Americans Spend Billions on Takeout. But Food Delivery Apps Are Still a Terrible Business.

Before you dig into this column, you may want to order a pizza. Open up your favorite food-delivery app—DoorDash or Uber Eats, Grubhub or Postmates—and pick your favorite pizzeria. As I wrote the column, I had a hankering for a margherita pie from Amici’s East Coast, just a few miles away, in Mountain View, Calif. Luckily for me, the pizzeria is on all four of the delivery apps.

Just like that, you can see the problem with the food-delivery business. Takeout has become too easy, with little value accruing to the companies running the platforms. By some estimates, Americans spend $200 billion a year on takeout meals. That’s a lot of chips and guac—and almost no profit.

In June, Amazon.com (ticker: AMZN), never shy about losses while building new businesses, shut down struggling Amazon Restaurants. Investors are still waiting on an initial public offering from Postmates.

Then there’s Grubhub (GRUB). In late October, Grubhub sent a 10-page missive to shareholders. Lots of companies write shareholder letters, but you’ve never read one quite like this.

Grubhub (GRUB)Source: FactSet

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The letter started encouragingly. Over the past decade, Grubhub observed, online takeout sales exploded, driven by ease of ordering, diversity of choice, and control and transparency for the diner. But over the summer, Grubhub explains, metrics deteriorated.

“What we concluded is that the supply innovations in online takeout have been played out, and annual growth is slowing…there are multiple players all competing for the same new diners and order growth,” Grubhub wrote.

The company said that “online diners are becoming more promiscuous.” Not the word I would have chosen, but the point is clear. “Our existing diners are increasingly ordering from multiple platforms,” Grubhub added. “The easy wins in the market are disappearing a little more quickly than we thought.”

The day Grubhub issued the letter, its stock fell 43%.

Grubhub says it will quickly add more restaurants to its platform, a dramatic change for a company long focused on building relationships with local eateries. The firm now contends that “the single biggest determinant of diners’ usage on marketplaces is whether it has the restaurants the diner wants.” The company vowed a big push to add choices—and to keep people on the platform with loyalty programs.

Grubhub is acting out of necessity. Many of the largest restaurant chains are on all four of the major delivery apps— McDonald’s (MCD), Taco Bell, KFC, Popeye’s, Chipotle (CMG), Wendy’s (WEN), and Jack in the Box (JACK).

Grubhub’s hope is that more restaurants means more diners, who then gravitate to Grubhub partners, which pay Grubhub not just to deliver food but also to do marketing and logistics.

“We contemplated retrenching, waiting until people stopped using capital as a weapon, until rationality came back to the marketplace,” Grubhub Chief Financial Officer Adam DeWitt told me this past week. “We could have stayed the course and slowly drifted down growth-wise. Instead, we’re leaning into our profitable model and putting pressure on the other players that do not have that.”

Grubhub reported $1.4 billion in third-quarter gross food sales, $322.1 million in revenue, and $53.8 million in adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, a measure of cash flow. Uber would love those kind of results; its food-delivery service, Uber Eats, pulled in $645 million in revenue in the latest quarter, but that translated to an adjusted Ebitda loss of $316 million.

Grubhub and everyone else are in a tough position when one rival is willing to lose hundreds of millions of dollars.

There are fears that the food-delivery market suffers from the same challenges as the ride-sharing business: armies of part-time drivers, consumers seeking convenience, and services struggling to stand out. In truth, food delivery is more complex. It’s a three-sided market, including diners, drivers, and restaurants. Ride-sharing is two-sided. The extra party gives food-delivery companies two sources of revenue, not just one. But the market is uncomfortably crowded.

The situation is troubling for both public-market and venture investors. It’s hard to imagine an IPO from DoorDash or Postmates anytime soon. Neither will discuss its financial condition, but there’s little doubt that both lose money.

Despite the troubles, the private party continues for the delivery companies. This past week, Bloomberg reported that DoorDash raised another $100 million on top of the $2 billion it already raked in from venture investors including Kleiner Perkins, Sequoia Capital, and, yes, the SoftBank Vision Fund, which also has big bets on Uber and WeWork. The latest cash infusion at DoorDash reportedly comes at a valuation of close to $13 billion. Postmates has raised $900 million, with a reported valuation of $2.4 billion at the last round. The huge losses at Eats, meanwhile, are putting pressure on Uber’s shares, with the stock hovering near a post-IPO low, down more than 40% since its May public market debut.

All four companies argue that they are differentiated. DoorDash claims it has the most restaurants—more than 300,000. Postmates claims it has more than 500,000 merchants, when you include drugstores and other retailers. Grubhub claims to be more efficient, generating more cash flow per order than the others. Uber Eats has a broader international footprint, operating in 500 cities in 35 countries, with 220,000 restaurants.

Congratulations to them all. But that Amici’s pizza? All four apps offer their mini margherita for $10.75. I’ll pick the one with a free delivery offer. Because I’m hungry, and competition works wonders—for the consumer.

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