Summary
I believe that there is a misunderstanding on increasing competition against Waitr as it has a competitive advantage in terms of a sizeable restaurant supply in its tier 3/4 markets.
However, it is true that Waitr has incredibly poor gross margins due to its focus on the lower margin food delivery business vs. higher margin marketplace and increasing delivery costs.
It also has incredibly high operating costs due to its relatively high general & administrative costs that I attribute to its relatively high headcount.
Management has guided for long-term EBITDA margins of 20% without providing much details. I have provided the necessary gross and operating margins that Waitr needs to realistically achieve to hit 20% EBITDA margins.
Despite uncertainty surrounding Waitr’s margins, top-line growth has the potential to hit $700 million by 2023 based on TAM numbers provided by management and user penetration rate estimates.
I previously wrote about the conflicting views of the food delivery industry in the US through the lens of Grubhub (GRUB). On one hand, there are secular tailwinds that are making this a high growth industry as consumers are beginning to accept food deliveries as a normal and routine part of their lives. However at the same time, the industry is facing rising competition fueled by VC and PE money which has resulted in a severe contraction of margins and an intense price war. This was the reason behind my article where I wrote about my worries about Grubhub’s slowing revenue growth and market share as well as shrinking margins.
However, many users in the comment section told me to do more research on another food-delivery company, Waitr (WTRH). Like Grubhub, its stock has done dismally over the last few months. This is in stark contrast to privately-held food delivery companies that have seen their valuations soar. For example, DoorDash (the new market leader) was recently valued at $12.6 billion in May, nearly double from its Feb valuation of $7.1 billion. Postmates (POSTM) was also valued at $1.85 billion, up from the $1.2 billion that it received only a few months before. This is in stark contrast to Grubhub whose valuation has nearly halved to $7 billion as well as Waitr which has fallen from nearly $1 billion to $400 million. The discrepancy between valuations of publicly traded and privately held food delivery companies have made companies such as Grubhub and Waitr interesting prospects.
Can Waitr survive competition?
One of the biggest concerns about Waitr has been the continued increase in competition in the industry where competitors are far bigger and far better funded. The best analogy of Waitr’s position in the food delivery was provided by Friendly Bear, a short seller.
A competitive landscape that makes WTRH look like a JV high school basketball team facing the Kobe/Shaq LA Lakers.
- Differentiating factor. Waitr’s differentiating factor has always been the locations that it operates in. According to its 10-K, “Waitr operate[s] in small and medium sized markets in the Southeastern United States, spanning more than 250 cities across 10 states.” Since its acquisition of Bite Squad, it is now in 700 cities in 29 states. Its focus on smaller markets was a form of competitive advantage against Waitr’s bigger competitors since it operated in markets that its competitors were not in as these smaller markets were largely ignored in favor of bigger cities (markets). As can be seen below, Waitr does not operate in traditional large markets such as New York, Chicago or LA.
- Increased competition. However, as the bigger markets become increasingly saturated and growth has stalled there, these bigger competitors have begun to enter Waitr’s previously non-competitive markets in 2018. Their expansion have been quick and extensive given their new rounds of funding for the privately held DoorDash and Postmates as well as the recently IPO of Uber (UberEats).
- Postmates. According to a recent Fortune article in April 2019, Postmates added 1,000 more cities to its service. It is now in 3,500 across 50 states, which means that it’s available to more than 70% of U.S. households, a drastic increase from 26% in mid 2018. Its CEO has specifically pointed out that its expansion into smaller markets like “Park City, Utah; Santa Cruz, Calif.; and Myrtle Beach, S.C.” is because “Postmates thinks it can become one of the top services [as] there is little competition.”
- Uber Eats. Uber Eats also made similar plans to cover up to 70% of the US by the end of 2018. Analysts have been particularly impressed with Uber’s speed of expansion, increasing its market share from 3% in 2016 to 24% in 2018.
- DoorDash. DoorDash has made the biggest progress in its expansion plans. Its revenue growth has accelerated to 325%, and in 2018, it expanded its geographic footprint by 5x, reaching 3,300 cities and 80% of Americans. The overlap between DoorDash and Waitr is undeniable as DoorDash continues its rapid expansion.
- Grubhub. Grubhub expanded into more than 100 new cities in 2018, many of which are small and medium markets.
Waitr’s Hyperlocal Strategy
Despite the increased competition, management continues to believe that its long-time focus on smaller markets gives it an undeniable advantage over its competitors.
Our founding strategy to serve smaller markets in the U.S. continues to pay off. Our business model has proven to be an advantage over competitors in the small and midsized markets that we serve. These markets are won at the local level and our proven playbook is local market-focused, therefore, national scale is not always an advantage to winning at a hyperlocal layer. We cater to the wants and needs of the community for consumers and restaurant partners alike.
Its confidence in its hyperlocal strategy is backed up by its continued leadership of market share in some of its small and medium markets (as seen below) despite the increase in competition. But what exactly is its hyperlocal strategy that it is so confident in?
I believe that there are only two real differentiating factors between online food delivery platforms. Firstly, it’s price, customers will choose the platform that offers them the best price in the form of discounts or free deliveries. Secondly, the number and type of restaurants that it has for users to choose from. Hence I believe there is a clear misunderstanding on whether Waitr can survive increased competition. Waitr’s hyperlocal strategy is centered around its competitive edge in restaurant supply and helped by its clear strategy in focusing on small and medium cities.
- Restaurant supply – misunderstanding of escalating competition. A concrete advantage that Waitr has is that in markets that it has had a presence in for quite some time, it has acquired a sizeable number of restaurant partners thus making it more difficult for its competitors to step in. This is especially relevant in small and medium markets where there are many more local restaurants/eateries as compared to chain restaurants. Hence, management believes that its restaurant supply, which is “typically much higher than many of the competitors” is a durable moat.
And so we’ve had competitors coming in for years and they spend a lot of money, they’ve done free delivery, they spent money on advertisement, they’ve bought at AdWords, whatever it might be, but yet they get very little of the restaurant supply in those markets to sign up. And that’s been a significant advantage for us.
- Restaurant supply (established markets). There are two parts to this that needs to be verified. Firstly, that it has managed to maintain its restaurant supply for well-established markets despite the influx of competition. I have compiled a list of six different markets that Waitr (and BiteSquad) has had a significant presence in for a number of years that other online food-delivery companies have started entering in. As seen in the below table, Waitr has a significant advantage in all six markets in terms of restaurant supply. With the exception of price, restaurant supply is the only other concrete moat that an online food-delivery company can have. Hence, it is reassuring that despite the increased competition, Waitr has managed to maintain and even grow its sizeable list of restaurants. Furthermore, only DoorDash has really expanded into Waitr’s markets.
Compiled on July 1st 2019
- Restaurant supply (new markets). The second part to management’s claim is that even in new markets, Waitr is able to quickly establish a sizeable advantage in restaurant supply due to its experience and expertise in small and medium cities and working with local eateries. In Oct 2018, Waitr announced that it will expand into about 20 more small and medium cities. I placed these cities in a table to compare the number of restaurants that Waitr and other online food delivery platforms have. Waitr has a commanding lead in restaurant supply with the exception of two cities – Chattanooga and Athens. I used the address of either city hall or the city’s public library to calculate the number of restaurants that Waitr and other platforms deliver to. It is also worth noting that Grubhub and Uber Eats have yet to even enter many of these small and medium cities that Waitr is in. Hence, I seem inclined to believe management’s claim that Waitr has managed to maintain its durable moat (restaurant supply) despite the increased competition. This was reaffirmed by management in the recent earnings call who said that “in most of the markets that we operate in, we have a clear leadership (market share) position.”
Compiled on July 1st 2019
- Focus on small and medium cities (clear strategy). As previously mentioned, it is clear that Waitr is the dominant force in many of the small and medium cities that it is currently in. Waitr is well aware that its comparative advantage is in small and medium American cities in the Southeast of America where competition is not as intense (Uber Eats and Grubhub aren’t even in many of the cities that Waitr is in). I believe that the focus and clarity on its overarching strategy is beneficial as it would not waste money in trying to establish itself in markets that it does not have the necessary expertise and experience to succeed. This was reaffirmed by Waitr’s CEO, Chris Meaux, in a 2018 interview where he explained why the company backed out of California. “What we figured out really quickly is that our playbook is more suited to contiguous expansion as opposed to just popping up hubs around the country. As a result, we grow now from markets we’re already strong in. We realized we really need to focus on our base – the Gulf South.”
- Technology (W2 model) that is focused on small markets. According to management, its platform is “purpose-built” for small and medium markets. Waitr has highlighted its routing algorithms are optimized for getting food to customers in the more spread-out geographies. Its W2 model also helps Waitr’s efficiency by optimizing the matching of supply and demand for drivers. Waitr focuses on accurate forecasting in order to create an efficient use of its drivers who are also paid by hour instead of per order. Hence, the efficient and optimal matching of driver supply and demand will mean that drivers are able to deliver more per hour.
Waitr’s poor financials and margins
Besides the argument by shorts that Waitr is facing escalating competition and competitors that are increasingly well-funded; the other common argument is the problem of high cash burn and uncertainty on the timeline towards positive EBITDA margins.
Understanding low gross margins (high costs of revenue)
As seen in the below table that I’ve compiled of the different public food delivery platforms, Waitr has, with the exception of Meituan (OTCPK:MPNGY) (China), the lowest gross margins. I believe that there are two reasons that helps explain Waitr’s low margins: its focus on lower margin delivery business as opposed to the higher margin marketplace business as well as an inefficient W2 delivery model that results in a high cost to serve/deliver.
- Focus on lower margin (platform to consumer) and its other financial impacts. I first came across the idea that Waitr has a weaker business model as compared to other online food delivery platforms in a short thesis presented by althea on Value Investors Club. His/her thesis was that Waitr’s business model is centered around food delivery which has lower margins as compared to its competitors (Grubhub) who are focused more on the higher margin marketplace business. According to Waitr’s 10-K, Gross Food Sales (represented as GMV in below table) include not only the actual food sales but also sales tax, prepaid tips and diner fees. Hence as can be seen, Waitr’s focus on the food delivery business has three immediate consequences. The first is inflating gross food sales (GMV) and the second is a higher take rate (includes driver fee). But most importantly, the online food delivery business has far lower margins.
- Low gross margins. Due to elevated GMV and take rate, the food delivery business has a higher absolute revenue but lower gross profits (around 40%) as compared to the marketplace business where gross profits are closer to 100%. The table’s numbers are a little exaggerated since the cost of revenue for marketplace business is certainly not $0 but what is clear is the stark difference between gross profit margins. This is quite worrying because it suggests that despite Waitr’s continued gross margin expansion, there is clearly a short-term hard cap on its gross margins at around (30-35%) due to its focus on the lower-margin food delivery business.
Source: althea (Value Investors Club)
There are two main ways for Waitr to increase gross margins (even to the extent of passing its “hard cap”). Firstly it is to increase take rate which increases revenue hence if delivery costs remain the same, gross margins will increase. Secondly, it is to lower delivery costs which will increase gross margins as costs of revenue falls.
- Higher cost-to-serve/deliver. However, while Waitr has been successful in the first part (increasing take rate), it has been unsuccessful in the second part (lowering delivery costs). Instead, costs of revenue has actually increased. Since Waitr’s business model works by paying its drivers by the hour rather than per delivery, costs of revenue (delivery costs) are not fixed. Hence by dividing costs of revenue by gross food sales, we would get costs of delivery per $1 of gross food sales. As seen below, Waitr’s cost of revenue per each dollar of Gross Food Sales has increased each year despite the substantial increase in take-rate and that average order size has remained stable. From the cost of revenue per $1 of gross food sales and the average order size, I’ve managed to calculate delivery cost per order, which has increased substantially from $5.32 in 2016 to $6.63 in 2018. This is problematic as gross margin expansion could have been bigger from the increase in take rate, but was hindered by the increase in delivery costs.
- Inefficient W2 model & inefficiencies in tier 3/4 cities. This suggests that Waitr is extremely disadvantaged by its W2 model which pays drivers by the hour instead of other platforms which pay drivers per delivery. As seen in the below chart, paying by the hour only works if there is an average of 1.45 orders per hour hence cost of delivery per order would be $5, equal to the 1099 model. However, since delivery cost per order has steadily increased (as shown above) to a 2018 number of $6.63, I believe that the current W-2 model is actually inferior to the 1099 model.Source: Waitr
- Besides paying them on a per hour, Waitr has decided to consider them as part of Waitr’s workforce and not as independent contractors as other platforms such as Grubhub has. This has led to a class action lawsuit filed against Waitr. They argue that “Waitr’s systematic failure to adequately reimburse automobile expenses constitutes a ‘kickback’ to Waitr such that the hourly wages… was and continues to be below the minimum wage.” These automobile expenses that are not being reimbursed refers largely to gas, and as the victims are arguing, because Waitr operates in low density areas, drivers usually need to travel considerable distance for deliveries. Hence, the food delivery business in tier 3/4 cities are inherently disadvantaged due to the considerable distance that is required to make deliveries hence the need to pay drivers more.
- Can gross margins increase with scale? Despite pessimism about increasing cost of delivery and inefficiencies caused by the W2 model, gross margins can still increase by increasing take-rate. As seen in the graph below, Waitr’s gross margins in its top 10 markets are around 39% which means that a pathway to gross margins of 33-35% is quite possible with increased scale.
Source: Waitr
Understanding low operating/net margins
Besides having low gross margins, Waitr’s operating costs can be divided into three major components – Sales & Marketing, Research & Development, General & Administrative.
Why are G&A costs so high? The problem seems to lie in general & administrative costs which are abnormally large relative to other online food delivery companies. They refer to salaries, benefits, stock-based compensation and bonuses for all staff (excluding drivers), other professional services, insurance, facilities rent, and other corporate overhead costs.
Waitr’s G&A expenses are high on an absolute level as well at around $31.5 million compared to Grubhub’s $86 million despite being a much smaller company (Grubhub’s market cap is 14 times bigger than Waitr). In order to understand why G&A expenses for Waitr are high on both a relative and absolute basis, I first examine executive compensation (cash compensation and stock-based compensation).
- As seen in the below tables, Waitr’s executive team’s cash salary (base salary + annual bonus) is actually very high relative to Grubhub’s executive team’s cash salary. Despite Waitr being a significantly smaller company, their executives are paid very similar cash salaries. However, the differences clearly lies in the equity award (stock options and stock awards) where Grubhub’s executives are compensated much more handsomely. The difference in their stock-based compensation can be seen in the amount of stock based compensation paid in 2018, about $9.5 million for Waitr and about $64.3 million for Grubhub.
- I believe that the relatively high G&A costs can be improved with scale, especially when considering that the average salary at Waitr is less than that at Grubhub. According to Waitr’s 10-K, for 2018, it had approximately 22,000 employees including drivers and it had approximately 21,000 drivers, which means it has around 1,000 employees (non-drivers). On the other hand Grubhub has 2,722 employees according to its 2018 10-K. Assuming that employee salary and stock-based compensation make up most of G&A costs, I am able to estimate average salary per employee (non-driver) for 2018 after accounting for Waitr’s business combination-related expenses (one-off). Waitr’s average annual salary is around $25,380, which is lower than Grubhub’s average annual salary at about $31,400. Hence it is clear that the higher G&A costs for Waitr is due to its higher relative manpower (1,000 employees for $69 million in revenue) as compared to Grubhub (2,722 employees for $1.09 billion in revenue).
- Is high G&A costs a problem that can be solved with scale? Cost improvement from 2017 to 2016 where G&A costs as a percentage of revenue fell from 73.6% to 41.3% suggests that it may be improved with scale. However, 2018 and 2019 Q1 numbers do not look too great. 2018’s G&A costs as percentage of revenue increased from 41.3% to 45%. 2019 Q1 G&A costs as percentage revenue increased YoY from 28.3% to 39.4%. However, this number may improve in the future due to synergies and redundancies from the combination of BiteSquad and Waitr that leads to greater efficiency through layoffs. Furthermore, management in the 2018 10-K attributed the huge jump in G&A costs to one-off “transaction costsand stock-based compensation incurred in 2018.” If one does not take the one-off business related combination expenses ($5.77 million), G&A costs would be 36.6% of revenue. Furthermore, as previously mentioned, Waitr’s high G&A costs are in part due to its relatively high headcount hence as long as scale increases faster than headcount, G&A costs should continue to be lowered once accounting for business combination expenses. However, I believe that the jury is still out on whether Waitr can truly bring G&A costs to a respectable level (low 20% and below). The vesting of stock-based compensation seems like a normal part of compensating employees at companies such as Waitr so I am not convinced that it should be removed. Furthermore, I am also unsure as to why Waitr’s headcount is so high in 2018 considering its operations are so much smaller but this will be something to keep an eye on in the future.
- The other two operational costs (as a percentage of revenue) are similar to the profitable Grubhub. Hence, the path to profitability lies in whether it is able to lower costs of sales as well as general & administrative costs.
Long-term EBITDA/adjusted EBITDA margins
This is the main point on the short thesis that I can agree with. Management has guided for long-term EBITDA margins of 20% however has provided no timetable to reaching 20% EBITDA margins. Waitr’s CEO, Meaux, said in the recent earnings call to a question of what exactly “long-term” means. “It’s not next year but it’s in the relative near future, right? It’s not — we’re not talking about 10 years down the road here.”
While management has not given explicit numbers on EBITDA margins in its more profitable markets, CEO Meaux said:
I think what maybe gets lost, too, about our business is because we were so capital constrained for so long, we were both either profitable or very close to profitability when we — in Waitr’s case, when we did the Landcadia transaction, we were just a few hundred thousand dollars a month away from profitability. In the case of Bite Squad, they had already been profitable at some period. So we know how to get this business profitable. But we want to make sure that we’re maximizing our ability to grow in scale and so we’re putting the investments into those markets…. if we just stopped opening new markets, it wouldn’t take us long to find profitability.
Conclusion
2019 is poised to be a year of growth for Waitr. Management has guided for 2019 revenue to exceed $250 million and it’ll also expand into more than 200 cities. This expansion will mean increased losses particularly in general & administrative costs and limited gross margin expansion since newer markets will have lower gross margins.
According to Statista’s graph (below), the average user penetration rate in the US for 2018 (platform to consumer delivery) is 13.6%. On the other hand, the average Waitr market penetration rate is 5% while its market penetration rate for its top 10 cities is much higher at 9%.
Source: Statista
Source: Waitr
Given Waitr’s under-penetration in current markets as well as its Total Addressable Market (TAM) that is 5x its current market size, I believe that there is a huge runway for growth for Waitr. For example, assuming Statista’s estimates that user penetration rate in 2023 would be 18% and assuming Waitr manages to have a market penetration of about 10% (55% of market share in its small and medium markets), this indicates that revenue could increase by tenfold by 2023 (around 700 million). This is assuming constant ARPU (which is unlikely as ARPU should increase) as well as constant take rate. I believe that top-line growth would exceed expectations and should have no problems hitting $700 million by 2023. An example of Waitr exceeding expectations was it predicting 120% YoY revenue growth but actually hit 202% YoY growth.
Source: Waitr
What I am most concerned about is not the increasing competition as I believe that Waitr is still and will continue to be the market leader in tier 3/4 cities due to its competitive advantage in restaurant supply and the current disinterest of larger online food delivery platforms (except for DoorDash) in entering the same markets, but rather whether margins can improve.
I don’t expect 2019 to see any material improvement in operating and net margins; however, I am hoping to see guidance or marked improvement for gross margins to hit around the 35% range, G&A costs to be lowered to low 20% range as well as a timeline to achieve long-term EBITDA margin of 20%. I believe that gross margins can be achieved either through a marked improvement in delivery costs (when W2 model actually achieves superior economics with scale) or continued improvement in take-rate (which is more unlikely). Until then, I believe there is too much uncertainty to buy into Waitr except for perhaps a small speculative position.