We’ve written extensively about the local food scene in this space. Late last week we covered the acquisition of GrubHub by JustEat Takeaway and the recent rounds of cash DoorDash and InstaCart raised. One of the great things about our interconnected world is that sometimes a post like last week’s will be read by someone doing something very interesting in the space.
That GrubHub post last week prompted Jon Sewell to reach out to me on LinkedIn. More often than not these outreaches are thinly (or not so thinly) veiled sales pitches. Jon’s wasn’t one of these.
From Healthcare to Cheesy Dough
A bit about Jon. He’s had a career in the health care industry. Moving from one great city to another e.g., Denver to New Orleans and many others to run non-profit hospitals. His last stop was as CEO of Health Enterprises of Iowa, yet another no-profit health care operator.
As he tells me his daughter pushed him to open a D.P. Dough franchise in Iowa City, Iowa. D.P. Dough is a growing operation targeting college and university towns.
After a couple of years of learning the tricks of the food industry, he became increasingly aware of the importance of local food delivery on the health of the overall food scene. At the time he was using OrderUp, an online ordering and delivery service that had started in State College, PA (home of the Nitty Lions), the heart of the American college scene.
Subsequently, it moved to Baltimore and was branded initially as LocalUp and then rebranded to OrderUp. The company went through two acquisitions first by Groupon in 2015 and then by Grubhub in 2017.
D.P. Dough is the number one delivery food provider in Iowa City. After all, its core customer base is super hungry college students who’ve had a little too much fun and need a cheesy, doughy late-night snack. As OrderUp was opening in Iowa City, Jon quickly realized he needed to be part of the OrderUp marketplace. His chief constituency had a strong propensity to turn to their smartphones late at night to order up quick nourishment. Jon forged a solid working relationship with OrderUp. He leveraged its delivery service and marketplace to expand his business with good unit economics.
Enter the New Regime
The good times didn’t last long, however. Groupon sold OrderUp to Grubhub in 2017. Then everything changed. Grubhub offered local restaurants what Jon labeled a “take it or leave it” offer with a very short window to decide. The “offer” was, pay Grubhub twice the commission they had been paying OrderUp (from 15% to 30%) and accept a centralized customer support and service team.
Jon wasn’t going to bite. He was fortunate that he had his proprietary delivery service and relied on Grubhub only for expansion. Other restaurants in the area were not as well-positioned. Many had upwards of 40% to 50% of the topline flowing through OrderUp. Along comes Grubhub with its double commission “offer” and local operators suddenly faced a difficult decision. Restaurant margins are razor-thin in the best of times. Paying a 30% commission would make every Grubhub order break even at best. In reality, most would be loss leaders. And leading to what, exactly?
Jon Sewell Shared the CHOMP Story Last December on the Barron Report Podcast
Finding Strength in Numbers
Jon reached back to his years of experience in the non-profit hospital industry. As a regional hospital operator, Jon faced many tough business challenges. For example, how to afford a multi-million dollar MRI machine without adequate scale at his hospital. That’s when he discovered the magic of building business cooperatives. Instead of five regional hospitals each buying a multimillion-dollar machine, he got them together to buy one machine. The machine would rotate from hospital to hospital, with each having a guaranteed day of the week to perform life-saving diagnostic procedures.
Using the same logic, Jon rounded up a group of 17 local restaurant operators to create a new food delivery cooperative. Each owner put in some scratch and became a part-owner of the cooperative called CHOMP. It launched in January 2018.
During its first year of operation, CHOMP delivered 108,000 meals to 16,000 unique homes, tallying more than $4 million in gross revenue. For this, CHOMP took a 15% commission, about $600,000, to run the delivery operation. This may sound like a lot, but it’s not. The same delivery via Grubhub or DoorDash would have taken another $600,000 from the owners’ pockets. That’s the difference between a 15% commission and a 30% commission.
CHOMP was able to keep more money in the cash registers of the local restaurants and in the community since the operations were 100% local. When it was all said and done the cooperative netted $8,000 in its first year. By the end of the second year, platform revenue grew 6% and the 17 original owners were $40,000 in the black and received a dividend. CHOMP’s drivers were independent contractors earning upwards of $25 per hour. Jon said he currently has a list of 400 applicants waiting for driving openings.
A Sustainable Alternative
Pre COVID-19 CHOMP averaged about 300 deliveries per day. Now it’s doing close to 900 per day. Jon thinks the new steady-state will be around 600 deliveries per day. That volume would drive something like $10 million in gross orders, yielding $1.5 million in commissions. And, of course, it will save the local community from handing over another $1.5 million to the likes of Grubhub, Uber Eats, and DoorDash.
Jon thinks he’s on to something. And I agree. He’s setting out to build a franchise platform for other entrepreneurs to build cooperative food delivery services in other markets. He’s expecting three markets to come online in the coming months — Flagstaff, AZ, Omaha, NE, and Atlanta, GA. He also believes there is zero chance that UberEats, DoorDash, Postmates, and their ilk will survive over the long haul. Their operations just extract money from local markets and, as Jon said, “Most restaurant owners can’t sleep at night with DoorDash and UberEats in their lives.”