Food delivery – End of the beginning.

Uber taking out Grubhub is exactly what is needed.

• Uber has proposed to take over Grubhub which would create an entity slightly larger than DoorDash, setting the scene for intense competition between the two and the exit of all of the others.
• I have argued (see here) that the impact of the pandemic will be to accelerate consolidation in the food delivery industry and if this deal goes through, it will clarify the market making it a simple two-horse race.
• The current situation is unsustainable.
• There are currently 5 players who are all slashing each other’s throats to gain market share and losing a lot of money in the process.
• Grubhub was once the king of this sector but it was unable to generate any loyalty that would have prevented customers from ordering from rival platforms when financially incentivised to do so.
• The net result was a race to the bottom on a commodity product and a collapse in Grubhub’s share price from $150 to the current level of just $47 ($60 including the Uber offer induced rally).
• Just like ride-hailing, food delivery is a marketplace where buyers (diners) and sellers (restaurants) meet to transact.
• This means that food delivery is subject to the same economics which is that it is a winner takes all game where one needs to establish a dominant position.
• My rule of thumb has long been that decent and real (GAAP) profitability requires 60% market share or to be double the size of the nearest competitor which has been demonstrated on numerous occasions in the last 5 years.
• Adding Grubhub’s market share to UberEat’s would give a combined business with around 50% market share (US) putting it just ahead of DoorDash at 43%.
• This in no way would create a dominant position and could even lead to an even more aggressive competitive environment as each vies to reach the dominant position that would allow it to earn a significant return on its service.
• This is why a regulatory intervention at this stage makes no sense.
• As it stands at the moment no-one is making money and unless the field is narrowed down and some money can be made, everyone will eventually give up and the industry will disappear.
• This is would be a really bad turn of events for the very businesses that regulators are trying to protect because, for the foreseeable future, take-away food is their only real hope of staying in business.
• Even this will be hard as most dine-in restaurants make most of their money on dine-in beverages which is now not possible.
• An outsourced food delivery service could help them greatly to survive in an environment where people prefer to dine at home rather than be reminded of the dystopian present while trying to eat dinner through a face mask.
• Grubhub’s management has clearly demonstrated that it is incapable of holding onto a winning position and so the outlook for Grubhub to continue on its own is pretty bleak.
• Hence, I think both the restaurants and the food delivery industry will be better off if this consolidation takes place as it is badly needed given that the current situation is unsustainable.
• Lazy diners who are not happy to pay the delivery charge when it inevitably must rise, can still go and collect the food themselves meaning that this is an entirely voluntary service where the charge to both the restaurant and the diner does not have to be paid to access the product.
• The pandemic has already ensured that many restaurants will not re-open meaning that those that are left will need all the help that they can get to stay afloat.
• A competitive, high-quality and profitable food delivery industry is required to allow that to happen while there is no vaccine and no prospect of profitably offering a dine-in service.