Is loyalty to mobile ordering worth the cost?

Mobile order, delivery and payment apps are proliferating at restaurants, but they're also becoming less distinguishable, posing an entirely new challenge as deep discounts become the weapon of choice.

Grubhub has just released a rewards aggregator called “Perks.” Consumers on Grubhub receive free-food incentives on a single tab for Grubhub’s brands, such as Red Lobster, Shake Shack, Taco Bell and Honeygrow, integrated with the restaurant’s loyalty programs.

Perks builds on a nine-figure investment from the Chicago-based Grubhub, which acquired LevelUp about a year ago for $390 million, adding in-restaurant marketing and payment technology to Grubhub’s network of more than 120,000 restaurants in more than 2,400 cities in the U.S. and the U.K. Perks uses a points system, or a digital currency that can be spent immediately at the restaurants, with as much as $400 in free food available at any given time.

Andrew Harrer/Bloomberg

By offering what amounts to steep discounts — Grubhub’s own marketing materials tout “hundreds of millions of dollars in free food” — it hopes to add a financial sweetener to its restaurant network and acquired technology from LevelUp.

LevelUp built its own network around marketing and mobile payments, drawing investment and business from JPMorgan Chase, among others. LevelUp is part of a portfolio of investments Grubhub has made over the years to add restaurant service, marketing and payment technology.

“Grubhub is trying to make itself more of a destination app rather than just a purely utilitarian tool,” said Christian Selchau-Hansen, CEO and co-fonder of Formation, a marketing and analysis company. “By giving diners a single place to look for discounts, Grubhub is trying to make itself the place for hungry diners to go when looking for dining options.”

Grubhub’s program combines elements offered by several of its competitors, such as Uber Eats delivery, Groupon’s consolidation, and a digital wallet model that allows the deals to be accessed and redeemed in a single mobile experience.

“Grubhub is not launching their own rewards program or a coalition loyalty program across restaurants; this is about perceived convenience,” said Kate Hogenson, senior loyalty consultant at Kobie. “Is it novel enough and that much more convenient to have a combination of Uber Eats, Groupon and Apple Wallet in one app?”

Grubhub and LevelUp did not return requests for comment. Grubhub’s core delivery business is under pressure from mobile delivery competitors that are acquiring or partnering with other companies to provide easier navigation for ordering, delivery, payment and incentives. Its Perks app follows quickly on Square selling its Caviar delivery unit to DoorDash for $400 million, giving DoorDash more scale and access to additional restaurants.

Postmates added merchants by adding payment processor Adyen to an existing partnership with Stripe; and Uber Eats’ partners include Starbucks and McDonald’s. Uber has taken steps to provide service inside restaurants by testing a feature that allows consumers to order, pay and schedule a seating time.

And Amazon recently invested about $500 million in Deliveroo, which plans to expand its technology to support new restaurant models that rely on mobile order, pickup and pay by designing establishments with only a kitchen.

Incentive marketing is a large part of the strategy, since restaurants can more easily add loyalty programs since the EMV migration in the U.S. made it easier to upgrade payment systems. Apple Pay and Google Pay, for example, have both partnered with technology companies to support mobile-based loyalty programs at restaurants.

The emphasis on cost-based loyalty can get expensive for both the merchants and the delivery companies.

“The [Grubhub] program’s emphasis on discounts may end up hurting partner restaurants — and ultimately, Grubhub itself,” Selchau-Hansen said. “Blanket discounts have a conditioning effect on consumers, meaning diners will end up taking their business to whichever restaurant has the biggest deal. It’s a race to the bottom.”

The pain will be particularly acute for smaller restaurants, which don’t have the marketing budgets to stimulate demand through other means, Selchau-Hasen said. "They’re in a Catch-22. On the one hand, Grubhub gives smaller restaurants visibility they may not otherwise be able to achieve; on the other hand, it may suck them into a price war they cannot ultimately win."