Grubhub & The Limitations of TAM

Flip through any start-up’s pitch deck and you’re likely to find a few references to a large market size, often denoted as total addressable market, or TAM. Large, growing markets are catnip to businesses. But a point not often highlighted in pitch decks is that large markets attract lots of competitors. In the absence of a strong moat, a large market only provides limited protection against competition.

This week food ordering and delivery company Grubhub provided a good case study about the limitations of TAM, the importance of moats, and the need to constantly sense check assumptions. The excerpts below come from the company’s 3Q 2019 letter to shareholders.

Grubhub operates a large market:

“It is widely believed that the total market for takeout in the United States, including pickup and delivery, is greater than $200 billion annually.”

And large markets attract lots of competition. Grubhub’s competitors include Doordash, Postmates, and Uber Eats. Uber alone is sitting on over $11B of cash on its balance sheet. And competition has consequences:

“In August, overall DAG [daily orders] growth began trending noticeably lower than our expectations. As we dug into the data, we saw that our newer diners, particularly those in our newer markets, were not driving as many orders as we expected at that point in their lifecycle. While retention of these newer diners was good, their ordering frequency wasn’t “maturing” at the same level as earlier cohorts.”