first point and then maybe give a quick pass at the second and then Adam can follow up.
Specifics on what you're asking about.
I mean, the industry wide versus grub specific I kind of just answered that question. When you. When you look at the third party data available when all that data is pointing in the same direction. It's hard to argue that it's completely wrong.
Secondly.
Looking.
At the other food at that is going to be talking about this and potentially refuting. It I you know.
Their innovation as outlined in our paper as well and it justifies their significant growth at a point in time and I don't think we have seen that growth rate.
Consistently executed on since then.
So I I think that if you look at.
The fact pattern of the past few years. It it supports the analysis that we put forward last night.
And.
We're stealing share.
In specific markets.
So we're looking at markets.
Were you know for example.
Only one competitor, we're launching in that market successfully.
Both on a logistics.
And and an advertising diner perspective, we're evaluating those diners and seeing that we are attracting consumers that have consistently ordered on other platforms. So even in these smaller.
Very new markets, we're seeing were budding up head to head against the competition.
So I don't think there's there's a question of if this is just us orthos as industry wide I.
I guess only time will tell but I.
I think that our argument is concise an accurate.
The fallacy around.
A lot of.
Activity will make your delivery network more efficient.
And that we put that in there because we're hearing a lot of noise around.
Oh corner store delivery.
Walmart delivery.
Various exercises that your delivery.
Team can connect execute on and the justification that there is kind of this.
Ask them Tata decline of in incremental expense to zero.
And that's just not true.
So.
We kind of laid it out in and clear terms it takes about a half an hour.
To do something to go pick something up to take it somewhere in the dropping off.
Clearly, there's bundling opportunity, which we've talked about before and everyone's trying to crack that code.
But you're not going to get to a place where it costs a dollar to deliver something even if you.
Deliver everything that needs to be delivered across entire country <unk>.
I think we were just poking a hole.
And that that thought bubble around hey, we're going to really make our icees extremely busy and we're going to see the incremental costs go to zero and this is gonna be full on profit I think there's a lot of.
Bogus arguments floating around.
Our industry, when you're trying to justify incremental jolts of capital and so we're just trying to pop those fallacies when we see them.
Hey, Brian It just a follow up real quick it you know in terms of the industry going to a low double digit growth you know our comment is that it's going there may not be there next month for the month after but it's trending there quickly you know I mean, your how the you know how growth rates work, where you're just have this pent up a mountain you know your your comp.
During different periods and things like that but that growth is that from our perspective and the data that we're looking at the growth is slowing quickly and we think that long term. This industry can support low double digit growth. There is a lotta opportunity left but it's you know as Matt said you know there's not a lot of pop you know magic tricks, where you can.
Just throw 100000, new restaurants on the platform and give the give delivery or give options to people that don't have it before and so it's going to be a you know ground battle, where we're competing on as Matt said on diner differentiation.
You know a in just a couple bucks or thoughts on the on the on the cost of delivery. I think you know those comments were meant to not to calendar or what we what we've said historically on delivery, which we still believe is absolutely true where for an SMB, where we're sharing the cost of delivery.
We can deliver the food I economically at a price that's reasonable to a diner I think it's meant to underscore some of the challenges of of working on the extremes of the model, where you're working with you know for example, a QSR even if your partnered with the QSR I think we've talked about this before that if the O V is lower.
Or a and the tip is lower.
And the amount that you're getting paid is lower it's a lot more challenging to make the economics work and so you have to pass that on the diner and just by adding a ton more volume of QSR as you're not going to be able to drive that price down or the cost to grubhub down dramatically and that that equation is even more dramatic when you think about QSR a non partner relationship.
Where we are bearing 100% into cost.
Got it okay. Thanks, guys.
Your next question comes from the line of Brad Erickson with Needham Go ahead. Please your line is open.
Thanks, guys just two for me one.
Given that you mentioned, you're not making as much money or with the larger QSR is versus independent SMB restaurants can can you explain the rationale just I guess around the investment you talk about with some of those larger delivery partners I guess it seemed like those initiatives are leading you're right back to sort of the same lower LTV diners, which have emerged than these newer cohorts.
Still just need some help understanding a strategy in light of meeting to remedy what appears to be I guess, a marginal marginally lower diner LTV.
Second.
On signing up restaurants, where you're not contracted with just what have you seen in terms of new diner acquisition, and where you started doing that or what do you expect out of that just curious if it's as simple as just jump starting your koremans marketing conversion and subscale markets or what are your expectations for that that new arrangement. Thanks.
Hey, Brad I'll talk about the QSR so.
Yeah, 80% of our volume is currently going through the SMB is it's definitely a higher margin the restaurants are paying us for the demand generation it makes them on work.
The challenge around QSR as it's what a lot of the consumers want and so it's.
I would almost say it's impossible to win the category without QSR.
And we've seen over the past few years, especially in the non partnered models when they list. The QSR is on a non partnered basis. They have a tremendous jumpstart in their their funnel and their new diner marketing.
So I wouldn't.
I wouldn't think about it in terms of.
Lower LTV cohorts of consumers I think about is definitely we're not getting paid for demand Gen demands in is where we make our profits.
Hopefully, we're getting paid for delivery, but it makes our marketing more effective and so you're creating a funnel and this is what we saw with the the young markets over the past 18 months is you have a market that we're completely not executing it and so we drop a taco bell a KFC a few cornerstones from.
The young network in there and then we pepper a bunch of smbs around that and that creates the initial marketplace for us.
And what we've seen is the consumers it begin ordering from Taco Bell because taco bells doing their advertising there during their in store, they're promoting their channels on grubhub.
You have the consumers are introduced to grab.
The the brands that they know and love and then they start to broaden and they order from more and more Smbs. In fact, we we've seen a lot of diversification of ordering from consumers, especially in these early young markets, where you know that was kind of our bet that the diners or come to the platform from the QSR relationship and then they would do.
Diversify and start to order from more of the SMB that within justify the actual marketplace and we are seeing just that so I wouldn't say, we're getting lowered LTV cohorts I wouldn't say that the QSR as.
Our one of the reasons that we're seeing a the cohorts not perform where we thought they would I would say that the QSR, they're definitely doing their job in attracting consumers to our platform.
And it's our job to then channel that demand to the to the Smbs to make a higher margin on on those consumers.
In terms of the answers the non partnered as Matt mentioned, we've we've rolled out a bunch of a them and a few markets and Ah you know it to your point.
And to our strategy and the way to use them. You know, we think that they do help us a acquire new diner. So if a diners looking online for specific restaurants, a you know they can find us and SCM moresco now as it as a non partnered restaurants, whereas before they couldn't and so.
We do find that the percentage of diners that are ordering from the non partnered that our new diners to Grubhub is is higher than the a percentage of new diners that order from a typical grubhub partnered restaurant I I will say that you know weve underlined this.
A bunch in and we've seen it in practice, so far which is the you know the prices that we have to charge the diner, because theyre, they're basically bearing full freight.
For the cost of the delivery on the non partner.
Are so high that de conversion on those orders or is it fair amount lower and so you know, even though we're adding tens of thousands of restaurants.
You know I think we said, we're going to we're likely to double our restaurants supply over the next year.
You know, we don't expect the numbers of orders to be similar at all to due to the parted restaurants and I think it's our job over time too.
Meet those restaurants turn those restaurants into partnered restaurants and drive the cost down. So we can drive more volume more conversion, but addington, adding them to the platform does help US you know in this in a similar way that matches walk you through a with QSR as helps us to track or some new diners and.
Also you know if we have a diner.
As a a you know a very loyal diner and dies looking for specific restaurant at least gives them the option to order from that restaurant.
So we're seeing those things play out so far but its you know it is early.
That's great. Thanks.
Your next question comes from the line of Aaron Kessler with Raymond James Go ahead. Please your line is open.
Yeah, Let me just a couple of questions made as quickly back to the industry growth. If there is some third party data for September it's just about 40% growth year over year, just want to see if your thoughts on that or anything growth was much lower than that in seconds on the loyalty plans that you talked about.
You're talking about me experimented with a few different types of loyalty plan should we expect I'd say a subscription plan that you would a fair amount with and then it shouldn't get your thoughts on service fees as well most of your competitors charge service fees.
If you guys tried to very nominal certainly it's a one dollar without could generate significant increase the.
EBITDA revenue for you as well it's made off that somebody's investments. Thank you.
Aaron Yep.
Again.
I I go I go back and forth on my.
My support of third party data I think it's fundamentally inaccurate because it sampled however, when you see all the signals.
Turning in the same direction, there's probably some colonel truth. There I think that you know one industry report, saying this 40% growth I I mean, I wouldn't be shocked I wouldn't be shocked if that was accurate I'm, just saying that it's coming down overtime.
I you we've had tremendous growth incredible growth in this industry over the past two years. So if you take all of the growth of all the players together that is the growth I'm, saying is coming down long term steady state, we're saying low double digits I don't think there's magic in that number we can't control it.
The higher the better but what we've seen in the past is that this is not an industry that flocks from offline to online.
I would say five years ago, we were all in on television we were all in on on every type of consumer awareness channel that we could think of.
And we weren't growing 100% per year. So there's just a fundamental friction to consumers going from offline to online the only thing that accelerates that trend as supply side innovations I don't see any supply said innovations on the horizon right now at least none that were not participating in to the to equal or more than our competition.
So I I would say whatever the industry rate is this year or next year, it's coming down over time, if you look at the total.
Loyalty <unk>, yes, there's going to be it doesn't make a ton of loyalty testing going on in the next year.
As Adam was saying earlier huge part of the.
The the EBITDA take down that we're talking about we don't have specifically allocated to programs, we have allocated to test I.
We know it works, we see in our current marketplace.
You know just salad extended their loyalty program from their branded channels into our marketplace and we saw share shift from other.
Healthy QSR concepts to there is especially when they ran a specific promotions to to drive loyalty rewards. It absolutely works. It makes restaurants more competitive on our platform like I said, we've given away universe restaurants, I'm, sorry, I have given away over $70 million on our platform. So far this year.
And it works so we're going to continue to reiterate around concepts that make restaurants more competitive on our platform to the benefit of consumers because we believe that the more.
Economic incentives, we can allocate to consumers the higher the stickiness will be.
Once we have once we close the gap on restaurants, they will be no reason for consumers to go elsewhere, because we will have all the restaurants and we will have the lowest pricing and we will have the highest economic incentives and emotional incentives for restaurants are for consumers to ordering or platform. So I'm not sure what forms that'll take a were death.
I'm going to be testing a subscription program. We we already have won a that we're playing around with I think someone asked about it in the last earnings call called deal pass its kind of a pay it forward type concept it's not.
It's not perfect, but we are on our way there I think when we when we launch things will be.
Transparent about them.
Because we'll be excited will be launching it when we see that it is effective.
Service fees.
So.
Here's the thing about service fees and we've done.
An incredible amount of a research on this.
It doesn't matter if the cost of consumer is strict delivery fee strict service fee or combination of both is the aggregate diner burden that they face that defines conversion.
So.
It does like.
Sub.
10 dollar diner burden, it's irrelevant, how you split it consumers are smart they figure that they see $6 here $4. There. It's still 10 Bucks once you exceeded $10 burden things get a little squarely, but you're also in very low conversion area, where it kind of doesn't matter that much.
So we're absolutely testing service fees were absolutely trying to figure out the way to maximize.
Conversion with a given diner burden and we have been four months whatever we have on our platform right. Now is what we believe the current best practices and that's justified by exhaustive AB testing.
That will change over time, we will continue to optimize we will continue to try to increase conversion for given cost constructs and I believe that overtime you will see all of our competition are doing.
The same thing, but the reality is.
It's very hard to trick a consumer to pay more than they they want to pay.
Great. Thanks for that if you pick up [noise].
Your next question comes from the line of Heath, Terry with Goldman Sachs. Go ahead. Please your line is open.
Great. Thanks, Matt just to the to follow up on that last part the part about it's very hard to can correct consumers to pay more than they then then they want to I mean <unk> it would seem just given.
We've now got sort of five years or so of this that.
Theres at least some evidence that.
I guess and whether or not you want to consider five years long term or short term that there's the there's at least some segment and maybe it's the.
Some other people some of the time part of it the segment that that it does work more or has worked for some of those competitors out there and I guess to some extent I guess the question is.
Is there a sense and you're buying that that you simply have to play along with this is long is that part is going to work for that segment of the audience and then.
Back to the discussion about what may or May may have happened in August specifically is there a sense that that focus on profitability that you seem to see coming from some of the privately funded competitors out there that are.
Ah that are maybe now a little bit more aware of the need to get the profitability is also driving that significant slowdown and the the broader market are you seeing a change in behavior around consumer subsidies driver subsidies that would have led to that sharp falloff and industry evolves.
I am just because consumers are reacting to that kind of pricing environment.
Sure to your first point.
I think that [noise].
Shell games around pricing they do make tiny differences is not that it doesn't work, but it's not going to move the needle I mean, you will see like a eight.
Fraction of a percent increase or decrease in conversion as you play around and I think it's it is more impactful.
For sure in the price insensitive segments. So you have consumers that.
You know they don't really care what it costs.
And they're just going to order it anyway, I think you've seen a lot of that over the past few years, especially in communities, where you didn't have the option to do any delivery historically and all of sudden you can have anything delivered and sure. It costs a lot, but like you can get a delivered and I think you've seen a lot of that.
As we.
As we equalize the the supply available and different platforms, I think you're going to see consumers make a different choice because they realize that.
You know we were we were actually laughing internally a couple of days ago, because mcdonalds is on multiple platforms and mcdonalds is a is it.
Oh really smart operation and they know the the demand triggers for the different prices are there other items and so they they held strict requirements around what the fee structure is for consumers, both menu price, which they define as well services, which they define as well.
And a weird poking around some competitor sites and we noticed you know a 599 big Mac meal available for like.
$10.70.
All in fees and who is ridiculous and it's completely outside of the rule set that a that mcdonalds is put forward, but that's the kind of sleight of hand, you're seeing in our and our marketplace and it's ridiculous.
So I I think that in.
The number one thing that matters to consumers as restaurants.
But I think though they're willing to pay more.
If they're able to get restaurants that they're only able to get from the expensive platform at once the restaurants have equalized.
They're not going to continue paying those fees. They are incredibly price sensitive as what we see over and over again in our tests like I said it doesn't matter if its delivery fee or service via a combination of both it doesn't matter. If you hide the fees or if you put them front and center.
On there on their ticket.
They understand what they're paying they're not going to pay two X the food and Bev and a delivery slash service fee in order to get delivered and less that's the only way they can get it delivered.
So the the amount of restaurants I think is paramount.
Then the then the price sensitivity kicks in.
And I I don't think that the tactics that have been used in this industry are sustainable once.
A solid competitor with.
All available in restaurants is an option.
Consumers.
And Heath on your question related to August and the and the competition I don't think we we've seen anything.
Any dramatic a sea change in spend it's possible that thats happening, but but we haven't seen it whether it's in.
You know on the diner acquisition side on the restaurant side or even the driver supply driver cost.
I'm sorry.
Side, what do you know I think one of the one thing that we haven't mentioned, which I think is worth mentioning it.
About our thoughts are related to the fourth quarter in 2020 of next year and this shift in strategy, we're operating under the assumption that behavior doesn't change.
And so when we talk about investing behind these initiatives and kind of you know our our you know our baseline expectation for next year. That's all assuming that the competitive environment continues to be or you know very engaged in a you know very complex.
And doesn't change so I if it does change you know, we think that Theres upside I I would actually you know if its competitors are spending less money I think it'll be easier for us to acquire and retained diners and drive frequency. So I think that would be a positive for us not they are not necessarily negative.
Your next question comes from the line of Jason Health Stein from Oppenheimer Go ahead. Please your line is open.
Hey, Thanks for taking my question.
And it's worth putting out because we're going to keep talking about this for a while Amazon just announced today that.
They're making grocery delivery service free for all prime members in the United States and I think theres still a whole lot of questions about how anyone makes money on grocery delivery, but.
Do you guys.
He discussed in the latter some of the reasons why consumers are going to competing platforms and steps you're going to take in the fourth quarter next year to make grab more compelling for diners I know you don't you're not giving guidance for next year, but can you help us bridge the financial impact between I think prior consensus for next year was like Threeforty your.
Saying EBITDA next year will be more than 100 at the low end. So maybe help us understand how much of this is revenue how much of expenses I think you said in the fourth quarter, it's half and half.
And then on the expense side.
I guess, you've made a decision to invest a lot of money.
Why not partner with other companies.
Who have some of the attributes you're looking for just kind of I think a lot of people think this is a pretty extreme decisions you've made and maybe talk about why you think so this was the necessary decisions. So two questions. Thank you.
Hey, Jason on the on the first question I try to answer that with Ron earlier, but the.
Obviously the street number three fourg is not our number but if you're thinking in broad strokes.
You know how to how to get from there to the hundred number that we gave you know again just step back on not on what the hundred is right. We wanted to we're not giving guidance right. Now we just wanted to underscore that we can make in aggressive strategy change to lean in because of the based.
Equity and talk about how we are still going to make a lot of money next year or even with these initiatives right. So the 100 numbers. Just a is just a you know a baseline to give you know to give you guys. An idea of how we're thinking about what this means for us in 2020 that said if you're to.
Trying to if you're trying to build a bridge what I'd say is a it's roughly half.
Lower volume and roughly half explicit spend on initiatives and obviously, a you know the lower volume you know reduction EBITDA. It implies investment and you know I taught we talked in the letter about how we could make a different decision retrench and make a.
Lot more money in which case, our infrastructure would probably be a lot smaller.
But instead were our plan is to grow into that infrastructure over time and lean in with the with the spend so it's about half and half I didn't really break it into revenue and expense, but at least that gives you an idea how to get from the from the street to the to the Hunter.
And Jason.
I I didn't I hadn't heard about Amazon's a this isn't about grocery, but I think they're seeing the same thing we are and that there is weakness in the private markets.
There is a push for profitability.
I think some of these companies are finally going to be held accountable for a lot of their their investments.
And we see an opportunity as the only profitable player in this space that has incredible Tam ahead of us.
So we're going to go after that with everything we have we're going to take the profitability like Adam said, we're still going to make a lot of money next year.
Not going to break even we're not losing money next year like our competitors, we're going to take a tremendous amount of our profit are going to channel right back into our industry to be as competitive as possible.
With the restaurant network, when we see the opportunity where we are stealing share from competitors and on top of that we're going to leverage our internal assets around loyalty programs that we've been building for years to try to make the platform as sticky as possible.
We're creating a scenario.
Were to replicate our consumer facing differentiation.
Competitors are going to have to spend eight incredible amount of money exactly at the time that their shareholders and boards are forcing them into more profitable investments.
So I think this is exactly the right time I don't I don't know, who we partner with two when our space. But this is this is our opportunity take share to win and to reestablish ourself as the leader and innovator in the space.
Hey, Jason just one last thought on the on the economics of why delivery economics are so are the logistics economics are so challenging in our space is the low Aone E. Right. There's just not a lot of room in the transaction, if you're talking about $30 and lower and we've always said that in order to drive the most demand in this business.
You know you want the ASV to be closer to 20, and it's it's just not going to go there if you have to charge the diner $10.
To pay for the cost of delivery. So that's a you know when you think about delivery in our business versus other businesses and also the you know the nature of it having to be you know on the minute on demand as opposed to a you know as opposed to a Ah you know a a group of hours makes it also significantly more challenging.
So as you're thinking about logistics related to food delivery or I'm on demand food delivery versus other industries I think theres a couple of unique factors that.
Make the this business, particularly complex.
And our final question comes from the line of Elliot all per with D.A. Davidson go ahead. Please your line is open.
Great. Thank you thought you're pushing into the sales efforts of converting non partnered restaurants to partner partnerships.
What are you planning on doing differently compared to how you for your products, we before and what are some of the reasons your thing restaurants that wouldn't want to create this new partner relationship.
Yeah.
That's a great question actually the difference between a non partner relationship on the platform an apartment relationship while at a restaurant choose to partner when they have a non partner option. It's because the diner experience sucks the volumes going to be way [laughter] entity as accurate [laughter].
[laughter] I've received [laughter].
There's no way to fix the issues its less accurate delivery time, they're not going to have promotion on our platform and we know this because conversion is way lower on the non partner and the other way higher so many people don't want to pay a 12% for delivery or service or whatever you're going to call it and it's gonna be tough.
But it hasn't been a notice of problem. We've been we've been piloting this for months, we've seen it and the reality is non partner to restaurants are on the platform for the consumers. It specifically want that non partner, we're obviously going to try to route diners.
Who want.
A burger to a different partnered burger option, but if they want that specific restaurant that has no partner that doesn't have a partner with us no relationship we're going to allow that to happen.
But we're going to do whatever we can to route demand to partnered restaurants, where the economics or not so miserable and the experience is way better.
And so when we're going to show them.
Is this is what life looks like as a partner and this is what it cost to be a partner and this is how we're gonna grow your business as a partner versus as a non partner.
But that's it it is absolutely trick here and we're already gearing up the teams and they're already executing on that strategy.
Great appreciate it.
[noise] and with that ladies and gentlemen, todays conference call has concluded we do thank you for your participation and you may now disconnect.