Will a Further Consolidated Food Delivery Industry Dish Out Profits?

Food delivery, at first glance, is a fantastic idea. A consumer can order anything in a matter of seconds, and have it delivered directly to their doorstep. Over the past few years, intense competition and improvements in technology have led to immense growth in the sector. The industry rose 17.6% to $107 billion in 2019, and market researchers project the industry will sustain its double-digit growth for at least the next four years. Demand for food delivery has spiked even higher in recent months with restaurants closed or at limited capacity due to the coronavirus. However, when it comes to implementation, the concept quickly becomes a nightmare for all parties involved. Low margins, heavy advertising and promotion expenses, and price wars with competitors have brought a frightening reality to light – the current business model is unsustainable as all players are hemorrhaging cash and making up losses by jumping from one round of financing to the next.

The industry is strongly geographically divided and oligopolistic in nature, with only a handful of players in each country. Not only are these few companies faced with the slim margins of the restaurant industry, they also have to rigorously compete against one another to sign restaurants, add customers, and improve their platforms. Many analysts have long touted that the only path to profitability in this area is through consolidation, as synergies combined with enhanced pricing power would expand margins and create a much more sustainable business environment. This thesis has come to fruition recently, beginning with Takeaway’s $7.8 billion merger with Just Eat announced in early January, combining two of the largest food delivery providers in Europe. Several months later, news broke out that Uber was trying to acquire Grubhub, its closest competitor in terms of market share. The potential deal between the two quickly drew scrutiny from government officials concerned about the lack of an upper bound for fees as well as their treatment of drivers in the gig economy. Had the deal gone through, the combined company would have matched rival DoorDash and controlled 45% of the American market, a number which many believe would have ultimately lead regulators to cancel the deal due to antitrust concerns. 

On June 10th, newly formed Just Eat Takeaway surprised the world by announcing its agreement to acquire Grubhub for $7.3 billion. The former will pay $75.15 per share in an all-stock deal, a premium of 27% at the time of announcement. Grubhub shareholders were thrilled because the company had been underperforming, with both profitability and share price decreasing quickly. Moreover, Grubhub’s control of the market had been eaten up, dropping from a dominant position in the US in early 2019 to vying with Uber Eats for second place, far behind DoorDash. Through this acquisition, the companies will have access to each other’s infrastructure and be one of the largest food delivery businesses in the world. 

However, Just Eat Takeaway’s shareholders were not pleased, sending the stock plummeting 13% in extra hours. The negative sentiment comes primarily from a lack of clear value added, as the companies operate in entirely different regions and thus will not achieve significant synergies or improve Grubhub’s competitive position in the US market. On top of this, the two run different systems: Just Eat Takeaway uses its own fleet of delivery drivers to bring food from restaurants to customers, whereas 70% of Grubhub’s sales are simply connecting consumers with restaurants. To put it simply, Takeaway has acquired two industry titans operating in different geographies just months apart, both of which are bigger than itself – a lot of faith to put into the business acumen of their chief operating officer, Jitse Groen. While the acquisition certainly gives Just Eat Takeaway a pathway to the US, one of the most important food delivery markets in the world, whether it will succeed remains to be seen.

Uber retaliated quickly, announcing on July 6th that it will acquire Postmates, a distant fourth competitor with about 8% of the market, for $2.65 billion.­­­­­­­­­ The deal will be all-stock at a relatively small premium given that Postmates was valued at $2.4 billion in a private financing round last year. While not as ground-breaking as merging with Grubhub, the deal certainly puts both companies in a better place and should lead to significant cost and revenue synergies. Add onto this the fact that Postmates is the leader in a key US market – Los Angeles – where Uber has struggled, and the benefits become more defined. Interestingly, Postmates is the first of the major food delivery companies to explore delivery-as-a-service, competing against Amazon and Walmart to deliver goods and groceries to customers. The company already delivers a variety of different items, and Uber has publicly stated that the deal is intended to impact more than purely food delivery. This addition provides an extra element of depth to the product offering, an interesting differentiator going forward.

These mega mergers are very exciting and are changing the landscape of the industry, but the noise in the market has blurred two important questions: will these consolidations really change anything, and what comes next? 

The food delivery industry is often described as winner-takes-all. Price wars can only go on so long with constantly slimming margins, and venture funding will eventually run out. The idea is that with a higher market share, a company has the ability to increase prices and raise the bottom line, something that is practically impossible in the current cutthroat environment. When provided numerous options to choose from, the power lies with consumers, or as Grubhub puts it, “online diners are becoming more promiscuous.” By taking players out of the game, steep price discounts and promotion spending become more defendable. However, if the companies do not turn a profit soon, funding will eventually run out. This issue leaves companies with two choices: either play king of the hill until one company decidedly comes out on top or find a way to heavily cut expenses.

At the end of the day, businesses that continuously lose money cannot survive in the long-term. Going forward, food delivery companies will attempt to squeeze margins in their favour as much as possible and seeing as they already pay restaurants and drivers the absolute minimum, the only way to increase profits is through the customers. As a result, the coupons and promotions that have become practically synonymous with the industry may not be around for long, so enjoy them while they last.