Merchant Advance Blog

Blog Article: Yelp Buys GrubHub – Changing Models for Restaurant Businesses

Veggie_Burrito_Nuremberg

One of the most admirable small business ventures – and I do mean small – that this blogger has ever seen was Toronto’s very own Burrito Bike. If you lived downtown, you could call them up or Tweet out your location, and on any given Friday evening… delicious vegetarian burritos would trek through rain, sleet or snow by two wheeled power to arrive at your door, even the wee hours of the morn.

Sadly, such truly inspiring feats of human generosity were too good to last long in this unforgiving world. I am sad to report that Burrito Bike is no more. Its last bundle of joy (and beans and cheese) was delivered sometime in 2011 – though in its wake, a range of online-powered delivery services have emerged that use the power of data, rather than bikes, to get edibles to customers.

Just yesterday, Yelp – an organization whose impact on exposure and customer opinion any small business owner should be keenly aware of – spent $134M to purchase an online delivery service called Eat24. It appears that Yelp, a longstanding forum for opinion and feedback on restaurants (and a variety of other business types), aims to vertically integrate its involvement in customers’ eating habits right from order placement all the way to getting them to post about how it tasted. Such a model is quickly becoming commonplace – as I walk in Downtown Vancouver, more and more small restaurants can be seen displaying the logo of both Yelp and of a web delivery service. What might the effects be of such a market shift for the business owner?

Online ordering services contribute increased order volume for restauranteurs, while taking a commission fee as their end of the partnership. They have grown to fuel what the Vancouver Sun calls “a growing multi-billion-dollar market in Canada.Data from a QZ.com report indicates that commission rates may average 13.5%, but are variable based on volume.

Much as in any online search-based ecosystem, businesses are conditioned to understand the differenced between organic and paid rankings for their listings (at least on GrubHub and Seamless, the leading platforms in North America.) Similar to a paid Google search result or Promoted Tweet, businesses may choose to increase their search strength in exchange for higher search ranking. The appeal of a system that hybridizes Yelp (location-based search and opinion rankings) with an online ordering platform is that the “paralysis of choice” is lessened for the consumer. However, paid ranking models skew the appearance of choice significantly based on business’ budgets rather than the valuable consumer opinions that they mat generate on Yelp.

An article published by Bloomberg Businessweek criticizes the online-ordering business model for its lack of responsiveness to business needs. Namely,

“…rates rose along with the restaurant’s volume of orders. Seamless also holds funds for 40 days before distributing them… meaning an increase in business through Seamless led to… having less cash on hand to keep running”

In an industry where cash flow is critical and margins may often be tight, limitations on access to cash on hand can be challenging – as can managing the impact of fees on a per-order basis. Owners of restaurant businesses will have to gauge the importance of increased sales volume against such factors.

 

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