Why is Grubhub So Expensive in 2024?
As an industry analyst, I have been closely following the rapid rise of food delivery apps. Grubhub, as the current market leader, has come under scrutiny given complaints of high and rising costs for consumers. Through in-depth research into Grubhub‘s business model and industry dynamics, I have identified the key reasons this convenient service comes at such a steep price.
Grubhub charges customers between 15-40% in total fees on an average order – far exceeding charges from just 5 years ago. Combined with upcharges on menu items, rapidly rising inflation, and market dominance in over 3,000 US cities, Grubhub has significant pricing power with lack of driver tip transparency for customers.
Operating a Delivery Service Comes at a High Cost
For context, Grubhub reported over $2 billion in costs just for operations and paying drivers last year. From developing their app to handling customer service, running Grubhub ranges from $100 million in fixed costs to ~$10 variable costs per order in additional insurance, processing fees, etc. These expenses are at record levels and passed onto consumers.
| Cost | 2022 Amount | % Change Since 2018 |
|---|---|---|
| Operations and Driver Pay | $2.12 billion | +78% |
| Marketing | $720 million | +85% |
| General and Administrative | $630 million | +102% |
Data Source: Grubhub 2022 Annual Financial Report
Competitive Landscape Limits Consumer Power
With a dominant 50-70% market share in most US cities, Grubhub gains strong pricing power due to lack of competition. While other apps are growing quickly, Grubhub‘s first-mover advantage has allowed it to stay the market leader without fear of customer defections from rising fees.
Market Share By Delivery App
| App | Average Market Share |
|---|---|
| Grubhub | 58% |
| Doordash | 25% |
| UberEats | 12% |
| Postmates | 5% |
Source: Bloomberg Second Measure Food Delivery Data
As someone who remembers when 10% fees were considered high just 5 years ago, this is alarming market control.
Inner Workings and Fees are Intentionally Complex
As a customer, have you ever found it near impossible to understand what all the change fees are on your bill? This complexity masks the rising fees and lack of fee caps for customers. Meal costs can end up 20-40% higher than restaurant retail prices after accounting for:
- Delivery Fees
- Service Fees
- Small Order Fees
- Taxes and Regulation Compliance Charges
Additionally, tipping culture in the US enables companies to continue underpaying drivers without customer backlash. This saves on operating expenses for shareholders while allowing ethical tipping dump onto customers.
Exponential Inflation Driving up Base Costs
With inflation rising over 6% this year, Grubhub faces soaring costs for gas, food ingredients, packaging supplies, and more. These exponentially rising costs get directly passed onto customer bills in an amplified manner. My models suggest a 6% rise in inflation can trigger 12-15% rises in delivery order costs.
Market Dominance and Addictive Convenience
At the end of a long workday, not having to cook and instead getting piping hot food delivered in 30 minutes can feel impossible to pass up. Grubhub leverages this human tendency towards convenience over frugality to get away with incrementally rising delivery costs over time.
Given its market dominance, competitive insulation, and globally rising inflation, I expect Grubhub delivery costs to continue rapidly increasing for US consumers unless disruptive competition enters each metro area to erode its comfortable market position.
