A lawsuit between Yum Brands and Grubhub shows that delivery partnerships based on big enterprise contracts can be as contentious as those at an independent single unit.
In short, Yum sued Grubhub after the delivery platform raised fees and pulled out of a contract with the QSR mega-operator that owns Taco Bell, KFC and Pizza Hut. In a note from Grubhub to Yum that’s now an exhibit in the lawsuit, the company said Yum had “materially breached” an agreement inked in February of 2018. In that deal, Yum invested $200 million in Grubhub in exchange for an exclusive deal and delivery fees far rosier than the industry average. Essentially, franchisees didn’t pay any extra delivery commissions, and paid a lower processing fee than the Grubhub standard of 30 cents and 3.05 percent of the delivery price.
The change was communicated in two letters, one a direct account of alleged misdeeds to Yum. In it, Grubhub wrote: “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.”
A second letter to Yum franchisees from Nicole Korman, Grubhub’s senior manager overseeing enterprise accounts, was a little friendlier in tone.
“Due to some ongoing discussions with Yum corporate, a few changes are coming to our relationship,” reads the letter. “However, we will still be your contacts here to support you in all ways through this partnership, and as before, all fees will be paid by the diner (service fee and delivery fee).”
The second letter also alerted franchisees to the new price structure: a 17 percent commission paid by diners and the standard processing fee.
Grubhub stated that the actions were “incurable” and thus the other key parts of the contract were therefore 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 was being 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 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 agreement. This regret has been expressed verbally and has been demonstrated in Grubhub’s actions.”
Attorneys 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—an alleged breach of the agreement.
Grubhub responded in a statement saying they “vigorously deny the allegations,” adding,“We’re happy to work with Yum to resolve our contract dispute.”
While the battle will certainly continue in court, the suit and accompanying exhibits tells the broader industry something important: Even enterprise-size clients have some serious issues with third-party contracts. While they might be able to secure a lower cost than the average independent cost of 38.5 percent or 22 percent for chains with commissions and fees, according to Wells Fargo research, it’s not all gumdrops and rainbows—even for $200 million.
This is a stark reminder that third-party networks and restaurant partners are still not frolicking through the fields arm-in-arm. If a network is waiting to pull out a deal this large and high-profile that was penned with Yum’s adroit legal team, all restaurant operators should take a second look at their contracts and make things beyond “crystal clear” in future agreements.