We frequently write about the restaurant food delivery business on Localogy Insider. After all, what could be more local than restaurant food delivery?
So we read about Grubhub’s acquisition by European food delivery leader JustEat Takeaway with great interest. The transaction values U.S. based Grubhub at just over $7 billion. Or $7.3 billion for those of you who need the decimal point.
Uber Eats was in negotiations to purchase Grubhub as recently as a month ago, according to reports. Those reports suggested that Uber Eats put the value of Grubhub at around $6 billion. If the deal Grubhub signed yesterday goes through as planned, the value would be about 22% richer than what Uber Eats was offering.
A Brief History of the Delivery Wars
So is the deal overvalued, undervalued, or just right? And does this transaction make sense from a customer perspective?
Let’s start with a little history.
Grubhub was an early entry in the food delivery race, launching in Chicago in 2004. Since then a parade of tough competitors has emerged. Postmates launched in 2011, followed by market leader DoorDash in 2013. Uber jumped in with Uber Eats a year later.
Through a series of large and small acquisitions, Grubhub has grown to serve well over 20 million users.
The company went public in April 2014 at $26 per share and closed the day at $34 per share. The chart below shows a typical growth curve in today’s tech world with a very fast acceleration of users over the course of eight years. Given COVID-19, we’ve estimated that GrubHub now has upwards of 25 million active users.
The company’s stock performance has followed a different pattern. While GrubHub had some first-mover advantage, the fiercely competitive nature of the market has driven the company’s value downward as shown in the chart below.
Grubhub traded as high as $144 per share in September 2018 when its market value surpassed $13 billion. A big event in the company’s history came when it agreed to purchase Eat24, Yelp’s food delivery service, for $288 million in 2017. That acquisition appeared to be well received by the market.
Between August 2017 and the following September, the company saw its stock nearly triple rising from $55 to a peak of $146. The tripling of valuation made the Yelp transaction look like a great deal for Grubhub. At $146 per share, investors were valuing Grubhub’s then 17 million active users at about $750 each.
After the Heyday
Fast forward to today. The restaurant food delivery business is crowded. As outlined in this article, more than half of the consumers who use restaurant food delivery services use multiple apps. This suggests that there is little brand loyalty. According to research done in the second half of 2019, the leaderboard looked like this. DoorDash with 34% share, Uber Eats with 30%, Grubhub with 24%, and Postmates bringing up the rear at 10%.
The chart below from Second Measure shows the relative strengths of the competitors by market. Grubhub tends to have larger market shares in northeastern cities like New York and Boston, while DoorDash leads in markets in the south and west.
Given that Grubhub’s new owner is based in Amsterdam, we may see the U.S. split into a couple of concentrated markets. Many financial analysts agree that today’s highly competitive restaurant food delivery market is compressing operating margins. This is making it difficult for all of the operators. As a consequence, valuations have suffered. That estimated $750 per active user valuation from two years ago looks more like $300 per user today ($7.3 billion for 25 million estimated users).
Challenges Beyond Competition
As we’ve discussed in the space before, there are other challenges to this business. When the economy is robust and hot, paying double to have a salad delivered to your door is a nice luxury. When you’ve lost your job, however, a homemade salad will do. Couple this with more “Work from Home” employees, who in theory will have more time to make their own food, and the pressure on the delivery aggregators builds.
Further, there are growing regulatory concerns, as voiced by Rhode Island Democrat David Cicilline, who chairs heads the House Subcommittee on Antitrust, Commercial and Administrative Law. Cicilline said, “We cannot allow these corporations to monopolize food delivery, especially amid a crisis that is rendering American families and local restaurants more dependent than ever on these very services.”
All of these challenges roll up into a pretty thorny briar patch for the delivery industry to navigate.
To make things even more challenging, in April 2020, DoorDash, Grubhub, Postmates, and Uber Eats were all sued by a group of New Yorkers accusing the delivery companies of using their market power in a monopolistic manner. While the case was filed in the U.S. District Court, Southern District of New York, and could take years to resolve, it will nonetheless be a constant issue for these companies. It also may help explain why Uber Eats shied away from the acquisition.
The COVID Bump
We need to be mindful that the world in June 2020 is vastly different than the world that existed in the summer of 2017 when Grubhub and Yelp did their deal. Food delivery was still in its infancy or at least its early adolescence in 2017. Food deliver was the fancy of young urbanites who went off to work early, stopped at the gym on the way home, and ordered up their dinner around 7:30 or 8 pm. You know them, they’re all around us. They’re my kids. They’re your kids. Or perhaps they’re you.
Fast forward to the spring of 2020 and the onset of COVID-19. Restaurants were ordered shut, the public was ordered to shelter in place. According to McKinsey and Company’s ongoing consumer research, food take-out and delivery saw a 12 point increase from pre-COVID use from 38% to 50% during COVID-19, a 32% increase. This is one of those self-evident data points that make you say, “of course.”
Tough Days Ahead
Despite the boost in demand during the lockdowns, in our view, it will be very tough going for the food delivery aggregators in the coming months.
While orders and volumes grew during COVID-19, operating margins remain under pressure. Competitive intensity continues to escalate, giving consumers an ever-larger say in who wins. The company that can offer the best customer experience via its breath of dining options, speed of delivery, and value of performance will win.
If the delivery companies try to split up the country into operating regions, regulators, and potentially the courts, are likely to intervene. If they don’t and continue to lower fees to win consumers, margins will suffer even more.
Finally, it will be interesting to see what comes of the DoorDash IPO. According to this CNBC report, DoorDash had a valuation of $13 billion when it raised $700 million in a late 2019 Series G funding round. The bad taste that DoorDash’s disastrous tipping policy left in many consumers’ mouths has probably eased. Still, the company’s march to a high-flying IPO is no longer a foregone conclusion. Karma man, karma.
Update: Doordash and Instacart Top Off their Tanks
Yesterday DoorDash announced it was raising “several hundred million dollars” at a 25% higher valuation. Though no specific details have emerged, the new valuation is estimated at $15 billion, essentially two times the valuation that Grubhub accepted from JustEat Takeaway.
Is DoorDash two times more valuable? In most of the research we’ve seen DoorDash’s market share was never two times Grubhub’s. So for DoorDash to be worth two times, there must be some underlying expectations around margin growth, which we frankly don’t see happening.
Time will tell. Keep in mind that on the same day that DoorDash took additional pre-IPO money, so did Instacart, the fast-growing grocery delivery service. DoorDash and Instacart are both huge short term beneficiaries of COVID-19. Will their fortunes rise together or diverge in the coming weeks and months? We think they’ll diverge with Instacart gathering speed and DoorDash struggling to meet its lofty expectations.