Yum-Grubhub Lawsuit Shines Light on Delivery ‘Partnerships’
Yum Brands has sued Grubhub after the delivery platform raised fees and pulled out of a contract with the QSR giant.
In a note from Grubhub to Yum, the company said it had “materially breached” an agreement inked in February 2018. In that deal, Yum invested $200 million in Grubhub for an exclusive deal and fees far rosier than the industry average for delivery fees. Essentially, franchisees didn’t pay any extra delivery commissions, plus were charged a lower processing fee than the Grubhub standard of 30 cents and 3.05 percent of the delivery order price.
In a letter that now serves as an exhibit in the lawsuit, Grubhub alleges that Yum violated that contract’s exclusivity provisions.
“These breaches include, without limitation, direct technological integrations between Yum systems and those of Uber Eats and Postmates, as well as an integration of operations and logistics. Moreover, this robust integration has all been coordinated through a multi-wave roll-out plan, architected by Yum corporate,” read the letter.
Grubhub stated that the actions were “incurable” and thus the other key parts of the contract were also no longer effective. The provisions in question include data sharing, market coverage requirements, marketing obligations, reporting requirements, royalty requirements, limits on customer fees, exclusivity and agreed upon service levels.
In essence, getting out of this Yum contract means unloading a huge amount of liability and ongoing obligations for Grubhub, and it comes—very conveniently—a day after the company announced it would be acquired by Just Eat Takeaway.com in a $7.3 billion transaction.
According to the criminal complaint from law firm Mayer Brown in Chicago, the timing was quite inconvenient for consumers.
“Grubhub’s improper efforts to rid itself of a deal it no longer wanted and to line its pockets will cause enormous harm to consumers at a time when they can least afford it,” read the complaint. “Grubhub’s brazen action will result in an increase of nearly 40 percent in the fees consumers pay for Grubhub delivery of plaintiffs’ products.”
The complaint went on to say that integrating with additional services was “crystal clear” and allowed under the master service agreement (MSA) as long as other obligations were followed by Yum (which the company says it followed).
Attorneys for Yum also called out a $50 million termination fee to the company if Grubhub comes under the control of a third party, which “may well be relevant” given the Just Eat Takeaway.com deal.
It also sounds like the five-year contract had been a thorny obligation for Grubhub. According to the complaint, “It has been clear for some time that Grubhub regrets the economics of the MSA. This regret has been expressed verbally and has been demonstrated in Grubhub’s actions.”
Attorneys also wrote that Grubhub had “consistently failed” on its end of the contract. Yum alleges that there were blackout periods at the restaurant level, that Grubhub insisted on payments outside the contract and barred Yum from being a part of the company’s subscription program without additional fees—a breach of the agreement.
Grubhub responded in a statement saying it “vigorously deny the allegations,” adding that “we’re happy to work with Yum to resolve our contract dispute.”
While the battle will continue in court, the suit and accompanying exhibits tells the broader industry a few key things. One, to get a good deal, get ready to pay big. The $200 million investment was just $5 million less than Grubhub’s overall revenue for the most recent quarter (Q4 2017). It also came when Grubhub was in an all-out war for market share with DoorDash, as both were spending absurd amounts of money on acquisitions and market-expanding tactics.
Two, it tells the industry what enterprise clients are paying. Grubhub admitted that it made less money or lost money on every enterprise transaction depending on the quarter, and from this suit we can see that enterprise customers are paying much less than the common refrain of 20-25 percent. Yum was able to get better than 17 percent at least and franchisees paid no commission fees. That’s a stark contrast to even broader chain restaurant average, which a Wells Fargo analyst quantified as 22 percent including commissions and fees. And it’s much, much better than the average for independent restaurants, which pay 38.5 percent in commissions and fees.
And finally, it’s a stark reminder that third-party networks and restaurant partners are not frolicking through the fields arm-in-arm. If a network is waiting to pull the e-brake on a deal this large and high-profile that was penned with Yum’s adroit legal team, all restaurant groups should take a second look at their contracts and make things are beyond “crystal clear” in future agreements.