Thoughts from Ken Kaufman
The second quarter 2018 earnings report from Grubhub, the online meal ordering and delivery service, should make the restaurant industry nervous to say the least.
Grubhub announced that Q2 revenue grew 51 percent to $240 million and active diners increased 70 percent to 15.6 million, compared to Q2 2017. Perhaps more important, Grubhub also announced its intention to purchase a company called LevelUp, which processes more than 100,000 online orders per day for more than 200 restaurant companies, and will help Grubhub rapidly integrate with major chains like KFC and Taco Bell.
Grubhub is the market leader in online ordering and delivery, working with more than 85,000 restaurants in more than 1,600 cities. Its major competitor, Uber Eats, also is growing rapidly and is the most profitable part of Uber.
Platform versus Content
The Internet economy tends to divide companies into two camps: platforms and content providers. These two camps rely on one another, but make no mistake: they are not friends.
Platforms specialize in two broad areas: shopping, also known as the “first mile,” and delivery, also known as the “last mile.” While content providers produce the goods and services, the platform is what connects consumers with those goods and services. The best known companies of the Internet economy tend to be platforms: Amazon, Google, Netflix, YouTube, and Uber among them. These platforms share some important characteristics.
Platforms are incredibly good at what they do. The best platforms have huge scale, extensive financial and intellectual resources, and a relentless focus on exceeding consumer expectations. A search for “online platform” through Google yielded one billion results in less than one second. Amazon’s most recent efforts to improve the customer experience include shopping by voice through Alexa and delivery to your car trunk. These levels of expertise and innovation create an exhaustingly high bar for a legacy company trying to set up its own platform. If you want to buy a book, which is likely to have the better online user experience: an individual publisher or Amazon?
Platforms are great equalizers among content providers. To a large extent, platforms are brand agnostic. They present well-known brands comingled with lesser known brands and allow users to choose based on reviews, price, and product characteristics. Platforms can give a huge boost to little-known products that have low prices and good reviews—and can seriously hurt well-known brands that have high prices and tepid reviews.
Platforms are where the consumers are. As platforms offer a better and better experience, they get more and more popular. As they get more and more popular, they earn more and more loyalty. As they earn more and more loyalty, they get greater and greater market share. Amazon accounts for almost 50 percent of all online sales and is the most popular retail website in the country, with 197 million unique visitors per month. Google handles almost two-thirds of searches in the U.S., and is the most popular site in the world. Increasingly, a content provider has no choice but to maximize its visibility on these platforms, which are the major means of marketing and customer acquisition.
The power and pervasiveness of platforms put them largely in control of the relationship with content providers. Content providers have a hard time competing solely through their own platforms. Therefore, they need to be attractive to the platform, for example, with low prices and fast fulfillment. And they generally have to give part of their revenue to the platform.
Even more ominous, platforms are beginning to become content providers themselves—for example, Netflix and other video platforms creating their own movies and TV shows, Amazon launching private-label products, and Uber investigating self-driving cars. This development raises the specter of some content providers going from being commodities to being superfluous.
How Platform versus Content Is Playing Out in the Restaurant Business
In 2011, online delivery made up less than a quarter of gross merchandise volume for restaurants; it is predicted to be more than half in 2018 and almost three-quarters in 2022. This radical change in consumer behavior shows the power of the platform and the vulnerability of restaurant companies. Grubhub and Uber Eats have an enormous head start in platform technology. Even large companies like McDonald’s are playing catch-up. Restaurant companies run the risk of losing a significant amount of business by not being listed on Grubhub. Domino’s, which has developed a sophisticated and popular app for ordering and delivery, is one of the few that is competing directly with Grubhub.
As a result, we are seeing restaurants adapting themselves to fit the platform. Restaurants are setting up separate kitchens for online orders, designating space for delivery pick-up, selecting ingredients and meal options that hold up well during delivery, acquiring new containers for delivery, and even creating dishes that photograph well for online listings. At the same time, restaurants are paying between 13 percent and 30 percent of the check to the platforms. And it is not far-fetched to predict that Grubhub might buy a restaurant chain—or two or three—for more seamless integration and higher profitability.
What Would the Grubhub Model Look Like in Healthcare?
In many ways, healthcare is fertile ground for the platform/content model. Healthcare’s “first mile” and its “last mile” are among the least convenient of any industry. Screening, provider comparison and selection, and scheduling (the “first mile”), and care planning and coordination, care access, provider-patient communication, and billing and payment (the “last mile”) all are longstanding pain points for consumers. This situation creates significant opportunity for a sophisticated healthcare digital platform, whether developed by a legacy healthcare provider or some other entity.
Pieces of this digital platform already are emerging. Companies like Castlight focus on provider comparison and selection; companies like Zocdoc focus on provider selection and scheduling; companies like Teladoc provide access to virtual care; and electronic medical record companies have modules for several of these areas, including online scheduling. For most of these companies, the current business model is to offer white-label services to individual health systems, employers, and insurers. However, the emergence of an ascendant platform might change that strategy.
To date, the complexity, size, and fragmentation of healthcare have created major barriers to developing a more comprehensive platform. However, that is beginning to change. With its pending acquisition of Aetna, CVS Health is promising to “create a new front door” for healthcare that links digital tools with in-store and at-home interventions. This would be a platform with broad capabilities particularly focused on improving the “last mile,” as well as a national platform that would likely integrate providers and services in individual markets.
Perhaps more telling is the healthcare partnership of Amazon, JPMorgan Chase, and Berkshire Hathaway. Amazon’s position as the preeminent platform of the Internet economy, and its vast expertise and resources make it a logical entity to create a digital platform over time that would draw consumer loyalty while improving the first and last miles of healthcare. Apple, too, has shown signs of platform thinking with its new iPhone feature allowing users to view their medical records. These companies also would be well positioned to acquire companies that currently offer slices of the platform, aggregating those slices into an integrated whole.
Health Systems and Restaurants
In this scenario, the strategic options of hospitals and health systems resemble those of restaurants: A health system could create its own platform for its own providers; a health system could become a valued partner of a platform developed by another entity; or a health system could pursue both strategies. In any of these scenarios, the health system would need a deep understanding of the necessary capabilities for success and a plan to achieve those capabilities.
The platform-content provider model is not the only future scenario for healthcare, but it is the dominant economic model in the Internet economy, where solutions to problems of fragmentation, consumer experience, price, and efficiency—the big problems of healthcare—are always tech solutions.
As a restaurant designer said, “It used to be that we ate in the dining room and watched TV in the living room. Now your desk has moved into your pocket, and the food comes with you on your way. The old rules don't really make sense now.” It is inevitable that the platforms that dominate the Internet economy are coming to healthcare, and every legacy organization will have to determine where it resides on that platform.