Under pressure from restaurants. legislators, and the Massachusetts Attorney General, Grubhub has taken an important conciliatory step. It will no longer be relying on an algorithm to manage the phone lines it has set up to take the direct phone orders on behalf of its restaurant clients.   

Instead, it will use call centers, with actual human beings on the other side of the phone line from the customers, and it expects that with those humans, the right decisions will be made about what calls require a charge to the restaurants.

Grubhub, after all, is (at least on the surface of things) in the business of being an intermediary. This means it has two sets of customers: those who want to buy food and those who want to sell it. The older system had put Grubhub at odds with many of the latter. In a story broken by the New York Post in 2019, Grubhub’s algos were unfairly charging the owners of restaurants between $4 and $9 for calls that passed a threshold of 45 seconds, even if the calls resulted in no order.  

That story led to demands for refunds. Even Senator Chuck Schumer (D-NY), now the Majority Leader in the U.S. Senate, got involved, demanding that Grubhub “eat any fees they wrongfully charged restaurants or even customers.”

Lawsuit Against Grubhub

Grubhub alerted its restaurant clients of the details of the new system on Tuesday, August 10. Not only will they no longer be charged for exploratory calls that took more than 45 seconds but resulted in no order, (“do you have gluten-free pasta?”), they won’t be charged for call backs “hey, my meal is late, when did you send it out?” or for complaints, “I thought the subs were a bit soggy.” 

In July, the Attorney General for the Commonwealth of Massachusetts, Martha Healey, filed a lawsuit against Grubhub alleging that its charges, as they applied to restaurants in Massachusetts, were illegal in that they violated a statutory fee cap in place for the Covid-19 public health emergency. 

The fee cap was, of course, intended to encourage restaurants and customers to do business over the phone in order to limit the threat of contagion from more face-to-face dealings. 

Healey’s lawsuit is demanding refunds for restaurants harmed by the practice. 

As the state’s complaint outlines: Grubhub is a delivery platform through which customers order restaurant food for delivery or pickup. Restaurants contract with Grubhub so that the latter will advertise the restaurant’s menu, accept and process orders, transmit those orders to the restaurant, and deliver orders to such customers as request delivery.

The state charged not merely that it had violated the fee cap for its services as an intermediary, but that it had in the process engaged in unfair and deceptive practices at the expense of the restaurants. 

There has not yet been any indication that this lawsuit has been settled, although it seems likely Grubhub’s change in practices will ease settlement talks. 

How did Grubhub Fare in the Pandemic?

Casual observers may be under the impression that the pandemic was good for Grubhub. After all, they are one of the Big Four consumer-facing delivery apps (along with DoorDash, UberEats and Postmates), are they not? Should the whole category have done well?

It appears not. Indeed, the pandemic may well have made the point in a powerful way that the intermediary food delivery business is not sustainable. Even before the pandemic. Grubhub itself, in a letter to shareholders, indicated that it isn’t counting on a profit from that model. It uses its intermediary services as a foot in the door, as a way of developing a relationship with restaurants. Once it has that relationship, Grubhub wants to sell them its marketing prowess.

In short, it is really in the advertising business, and the intermediary model is a loss-leader. Heather Haddon, writing in the Wall Street Journal at the end of last month, made much the same point using numbers from the second quarter 2021. The pandemic has generated sales for Grubhub, and for the other members of the Big Four listed above. But it has not generated profits.

The company lost $45 million in the April-June period. This amounts to 17 cents lost per share, down from a profit of $1.3 million in the same period a year ago.

Yes, the pandemic may well have helped Grubhub develop relationships with restaurants, and that may allow it to sell its services. But Grubhub won’t do that as a stand-alone company. It is merging with Just Eat Takeaway.com, an Anglo-Dutch dotcom that is itself the creation of a merger last year.

These two mergers are part of a pattern of consolidation that is a sign of an industry still in search of a sustainable business model.