Taco Bell owner's $200 million deal with Grubhub gives it a leg up on the competition

Key Points
  • Third-party services charge restaurants a commission for their services and often reap the benefit of having full access to consumer data.
  • When Yum Brands took a 3 percent stake in Grubhub it earned itself a seat on the board as well as access to the data it collects on KFC and Taco Bell.
  • These easy-to-access delivery platforms not only lead to higher checks for restaurants, but also more occasions for customers to purchase food.
Taco Bell Nacho Fries
Source: Taco Bell

There's a good chance that the last time you ordered take-out you used your laptop or a mobile app.

Technology is altering how diners purchase food and have it delivered, a key reason companies like Yum Brands are so keen on getting a foot in the door with online ordering and delivery companies. John Glass, Morgan Stanley's U.S. restaurant analyst, expects that 40 percent of total restaurant sales — or $220 billion — could occur online by 2020, compared with current sales of around $30 billion.

Online ordering is convenient, it decreases the likelihood of an order error and gives customers a chance to browse the menu longer, often leading to bigger sales for restaurants. However, when restaurants rely on third-party ordering and delivery services, they can actually be putting themselves at a big disadvantage.

Third-party services, whether they incorporate delivery or not, charge restaurants a commission for their services and often reap the benefit of having full access to consumer data. With that data, those companies learn what customers order, when they order it, how often they are using the platform and can leverage it to bolster sales or lure in diners from other services.

"The battle between restaurants and their new digital competitors is not a fair fight," Eli Portnoy, CEO of Sense360, told CNBC via email. "Doordash, Amazon, and UberEats can collect and use data to drive precise decisions about everything they do, whereas traditional restaurants have never really had access to the same type of data and did not make it a part of their DNA."

Increasingly, restaurants — particularly mom-and-pop operators — are getting resentful of paying commissions of as much as 30 percent of an order to fund the delivery sites' growth without getting much in return.

That's why Yum's recent investment in Grubhub is such a smart move.

The Taco Bell owner bought a 3 percent stake in the online food-ordering company at the beginning of the year, earning itself a seat on Grubhub's board as well as access to the data it collects on KFC and its fast food Mexican chain.

"Having access to that data is critical," Greg Creed, CEO of Yum, said during an earnings call Wednesday.

"One of the unique aspects of the agreement is to have the [point of sale] at all KFC and Taco Bell restaurants fully integrated with Grubhub, which will significantly aid the accuracy of the order and the speed of delivery," Creed said.

The Grubhub deal also has allowed the online ordering platform to expand to more markets more quickly. Since the start of the year, Grubhub has added 50 new markets on its march to add 100 this year. The addition of these markets, plus the acquisitions of Eat24 and Foodler, are making Grubhub a force to be reckoned with in the delivery space. In its latest quarter, Grubhub's gross food sales rose 39 percent to $1.2 billion, and active diners jumped 72 percent to 15.1 million.

Creed said the broader Grubhub's presence, the better it is for Yum's brands.

"Yum getting access to delivery data is a very big step in the right direction and will allow it to better understand how to compete and potentially win in this new data-driven world," Portnoy said.

Sites like Grubhub make online ordering easier and convenient by displaying all of the restaurants that deliver in an area as well as menus, prices, delivery fees and the typical delivery time. Customers place their order through the site and it is sent directly to the restaurant. The restaurant fulfills the order and delivers it using its own drivers.

These easy-to-access delivery platforms not only lead to higher sales for restaurants, but also to more occasions for customers to purchase food. Those who might not have been able to travel to a restaurant for lunch because they were stuck at the office, can order their food online and have it brought to them.

Still, on these platforms restaurants will need to know how to market themselves in what is essentially a digital food hall. Without the data about who the customers are, that task becomes a greater challenge.