NEW YORK (TheStreet) -- The $70 billion online food ordering industry is on the cusp of taking its next evolutionary leap beyond simply helping college kids and urbanites order food by moving into the suburbs, broadening their merchant base and becoming involved in the delivery phase of the business.
This week's purchase by Yelp (YELP) - Get Yelp Inc Report of Eat24, which adds a food ordering element to Yelp's reviews, falls in line behind recent changes at Delivery.com and GrubHub (GRUB) - Get Grubhub, Inc. Report with the former expanding into liquor, groceries and laundry ordering and the latter adding a delivery capability. The next target on the horizon for some of these companies is the suburbs, increasing the number of restaurants using online ordering and possibly adding national retailers to their merchant list.
Jed Kleckner, CEO of Delivery.com, said the company's primary customers remain in cities and around colleges, but as merchants and customers in other areas become more tech savvy and grasp online ordering the company has to take a look at how to service these people.
"We are now seeing these services start to appear outside urban areas in suburbia," Kleckner said, adding it is only natural also make the move out of the city.
GrubHub is also keeping an eye on the other side of the city line.
"We think the model works almost everywhere there are multiple choices for takeout. As awareness increases and we add more restaurants outside of the city centers, we anticipate that adoption within suburban markets will grow -- both on the restaurant and diner side," said Adam DeWitt, GrubHub CFO.
Kleckner describes Delivery.com as an aggregator of consumer demand and a lead generation platform so it can easily add new categories and areas of operation. He pointed to several scenarios on how Delivery.com could become more heavily involved with suburban merchants both inside and outside online food ordering category. The first being through the company's current online tool, but he also sees an opportunity that integrates a merchant's Web site with Delivery.com's capability making the store's site that much more powerful.
Next, Kleckner believes there could be a chance to work with national retailers saying the chain stores will become local distribution points for items ordered with Delivery.com.
For its part GrubHub is not interested in branching out from its core business, but it is in the process of refining its product.
"We are getting into delivery because we believe it will allow us to provide a best-in-class diner experience and let us offer our diners restaurants that don't provide their own delivery services," he said.
Even without adding new product categories the companies said there is a great deal of room to grow just within the online food business. Kleckner and DeWitt agree that the less than 10% of all takeout food is ordered online, with DeWitt pegging it at around 5%.
"We remain focused on capturing the remaining 95% and opportunities for growing the $70 b[illion] by making takeout better," DeWitt said.
He said this will be accomplished, in part, through improving its business process and by more restaurants realizing the need to have an online ordering component.
"It is hard to imagine a world 10 years from now with anyone ordering takeout by dialing a phone and reading from a paper menu. If restaurateurs want to access the extremely large and profitable takeout market, they will likely have to have some type of online and mobile presence," DeWitt said.
The impact on a restaurant's business can be dramatic said Chris Hickey, regional director NYC for the New York State Restaurant Association.
While it [online ordering] is not right for every restaurant if the restaurant has the right model in operation it can be very lucrative," he said.
Delivery.com has also found an interesting tipping point that spurs a merchant's desire to become even more involved with the company.
"We have found then when 10% of their business is driven by online ordering they then come to us and ask how it [online ordering] can do more for them," Kleckner said.
Bringing more retailers into the fold is only part of the challenge facing these companies. The other task for Kleckner and DeWitt is increasing their user base. This will happen organically as youngsters who have grown up using smartphone will natural look to their device to shop, Kleckner said.
Sometimes just getting them to try it for the first time is the trick.
Brand awareness and getting people to understand how much better it is to order through GrubHub than utilizing the paper menu and phone. Our track record of keeping diners coming back once they try the platform is very strong, but our challenge is getting them "over the hump".
TheStreet Ratings team rates YELP INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:
"We rate YELP INC (YELP) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and compelling growth in net income. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and premium valuation."
You can view the full analysis from the report here: YELP Ratings Report
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.