Grubhub (NYSE: GRUB) recently agreed to buy Tapingo, a leading platform for college campus food orders, for about $150 million. Tapingo has over 150 college campus partners, and processes "tens of thousands" of daily transactions for over half a million active diners at on-campus cafes, restaurants, and cashierless stores.
Grubhub's active diners rose 70% annually to 15.6 million last quarter, while its daily average grubs (orders) rose 35% to 313,900. Buying Tapingo won't give Grubhub's growth figures a huge boost, but it could help the company secure a younger demographic on college campuses while expanding its digital ecosystem.
Tapingo's major partners include food service and facility management providers Aramark and Sodexo, as well as Yum Brands' Taco Bell, Chipotle, Panda Express, Jamba Juice, and Chick-fil-A. Grubhub expects to close the deal in the fourth quarter.
An unsurprising purchase
Grubhub's takeover of Tapingo isn't surprising; the company has repeatedly expanded by acquiring smaller platforms. It merged with Seamless in 2013, and subsequently acquired a long list of companies including MenuPages, Allmenus, DiningIn, Delivered Dish, LAbite, and Yelp's Eat24.
That aggressive expansion turned Grubhub into the biggest online food delivery platform in the US. Earlier this year, Second Measure estimated that Grubhub controlled 50% of the US food delivery market. Its closest rival, Uber Eats, held a 21% share. DoorDash ranked third, with a 15% share, followed by Postmates' 9% share, and a 4% share for Square's (NYSE: SQ) Caviar.
Amazon (NASDAQ: AMZN), which initially spooked Grubhub investors with its entrance into food deliveries, controlled less than 1% of the market. But Grubhub knows that it can't become complacent, and that it needs to keep gobbling up smaller players to scale up its operations and widen its moat against its rivals.
Some of Grubhub and Tapingo's services overlap. For example, both platforms provide deliveries from Chick-fil-A and Taco Bell. However, buying Tapingo could tighten Grubhub's bonds with fast food chains, especially among college students. That could help Grubhub counter similar strategies from its rivals, like Uber Eats' partnership with McDonald's.
Another move into the POS market
GrubHub's takeover of Tapingo also complements its recent acquisition of LevelUp, a payments and loyalty services provider. LevelUp helps restaurants manage digital orders, payments, and loyalty programs on a single online platform.
GrubHub is integrating LevelUp's platform into its restaurants' point of sale (POS) platforms. That move enables GrubHub to tighten its grip on restaurants by bundling together delivery, payment, and loyalty plans -- which would boost its total revenues per customer. That move also widens GrubHub's moat against Square, which is bundling payments, deliveries, and analytics together with its Square for Restaurants platform.
Tapingo's platform is directly integrated into college meal plans and POS systems. Adding those POS systems to its digital ecosystem complements GrubHub's POS plans with LevelUp, which could help it lock in more restaurants.
The financial impact
GrubHub didn't disclose the exact financial details of the deal, which will be revealed during its third quarter earnings report. However, GrubHub finished last quarter with $442.7 million in cash and equivalents, up from $234.1 million at the end of 2017. It also had $116.6 million in long-term debt and $5.5 million in short-term debt.
GrubHub closed its $390 million purchase of LevelUp, which it funded with a mix of cash and debt, in mid-September. GrubHub will likely fund the Tapingo buyout in a similar way, so the company's cash position should significantly decline during the third quarter as its debt levels rise.
GrubHub expects the LevelUp purchase to reduce its third quarter EBITDA by less than $1 million. Therefore, the Tapingo purchase should have a lower impact.
The bottom line
GrubHub's takeover of Tapingo is a smart move that will scale up its business, deepen its integration into POS systems, tighten its partnerships with food service and fast food companies, and help it reach more college students. Those moves will help GrubHub maintain its lead in the crowded online food delivery market, and possibly make it a more attractive takeover target for potential suitors like Amazon.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon, Grubhub, and Square. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, and Square. The Motley Fool has the following options: short January 2019 $80 calls on Square. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.