As I pull out the two racks of pork ribs I bought to barbecue on Saturday to celebrate Independence Day, I’m recalling our recent interview with Jon Sewell of Iowa City on his effort to launch a series of cooperative food delivery services around the country. That post, triggered by Just Eat Takeaway’s acquisition of Grubhub, explored many of the challenging dynamics of the local food delivery space.
Well, this week we learned of Uber Eats’ pursuit of Postmates for a reported $2.6 billion. Having raised more than $900 million since its founding, the $2.6 billion valuation is probably not the exit investors were hoping for when the company began the IPO process roughly a year ago. It certainly speaks to how difficult it is to achieve scale in the hyper-competitive last-mile delivery space.
What’s an Uber to Do?
Uber, facing a faltering ride-sharing business amid WFH and travel bans, is pivoting to logistics. Acquiring Postmates would grow its market share in the U.S. food delivery business to about 30%. This is still well behind DoorDash’s estimated 45% share.
Last month, Second Measure shared some interesting data about the food delivery space. The two charts below tell an interesting story. The first shows an estimate of the overall market shares of the key operators.
Simple math tells us the U.S. food delivery business is valued at around $32 billion ($2.6 billion divided by 8%). This is consistent with the $7.3 billion valuation that Grubhub received for its 23% market share ($7.3 billion divided by 23%). Again, about $32 billion.
In the second chart, Second Measure estimates the market shares for the same companies in the major U.S. markets. The combination of Uber Eats and Postmates gives them market power only in Miami and Los Angeles. They would have 78% and 50% market shares, respectively, in those cities. In key cities like San Francisco and New York, they’d only have market shares of 20% and 23%, respectively.
We wonder if this is ultimately a desperation move for both companies. Uber lost out on the Grubhub deal. And Postmates missed its IPO window. Or maybe “consolation” is a better word to describe this seemingly lackluster pairing?
According to information released by Just Eat Takeaway when the Grubhub deal was announced, Grubhub processed 180 million orders from 23 million accounts. That’s about eight orders per account per year. Those 180 million orders drove gross meal value (GMV) of $5.9 billion, or $32 per meal. The company generated $1.3 billion of revenue via those 180 million orders. That’s about $7 per order or about 22% in commission.
Where is all this heading?
Let’s consider the potential market. Using the data from the Just Eat Takeaway deal and the Second Measure share estimates, there were some 780 million orders last year. If you divide 780 million by an average of eight orders (see above) you get about 100 million users. Let’s use 130 million households as the total addressable market.
Again, some quick math. If every household chooses to order via a delivery app even 12 times a year — up from the current eight times a year — that would yield about 1.5 billion annual orders. At $7 per order, that translates into about $10 billion in revenue for the U.S. restaurant food delivery business.
That’s a lot of money. But when you think about the grocery delivery business, it’s chump change. A family of four probably needs at least $150 per week in food or $600 per month. If you assume grocery delivery is a semi-weekly event, that is 26 delivery orders per year. With players like Instacart, Walmart, and Amazon deeply into the grocery delivery business, it would seem that they would be the most logical players to consider entering the restaurant food delivery business.
That said, Amazon already made a go of it and exited. Perhaps they’ll reenter via a more established player. Square, which sold Caviar last year, announced it will be re-entering the delivery arena via partners. The payments company sees integrating delivery options as another means of tightening its connections to local merchants.
Back when I worked at the phone company, we had many conversations about who would own the last mile. In that context, the conversation was about owning the link from the central office where the telephone switching equipment sat to the junction box sitting outside the resident’s house.
Today, that last mile has a different meaning, but it remains a competitive hot zone. We wonder if local food operators — grocery stores and restaurants — and consumers can keep up with all the high-tech action taking place in the local market. After all, consumers just want their meal order delivered on time and still hot.