Amazon’s (NASDAQ:AMZN) recent market exit can only be a relief for all remaining players in the food delivery service space. The market is sizable, and the opportunity enticing. But the competitive landscape, which we propose to analyze, remains cut-throat. In the absence of a true moat, only the most talented management team will win, which brings me to Grubhub (NYSE:GRUB).
Grubhub’s CEO and founder Matt Maloney bought shares and has an impressive track record in the industry, which bodes well for the stock, and GRUB also enjoys a first-mover advantage, a robust tech stack, and, unlike its main rivals, a rather consistent record of profitability. Add competitors’ Achilles’ heels and merger opportunities into the mix, and a bullish case seems in order.
Via https://newsapi.org online business online marketing online business opportunities A Sizable Market opportunity
Grubhub is a leading online and mobile platform for restaurant pick-up and delivery orders. The company has grown its active diner network to 19.3 million users who can order from more than 115,000 takeout restaurants in over 2,200 cities. For restaurants, Grubhub generates takeout orders from diners at full menu prices without adding seating capacity or wait staff. GRUB does not charge the restaurants on its platform any upfront or subscription fees and only gets paid a percentage of the transaction on orders processed, providing restaurants with a low-risk, high-return solution. Paying a higher commission rate affects restaurants’ prominence on the platform. GRUB empowers diners with a user-friendly interface that helps them search for and discover local restaurants and efficiently place an order from any Internet-connected device.
Today, only 5% of U.S. restaurant sales are online, leaving GRUB — and its key rivals — with an enormous untapped market to try to service.Mobile food ordering grew 130% from 2016 to 2018, with mobile now constituting 60% of digital orders, and mobile apps help generate incremental revenue and encourage repeat purchases. However, only 31% of Quick Service Restaurants have mobile apps for ordering and only 32% offer delivery through apps like Grubhub. Such trends have likely contributed to the recent flood of capital in the online food delivery sector,with venture capital firms investing $4.8 billion across 60 deals in food-delivery companies in 2018, the most transactions ever tracked in the vertical, according to PitchBook Data Inc. DoorDash has raised $2 billion, including a $600 million round of financing in May (its second round this year), giving it a valuation of $12.6 billion and Amazon led a $575 million round of funding for U.K. delivery service Deliveroo. Postmatesalso raised$400 million in the last six months of 2018.
Via https://newsapi.org online business online marketing online business opportunities GRUB’s Financials Looked Great… Until Recently
Source:Grub’s Annual Report
- GRUB’s sales have been growing fast (more than 30% yearly) and consistently.
- The firm is profitable. But while net income doubled in fiscal 2017, it retreated around 20% in 2018 (year over year, ended December 31).
- GRUB’s P/E ratio of 124.5 is greater than 96% of other companies in the Software industry. Shares appear expensive on a trailing basis. They also trade at 35 times and 23 times 2019 and 2020 earnings estimates before interest, taxes, depreciation, and amortization.
- Some investors will argue that GRUB warrants a premium to other lead generation and eCommerce firms (which trade at roughly 30x 2020E P/E) due to its rather attractive margins, long-term growth potential, and growing addressable market. 40x 2020 EPS estimate [0.5x price/earnings to earnings growth rate (PEG) ratio] yields a price objective approaching $110.
- GRUB has a debt/equity ratio of .23x, indicating that it has been less aggressive with using debt to finance growth than 82% of its peers in the Software industry. The balance sheet remains healthy.
- A return on equity of 4.17% and return on invested capital of 3.32% are underwhelming.
- Short interest as a percentage of float is high at 18.85% (see below), indicating that a number of investors are willing to bet against the shares. A stock rally may trigger a short squeeze, but the key question to answer is why so many are skeptical GRUB can appreciate at all. Let’s dig in.
Via https://newsapi.org online business online marketing online business opportunities The Competitive Landscape is Cut-Throat
It sure tells us investors something that omnichannel retailer Amazon has decided to close its 4-year-old restaurants delivery service (by the end of June ’18). GRUB shares jumped on the news. Unfortunately, AMZN probably exited the market for a reason; it was late to the dance and might have had a hard time reaching profitability and market domination in what essentially is a cut-throat competitive environment. Not only is GRUB wrestling with rivals in an increasingly crowded space, butsome of the biggest restaurant operators are also pushing back against fees charged by delivery companies,placing undue pressure on all market participants (and likely adding complexity to any new market entry).
GRUB primarily competes with the traditional offline ordering process used by the vast majority of restaurants and diners involving paper menus that restaurants distribute to diners, as well as advertising that restaurants place in local publications to attract diners. For restaurants, GRUB offers a more targeted marketing opportunity than local advertising mediums like the yellow pages since diners typically access the Company’s platform when ready to place a takeout order. The Company’s online competition consists primarily of national and local service providers, point-of-sale module vendors serving some independent restaurants’ standalone websites and the online interfaces of enterprise restaurants offering takeout. Compared to other online platforms, GRUB offers diners a wide range of choices (>115,000 restaurants), limited cost delivery, menu price parity with any other online ordering venues and full price transparency with no hidden fees.
Unfortunately for GRUB, this only tells us part of the story. As is made clear in the graph below, competition has strengthened considerably and rivals, particularly DoorDash and Uber Eats, have gained market share. Other key competitors include Postmates and Square-owned Caviar, which do not seem to be gaining much momentum at this juncture.
In May 2019 DoorDash and GRUB were tied for 32% of the market. Other recent statistics reached slightly different conclusions, withDoorDash becoming the top on-demand food delivery service after overtaking GRUB in consumer spending market share, according to data released by third-party research firm Edison Trends. In dollars spent, GRUB has steadily lost ground. Uber Eats, which has flat lined (and actually seems to have trended slightly down over the past six months, retreating even more sharply in May), takes the third spot claiming a still impressive 20 percent of the market. It’s essentially become a three-horse race. But DoorDash and GRUB increasingly seem neck-to-neck.
What’s more, five-year-old DoorDash’s win is GRUB’s loss. DoorDash has almost doubled its percentage of consumer spend in just a little over a year. In July 2018, DoorDash’s market share reached little more than half of GrubHub’s 34.4 stake. Two rounds of capital raise from the likes of SoftBank, Sequoia Capital and Singaporean sovereign wealth fund GIC, have given DoorDash capital to expand into even more markets, grab share, andbuild up its merchant services engine, which, according to CEO Tony Xu, constitutes the key reason why DoorDash has been able to reach partnerships with 90% of the top 100 restaurants, thereby becoming the fastest growing service in the space over the past 12 months.
Though DoorDash and GRUB lead in consumer spending, they seem to trail Uber Eats in total number of transactions. Uber Eats likely experienced rapid growth shortly after launching in 2016 because it had a built-in marketing tool with Uber’s ride-hailing services. If Uber Eats is able to increase transaction size per order, and maintain or increase market share (i.e., reverse most recent trends), the service could quickly challenge, if not surpass, its rivals in consumer spending. Uber Eats’ partnership with McDonald’s (NYSE:MCD) (landed in 2016) and other merchants entails smaller tickets items. In 2017, McDonald’s expanded its Uber Eats partnership to offer delivery service from 5,000 of its more than 37,000 locations. Some of Uber Eats’ rivals also rely upon quick service restaurant chains, though. (Interestingly, many Uber Eats customers don’t even use the ride-hailing service: Last year, four of every ten people who used Eats were new to Uber, giving the company access to fresh customers who might later be convinced to give the car service a try.)
From the above, we can draw two key conclusions.
1) In the food delivery business, there is no clear winner yet. The race remains open. The competitive landscape has essentially become a trifecta – GRUB, DoorDash, and Uber Eats – with smaller players like Postmates (expected to publicly list shares this year) and Square’s Caviar seemingly unable to catch up, at least for now.
2) Recent competitive dynamics tends to confirm the market knows no moat. It is thus possible, but still a bit of a stretch, to anticipate GRUB generating excess returns on capital on a consistent basis over the next decade. The company has yet to carve out a sustainable competitive advantage. Put another way, there does not appear to be any significant customer switching costs from one platform or merchant to another, and while GRUB has developed a marketplace network of restaurants and users, several well-capitalized rivals have been able to build out similar networks. Partnerships with restaurants for the most part remain nonexclusive.
It’s a fast-paced, very fluid market. GRUB, DoorDash and Uber Eats track sales performance on a daily basis and adjust go-to-market parameters to enhance penetration and stave off competition — modulating marketing tactics, operating discounts, targeting specific audiences in the process — all of which impact both the top and bottom lines of market participants continuously. Charges and service fees, minimum orders per amount, surge pricing, key merchant relationships and geographic coverage, are other defining factors in the race, calibrated real-time.
To an extent, if one of the firms mentioned above has a moat, it probably is Uber Eats, which has the luxury to cross-sell online food ordering and delivery to its current, much larger transportation, peer-to-peer ridesharing, and ride service hailing client base. In this context, the recent degradation of its market positioning comes as a bit of a surprise. Uber Eats seems to be facing dilemmas of its own, challenges that its two main pure-play food delivery rivals don’t have to overcome (more on this below).
This intense competition may limit GRUB’s take rate growth, and higher costs associated with the expansion of delivery service may impede operating margin expansion. As a result, assigning the firm a 10-year average operating margin of 20% indeed remains a challenge. Market share and bottom line (fair value) uncertainties run rather high. Market leadership perpetuation is far from guaranteed, and actually is already being disputed. Now I remember reading similar analyzes of Netflix when the likes of Wal-Mart were pursuing Netflix’s business. It turns out Wal-Mart exited the DVD-mailing market shortly thereafter and Netflix’s stock took off (to never look back, at least so far!). Granted, Wal-Mart never came close to owning a 27% market share (à la Uber). But the market is crowded, and some of GRUB’s peers include well-capitalized rivals, in addition to local service providers. GRUB has created a network effect, strengthening further with the virtuous cycle driven by an increase in diners on one side and in restaurant partners on the other. However, this network is no longer strong enough to be considered an economic moat source for GRUB, as other rivals again have created similar platforms. With low barriers to entry, the firm’s leadership could be at risk in the long run. Lower price might become the only differentiator among the players in this space, giving more leverage to companies that have access to more capital and that are benefiting more from brand awareness.
Grubhub needs to continuously spend to acquire diners while competition may pressure margins. GRUB’s more aggressive ad spending in the short term could yield brand loyalty in the long term, but there is reason why its key rivals could not do the same.
The capital infusion that DoorDash and other rivals have enjoyed and an expansion of national chain partnerships likely constitute other near-term headwinds for GRUB profitability potential (with deliveries subsidized, courier incentives increasing, and take rates declining).
Given the above, it is not difficult to understand why some are willing to short GRUB. An erosion of the firm’s market share and deterioration of its profitability are both clear concerns. In sum, sellers have a point.
Of course, in a fast-growing market there is enough opportunity for three competitors to thrive. Uber Eats’ recent deceleration may also work to GRUB’s advantage. Fine. But we want to make sure that GRUB is able to fight back. After all, DoorDash has shown spectacular market savvy and could become the dominant player, with even GRUB largely displaced. And Uber Eats is far from out yet, obviously.
Via https://newsapi.org online business online marketing online business opportunities Key Insider Purchase, Good Omen
CEO Matthew Maloney purchased about $1 million worth of GRUB on April 30, 2019, at a price of $64.87 per share — an encouraging sign. What does he see that shorts may miss?
The firm also enjoysstrong institutional sponsorship. Baillie Gifford and Company, which was an early investor in some of the world’s most valuable private and public tech companies including unicorns from nearly all generations — Amazon, Google, Salesforce, Tesla, Airbnb, Spotify, Palantir and even SpaceX — owns 10%. (Check out Baillie Gifford’s portfolio, a terrific source of inspiration, here.) The VanGuard Group also owns about 10% of shares. BlackRock owns close to 5%, Morgan Stanley 4%, amongst other funds (as of March 31, 2019).
There must be comparative advantages to Grubhub’s offering. Let’s try to delineate the firm’s competitive edge then. Indeed, GRUB does offer a number of characteristics that its rivals may in some cases have a hard time to match at this juncture – key market differentiators and decisive leads or even probable winners.
Via https://newsapi.org online business online marketing online business opportunities First Mover Advantage
GRUB’s entry in the market five years ago has enabled the firm to build brand equity and create superior network effects. Increases in the number of restaurants on the GRUB’s Marketplace make it more attractive to diners and increases in the number of diners in turn make the Platform more attractive to restaurants. Scalability of the platform has the potential to lessen the firm’s annual capital expenditure and allows it to lower its take rate and compete more effectively with newer entrants in the market. However, as indicated above, this network is no longer strong enough to be considered an economic moat source for GRUB, as other rivals have created similar platforms and functionality, even if more recently.
Over the years, GRUB has also been able to fine-tune a number of go-to-market practices and in the process create key competitive advantages.A recent upgrade by Citihighlights GrubHub’s improvement in its delivery network “efficiencies” and possible partnerships. Early tests with McDonald’s, Starbucks and other large chains show the firm still enjoys significant momentum. Likewise, Dunkin’ Brands recently announced a new “Dunkin’ Delivers” online ordering & delivery service offered through Grubhub & Seamless. The service will launch across 400 Dunkin’ restaurants in all five boroughs of New York City, expanding to Boston, Chicago and Philadelphia “in the coming months”. Although Dunkin’ is also available on DoorDash in New York, only a couple of restaurants are listed.
Via https://newsapi.org online business online marketing online business opportunities Tech Stack Forte
In November ‘15, Dunkin’ first tested mobile ordering through a partnership with DoorDash. The partnership launched at 120+ restaurants in Maine, 20- in Dallas, then expanded to Atlanta, Chicago, Los Angeles and Washington DC, followed by New York and New Jersey in ‘17. However, in February ‘19 Dunkin’ announced it would begin testing delivery through Grubhub. Full integration with POS was mentioned as one of the decisive factors — highlighting how GRUB’s investment in providing restaurants with a full tech stack (with seamless POS integration & order processing) may help it counter DoorDash and other rivals’ offensives. Dunkin’ has invested in its digital capabilities by implementing new “Next Gen” store designs, mobile drive-thru lanes, dedicated pickup stations, and digital order status boards, at select restaurants. GRUB’s value-add tech stack and leading collection of merchant relationships appear to be synergistic with customers’ tech requirements and constitute paramount competitive advantages.
Mobile food ordering is growing fast, and mobile apps help generate incremental revenue and encourage repeat purchases. GRUB also offers customizable integrated technologies that support digital orders with point of sale system integration, customer relationship management and loyalty programs, actionable insights to optimize delivery, menus, pricing. GRUB provides diners with outstanding choice as it aggregates menus and enables ordering from restaurants across more than 2,000 U.S. cities (as of December 31, 2018). A user-friendly platform makes ordering simple from any connected device, thus bypassing phone orders and error prone processes. It is key to remember, though, that, while GRUB has largely been able to capitalize on all these tech and data trends, GRUB competes with other online platforms based on its ability to generate additional orders via technology and other means, manage challenges such as customization, menu updates and to help restaurants improve their operational efficiency. Product innovations in POS integration, mobile application development, or customer relationship management programs, as well as providing a seamless diner experience, are not merely GRUB’s prerogative. To sum it up, Uber or even DoorDash will strike few as tech laggards… Again, Grub has a solid offering, but no moat per se.
Via https://newsapi.org online business online marketing online business opportunities Grubhub’s Consistent Record Of Profitability
As indicated above, GRUB has been operating in the black rather consistently. While recent competitive pressure seems to be eroding profitability, the firm does not face the same predicament as DoorDash and Uber Eats: both rivals run significant losses.
Further, the three firms may operate with slightly different margin generation profiles. DoorDash has special partnerships with a number of popular restaurants, includingJack in the Box,Cheesecake Factory, IHOP, and Taco Bell.It recently startedworking with Wendy’s, shortly after Uber Eats began a partnership with McDonald’s. But many of these wins are prevaricated upon rather uneconomical or low-margin meal-delivery transactions. Mario Cibelli of Marathon Partners commented in Barron’s thatone transaction from an independent restaurant could accrue the same gross profit as close to ten orders from a national fast-food chain, which tend to exhibit rather low meal prices and afford poorer returns on investments. Therefore, making independent restaurants one of its sweet spots could actually help any competitor like GRUB formulate a winning strategy.
Of course, solid earnings is what makes or breaks a great stock. GRUB’s track record thus augurs well for its shares. To the extent that the firm is able to preserve it, the stock could, possibly should, reveal itself as a long-term market winner.
Via https://newsapi.org online business online marketing online business opportunities Deals And Merger Opportunities
GRUB has pursued expansion opportunities in existing and new markets, as well as in core and adjacent lines of business through strategic acquisitions and partnerships that have helped accelerate growth. Indeed, the firm’s recent acquisitions of Tapingo Ltd., a leading platform for campus food ordering, LevelUp, a leader in mobile diner engagement and payment solutions providing restaurant partners with powerful CRM and analytical tools to increase sales, Yelp’s Eat24, LLC, a wholly-owned subsidiary of Yelp Inc. and provider of online and mobile food-ordering services for restaurants across the United States, A&D Network Solutions, Inc. and Dashed, Inc. (collectively, “Foodler”), a food-ordering company headquartered in Boston, and more, show the firm is aggressive in its pursuit of market domination including via mergers and acquisitions. The absence of significant competitive moat and embrace of tech may explain why the firm has struck a number of deals, and may seek to swallow additional competitors and adjacent players in the foreseeable future. (If you can’t beat them, buy them…)
This said, the firm faces competition in that arena, too, as some of GRUB’s rivals have access to even more capital and can initiate and finalize large M&As, as well. In other words, fierce competition during any consolidation period could raise acquisition prices dissuasively for GRUB, and more likely than not minimize returns on potential investments.
Further, GRUB’s many assets, competitive positioning as a co-market lead, and enterprise value of $6.9 billion make it a potential takeover target for bigger tech companies that want to dominate the food delivery space. Amazon has been named as a potential acquirer. After all, AMZN’s recent exit of the U.S. food delivery space may make even more sense if the e-commerce juggernaut finds it easier to acquire a lead contender in the vertical than to develop organically and likely too late. The integration of Whole Foods’ groceries into GrubHub could constitute a game-changer, as well. Other tech giants may also get interested.
Via https://newsapi.org online business online marketing online business opportunities Competitors’ Achilles Heels And Other Distractions
Not only does GRUB exhibit a number of competitive advantages (albeit no moat per se), but its rivals also seem to have their share of weaknesses and liabilities. As indicated above, both GRUB’s competitors have yet to reach profitability.
Further, they face a number of distractions. For instance, DoorDash has pursued an aggressive and successful growth strategy. But in the process, the competitor has beenknown to deliver food from restaurants that had not given them explicit permission to do so. These practices have given diners more options but have angered some restaurants, such as In-N-Out Burger,resulting in lawsuits.
Uber Eats, while deemed a top priority within Uber, has had to overcome its own distractions, which may help explain the company’s recent market share erosion. For example, not so long ago,Uber’s executive team fell apart in the wake of reports of sexual harassment, gender discrimination and questionable business ethics.
GRUB and DoorDash’s single-minded focus on food delivery may also serve both competitors well. Although it is as easy to argue that Uber may be able to overcome short-term distractions quickly and enjoy plenty of runway in a vertical where, granted, it is a rather new operator, but can cross-sell into its huge ride-sharing client base.
Via https://newsapi.org online business online marketing online business opportunities Top Management
GRUB enjoys a number of advantages but no moat and has to stave off competition from savvy marketers and well-capitalized rivals. In this context, quality of leadership appears more crucial than ever. Matt Maloney, the founder and CEO of Grubhub, has a solid track record. Under his leadership, GRUB has grown its active diner network to 19.3 million users who can order from more than 115,000 takeout restaurants. He has led the company through five rounds of investment funding, several mergers, and a 2014 initial public offering. Matt was named one of America’s most powerful CEOs 40 and under in Forbes Magazine in 2016 and one of the top 50 business people of 2014 by Fortune Magazine.
Likewise, under the tenure of Adam DeWitt, President and CFO of GRUB, the firm’s annual revenues have grown from $20 million to more than $1 billion. The executive has co-led the company through its initial public offering in 2014. Before joining Grubhub, Adam was the CFO of publicly-held optionsXpress Holdings, Inc. and held financial leadership roles at JPMorgan Chase.
Sam Hall, chief product officer of Grubhub, was chief product and technology officer of ClassPass, leading the company’s engineering, product and design teams. Previously, he spent nearly 10 years at Amazon and served as vice president of consumable customer experience, overseeing worldwide product management, design, data analytics and engineering for cross-category products and programs. Sam also held the position of vice president of mobile at Amazon, where he was responsible for mobile shopping apps for phones and tablets, along with the company’s mobile websites worldwide.
Clearly, GRUB has a solid management team. Not that DoorDash or Uber are necessarily left wanting in this area. This said, ethical dilemmas at the former and recent management instability at the latter may have constituted unwelcome distractions in a recent past.
Via https://newsapi.org online business online marketing online business opportunities Risks
Of course, you never know how far down a stock will go before initiating a turnaround. Now that the bulk of competitive threats to GRUB are priced in the stock, what else can hit? Some further erosion of the firm’s leadership is a clear risk. Uber is a formidable competitor, and DoorDash has grabbed an impressive amount of market share in a rather short time. Unanticipated revenue/earnings shortcomings are always contingencies, of course. A market downtrend and more volatile stock market in general could also inflict pain. M&A integration headwinds may constitute another impediment. Potential disruption to the closing of recent acquisitions would also present a risk to Grubhub. GRUB has significant room for growth in the US ahead, but will need to invest internationally if it decides to expand geographically. In turn, many international markets have their respective food delivery leaders deep-seeded and entrenched.
In conclusion, GRUB’s leadership in online food delivery is being challenged. The firm has lost the clear market edge it had sustained for some time. It may be able to reclaim it. Top management, a solid embrace of technology and deal-making, and a rather consistent (if recently called into question) record of profitability, bode well for the firm. But the absence of a true competitive moat and emergence of two top competitors in Uber Eats and DoorDash surely complicate matters. Great leadership will indeed be required for GRUB to triumph.
Some quick notes:
- This is only provided as a starting point. Due diligence and further research are required before investing.
- Please, again and again remember that the more ‘dramatic’ the turnaround, the more inclined you may be to rely upon this one simple rule: You never know how low a stock will go before it shoots back up!
- I have found Seeking Alpha an increasingly attractive platform for publishing exclusive content. I also publish articles on individual stocks, industries, financial and economic trends, insider transactions, and hedge funds, on Financial Freedom Wiz and FUNanc!al.
Disclosure:I am/we are long GRUB.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.